Classifying marketplaces in a 2×2 matrixMarketplaces / Social / Collaboration / Network Effects
In a recent Invest Like The Best podcast, the guest, who goes by the pseudonym Modest Proposal, described a 2×2 matrix for segmenting marketplace types. It’s a simple, yet very effective way to think about the differences in online marketplaces, from the original product marketplaces like eBay to the emerging services marketplaces. One axis represents products or services, and the other axis represents homogenous or heterogenous.
Here’s our take on a marketplace matrix with some key examples for each quadrant.
This is the original marketplace category. These platforms bring together buyers and sellers of unique goods, reducing friction and unlocking value by breaking down geographic barriers. Buyers and sellers are no longer limited to their local pool: a buyer can find a specific item from a seller halfway across the world and vice versa.
- Strongest network effects, as each supplier usually adds unique inventory, often collectibles
- Strong buyer mindshare, as buyers are often collectors and passionate about their collections
- New opportunities emerge in this quadrant with new categories/niches (e.g. GOAT for sneakers or V1 portfolio company SuperRare for digital art)
These marketplaces sell commoditized products, from diapers and paper towels to USB cables. Customers may develop preferences for one brand over another, but there’s nothing particularly unique or exclusive about the inventory.
- Relatively low network effects as products can be easily sourced (and dropship services help new entrants even further)
- Low margins for sellers. Since sellers are offering nearly or exactly identical items, there’s not much to compete on beyond price
- Buyer mindshare is typically driven by convenience (ordering/delivery/returns), price and loyalty programs
- New opportunities have emerged in this space with direct-to-consumer (DTC) brands trying to create differentiation and tilt marketplace dynamics in their favour (e.g. Harry’s, Glossier, Casper)
A services marketplace has often some kind of physical nexus, where something (the service) is performed offline. Marketplaces in this quadrant offer standard well-described tasks that get further commoditized by platform rules and the user interface. For example, with ride sharing services, consumers care about getting from point A to point B – they don’t particularly care who picks them up, the type of car, etc.
- Medium network effects, mainly around the density of the network (customers require drivers to pick them up; drivers need customers) and the timeliness of the service
- Supply is mostly non-unique (e.g. drivers often drive for both Uber and Lyft)
- Buyer mindshare is strong due to the high frequency of the underlying service (e.g. rides or food delivery)
- Platforms have an opportunity to increase mindshare by expanding their service offerings (e.g. Uber + Uber Eats)
These platforms match buyers and providers for more complex, non-commoditized services, such as home services. Services are delivered offline and can’t typically be represented in a single easy-to-order SKU. As a result, it’s hard for these marketplaces to be part of the transaction and typically rely on lead generation for their business model.
- Strong network effects, as more suppliers and supplier diversity can meet the unique needs and preferences of customers for each job (assuming a horizontal marketplaces across many home services)
- Buyer mindshare is hard to capture due to the often low frequency of underlying services (e.g. you only need a fall yard cleanup once a year)
- Offers the biggest potential among all the quadrants, as there’s no dominant marketplace in this space yet!
By categorizing marketplaces into a matrix, it’s clear that each type has a unique set of challenges, success factors, and opportunities. It’s impossible to appreciate the power of network effects, for example, without understanding the frequency and commoditization of the underlying product or service. And if you’re interested in exploring any of these topics in more detail, we recently published the third edition of A Guide to Marketplaces.