Marketplace dynamics: buyer mindshare is key to building a moat

By boris, April 07, 2015

Most marketplaces start off by providing a unique supply of products/services. Demand follows supply, and so the flywheel of supply and demand begins.

However, as a marketplace gains popularity, its supply inevitably becomes less and less unique. I know this firsthand. At AbeBooks, our booksellers initially listed only with us, but then started to list with Amazon after it launched its marketplace.

Uber and Lyft drivers typically begin with one service, but often end up driving for both. And marketplace uniqueness can become diluted even when suppliers don’t intentionally leave. For example, Etsy struggles with design copying, including complaints of major retailers mass-producing products that look extremely similar to its handcrafted artisan designs.

If you’re building a marketplace, it’s safe to assume that the uniqueness of your supply will fade over time, as your suppliers seek out opportunities on other marketplaces and competitors look to grab a piece of the pie that you discovered.

In order to minimize the impact of these competitive dynamics, a marketplace can adopt to strategies: protect the supply and protect buyer mindshare.

When it comes to supply, you can’t keep supply unique when sellers list on other sites. Give your sellers little reason to seek out other marketplaces. For example, you can lower listing/transaction fees for unique inventory, tie sellers to your site through reviews (which cannot be transferred to other marketplaces), or find some other innovative model like Uber’s leasing model.

Yet while these strategies can slow down the drain of your unique supply to other marketplaces, they won’t stop it altogether. It’s much more effective, and important, to win buyer mindshare.

For example, Etsy has done an incredible job with its repeat usage. As revealed in its recent S1 filing, 78 percent of its gross merchandise sales in 2014 came from repeat customers.

Uber and Lyft have done a great job becoming the de-facto local transportation options locking valuable real estate on many people’s mobile phones. In the age of mobile where long-tail discovery (whether paid or organic) is less important, becoming such a home screen app is critical. This trend is even stronger in those countries that have skipped the desktop altogether and gone straight to mobile.

If buyer mindshare is the key to building a moat against the competition, you need to have the right product mix to become a frequent destination for your customers and build a brand that captures the mindshare of your target audience. And becoming a home screen app is the ultimate prize in a mobile-first world.

  • The post raises an interesting question… if the first marketplace that reaches liquidity earns a large moat (justifying large A rounds for marketplaces), what paths might new entrants take to disrupt existing marketplaces?

    Here are two I’ve observed:

    – Push on the incumbent’s economic model (HomeAway paid listing fee vs AirBnb free listing + transaction free); usually incumbents will find it hard to follow down market (innovator’s dilemma) and even if they do will wade in slowly providing precious time for a new entrant to get traction.

    – Unbundle a generalized marketplace and focus on providing an optimal flow for a specific vertical (e.g. Craiglist vs StubHub, Expedia vs HotelTonight) to create a top of mind brand in the category (i.e. get on the homescreen). h/t 22 Immutable Laws of Marketing

    Any other broadly effective strategies come to mind to breach a marketplace incumbent’s moat?

  • bwertz

    Agree with you – two more strategies:
    – Sometimes a 10x better product can do the job (VarageSale versus Craigslist) but those opportunities are rare
    – Identify unique inventory opportunities in underserved markets – this definitely helped AirBnB (against) HomeAway) and etsy (against eBay)

  • JamesHRH

    Boris – it seems as if VarageSale did an awfully good job of locking up a portion of the Buy&Sell supply chain by giving community Admins a standardized, easy to manage platform.

  • bwertz

    Good observation ????

  • Boris – good post. Key to buyer mindshare is differentiated supply or cheaper supply and for both creating a completely new source of supply will trump incumbents – Uber/Lyft created new supply with more cars on the street, Airbnb created new supply with apartments etc.

  • bwertz

    agreed – my argument is that this unique supply usually doesn’t stay unique as you scale but clearly the best differentiator at the start

  • Great points. I’d like to add that on top of buyer mindshare and lower fees (therefore potential for lower prices), another defensible way to build the moat is through easier and more efficient logistics options.

    Amazon handles this by having a large network of fulfillment centers, allowing buyers to get their products faster, and sellers to not have to worry about handling all that. This centralized approach is incredibly capital intensive and slow to adapt however.

    For the marketplace that I’m building, I’ve been thinking about a sort of hybrid approach by integrating a shipping service like Shyp into your product. This way sellers have the shipping handled for them by that 3rd party, and buyers get their products faster and properly packaged as a result.

    Both sides benefit and are less likely to switch as a result, without having to use a large amount of capital to get there. Granted, this depends on how well those 3rd party services are integrated, and your ability to get an exclusive partnership with them makes it more defensible. eBay did something like this when they integrated PayPal into their service, making paying and receiving money smoother.

    I’d love to hear your thoughts on this hybrid model.

  • bwertz

    Whatever friction you can remove for sellers (or buyers), the better for the marketplace. And would definitely go for the outsourced solution in order to scale quickly – you can always built it yourself when you have scale and you think you can deliver this service even better / cheaper.

  • Sam Toole

    Agreed that buyer mindshare is the superior and most defensible position for a marketplace. That being said, I would argue that strategies that “slow down the drain of your unique supply to other marketplaces,” must be kept on the value add side for sellers: low fees, innovative models, etc. The example of limiting reviews and ratings (which many companies do, and or, make difficult to transfer) is effectively stymying entrepreneurship.

    Going with the Etsy example…If a seller on Etsy wants to open up a new distribution channel, like a personal e-commerce website, Etsy should encourage this growth and help them grow. The clout/reputation they have have earned on the platform is valuable to both the seller AND Etsy.

    It is true that Etsy cannibalizes their sales to some extent, but I would hypothesize that that percentage is small over time. Building your own e-commerce business and driving traffic is incredibly difficult.

    Either way sellers will not shut down their Etsy storefront, since it is a viable distribution channel. By limiting the entrepreneur/seller, marketplaces open the door for other platforms to emerge. And without sellers, buyer’s mindshare is not worth much.

  • bwertz

    Great points – I think my point re reviews was probably too negatively formulated. Having reviews as a feature makes a platform more defensible as these reviews generally only make sense in the context of that specific site. So a competing marketplace that goes after the same supply will need time to build up a review base on its own (and probably have much lower conversion rates in the meantime)

  • Güimar Vaca Sittic

    Hi Boris,

    Good piece! I think you are missing other innovative ways marketplaces are protecting supply. Beepi has a unique approach which guarantees the sellers that their cars will be sold in 30 days or the company will buy the car from the seller at the agreed price. Taking the risk for the seller allows the sellers to have piece of mind and don’t post their items/goods in other marketplaces.

    Cheers
    Güimar

  • bwertz

    Great point and example – we are seeing more and more of those buyer experience focused marketplaces

  • Sam Toole

    Agreed, agreed. I’ve been interested in reviews for a while, specifically transferring them across different markets. I.e. Urbansitter reviews having value in DogVacay. Or Etsy reviews holding value in TaskRabbit. Etc., etc.

  • bwertz

    Interesting concept but might not be easy to implement as the context of the review matters a lot

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