How can a marketplace start-up disrupt the incumbent?

Last week, my post on “Marketplace dynamics: buyer mindshare is key to building a moat” generated good discussion about the best strategies to disrupt existing marketplaces and get past the incumbent’s moat. It’s certainly an important topic to any founder or entrepreneur looking to break into an existing market.

The discussion was sparked by Jonas’ question: “If the first marketplace that reaches liquidity earns a moat (justifying large A rounds for marketplaces), what paths might new entrants take to disrupt existing marketplaces?”

Jonas offered two key paths:

First, you can push on the incumbent’s economic model. For example, Craigslist came in with free listing fees compared with paid listings at traditional classifieds section of newspapers. Clayton Christensen’s Innovator Dilemma explains how most incumbents find it hard to follow down the market…they brush off an upstart as being too small or too low end to matter. By the time the incumbent finally gets around to addressing the new innovator, the upstart has already found traction.

His second point is that an upstart can unbundle a generalized marketplace and focus on creating the best product for a specific vertical. For example, StubHub vs. Craigslist and HotelTonight vs. Expedia. It is a strategy that has worked spectacularly well for many verticals and Andrew Parker’s market map has become the blueprint for tracking the different companies that have chosen that route.

(On a side note: that strategy is not just limited to marketplaces. Focusing on niche verticals or specific functional areas may be one of the most successful strategies for enterprise SaaS companies.)

In addition to disrupting the incumbent’s economic model and building to a specific market niche, there are a few other paths that a new startup can take to cross the incumbent’s moat. You can build a product that’s ten times better than the incumbent. I’d argue that this is the key to VarageSale’s success (a portfolio company that has done a great job building mobile-first, social, & safe local marketplaces) vs. Craigslist. Or Uber’s success against the taxi industry. Of course, these opportunities are rare and hard to execute on and the incumbent’s existing network effects might be too strong to just win on a better product.

Last but not least, a marketplace start-up can focus on the supply side, and identify opportunities to bring unique inventory to underserved markets. This strategy certainly helped Airbnb against HomeAway, as well as Etsy vs. eBay.

So let’s keep the conversation going. How else can new marketplace entrants disrupt an existing market?

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