Make the right trade-offs for your marketplace

It is better to grow slow in order to preserve the unique aspects of your marketplace.

– Some of the factors that separate the most successful peer-to-peer marketplaces from others have nothing to do with the marketplace or the nature of exchange itself, says Arun Sundararajan, professor at New York University.

Sundararajan believes it comes down to the usual ingredients that separate successful startups from unsuccessful ones.

– A good team and founders who know how to execute are essential factors.

Some of his research focuses on the governance of digital spaces, collaborative consumption, and the sharing economy. Sundararajan believes the marketplaces in the new economy fall into three categories.

– You have marketplaces for sharing assets, marketplaces for providing labor, and marketplaces for facilitating different forms of financing, whether it is philanthropic forms of financing, equity crowdfunding or peer-to-peer lending.

For the first kind of marketplace, the nature of the product seems to be a critical determinant of whether there is a viable peer-to-peer rental business.

– The product needs to be of high enough value relative to the income stream of the person who owns the asset—a high fraction of the provider's net worth. That is why we see marketplaces succeed within accommodation and transportation.

Sundararajan highlights KitSplit, a service rents cameras and creative equipment from vetted locals.

– High-end creativity items, like particular lenses, cameras or lighting, are examples of a category of items that have high value relative to the income of the person who owns it.

Another important characteristic is low utilization. If you are not using your goods at all times, there is spare capacity that can be used by others. This combination of high value and low utilization is why peer-to-peer transportation has gained so much early traction.

Insurance is another reason why marketplaces have succeeded with transportation: car insurance is familiar.

– Although this peer-to-peer form of insurance is new, you know what can go wrong when someone borrows your car and what the costs associated with those bad events are. On the other hand, if you are setting up a marketplace for renting out leaf blowers or lawn mowers, you do not even know what the events and costs are, so it will take a bit longer to work out the insurance in these markets.

In addition to insurance, logistics is always a barrier.

– Working out the logistics to minimize inconvenience on both sides seems to be a critical unifier in many marketplaces. If you can figure out a smooth way to get the asset out of the person’s home and into the other person’s hand—and then back—you will have a competitive advantage.

A common challenge that growing peer-to-peer marketplaces face is ensuring enough supply as demand increases.

– Early on, you try to get enough demand to legitimize the marketplace—to get people used to the idea of renting rather than ownership, or peer-to-peer rental rather than traditional rental. But as you start to grow, there is often a trade-off between growing supply fast and preserving the unique aspects of what you offer that your customers like.

Sundararajan is thinking about how eBay grew, starting out as a particular kind of retail that was very peer-to-peer and quirky, and scaling the business by getting traditional retail on board. This move gave them the increase in supply that was necessary to grow rapidly, but converted them into something that was not as unique.

– If you look at things today, eBay is like a retailer, competing with Amazon, who is also a retailer and who does it better.

The same goes for businesses in the sharing economy that are facing the same problems. They need to achieve high enough liquidity (the probability of each new listing leading to a transaction) to really serve their customers well.

– I am thinking about how Airbnb is currently scaling. They need liquidity in a fractional sort of way. You cannot just bring a bunch of homes onto the market somewhere—you need it in every city, in every town. That is perhaps the most challenging liquidity provisioning scenario that I have come across.

In the case of Airbnb, you cannot just buy supply.

– If you are a ridesharing platform, you can pay people to buy a car and share rides, but with hosting, it is more gradual. My point is that in financial markets, liquidity is very simple. The product is extremely uniform and divisible and immediately understood.

In markets like eBay, things are more complicated because of increased product variety and logistics. On the other hand, on eBay, it does not matter where the seller is: it is enough to achieve liquidity in a certain product category only once.

– In the new peer-to-peer markets, building liquidity is a huge challenge because it is so localized. Now, you have to balance the provision of liquidity and the preservation of what attracted customers in the first place.

To some extent, marketplaces for providing labor face similar issues.

– In the early labor marketplaces, you did not have to be geographically co-located with the people who provided you things. Your copy editor, transcriber or software engineer could be anywhere. TaskRabbit is very different—they have to build local liquidity as well.

If you are running a niche marketplace, the speed of growth does not necessarily have to be everything. Preserving what your customers consider valuable while growing slowly is a valid strategy.

– There is a lot of space for high-quality, specialized peer-to-peer marketplaces. There is a feeling that you have to grow rapidly to capture the market, but sometimes the network effect associated with these marketplaces are very local. Being a market leader for labor supply in Amsterdam does not necessarily mean that you are going to be a better provider of labor services in Helsinki.

Being a market leader means creating value for consumers in the sharing economy.

– Identifying experiences that people want where they face a barrier from the high cost of ownership—like owning a summer house or an Oculus Rift—is a good starting point for thinking about how you can create value through a sharing marketplace. The same goes for experiences where the cost of traditional access, like hiring a service, is high.

In recent research, Sundararajan finds that value creation will predominantly come from people with less than a median income.

– If you think about it, it is intuitive. These people are the ones who are not driving the cars that they want because they do not have enough money. For them, ownership is a very high barrier to experience, thus access over ownership is an actual value proposition.

At the same time, people might buy better cars with the additional revenue that is gained by renting the car out to others. On the supply side, Sundararajan argues that the primary driver for wanting to become a provider is the additional income it generates.

– The simple value proposition for your suppliers needs to be monetization of assets, talent or capital that is underutilized. At the same time, I think there are various individual dimensions to why people like being a sharing economy provider: the interaction with people, a sense of purpose, or the relations you form with other people that give you a sense of community.

Another value proposition worth highlighting to customers is that they can purchase higher-quality products than they would otherwise have bought.

– This is often not an immediate focus, but telling users that renting is an upgrade from ownership is actually a good value proposition, says Sundararajan.

– For labor marketplace providers, I think a growing fraction of the workforce is going to be thinking about these marketplaces as a primary form of generating a livelihood.

According to Sundararajan, peer-to-peer marketplaces entrepreneurs need to think carefully about how hands-off they want to be. Getting the right balance between a uniform customer experience and a more flexible marketplace where providers are incentivised to make their services or products better (or cheaper) than the competition is therefore critical.

– A smart marketplace allows room for entrepreneurship, and does not impose too much control—you merchandise yourself, you price your own product, you do a little bit of customer service. You should be empowering the providers, while still providing the layers that the providers cannot provide on their own. In Etsy, for instance, you are certainly running your own business. It is not like Uber, who controls pricing and has a more uniform service.

Providing mechanisms for marketplace trust mechanisms is also a way to empower customers. By constantly delivering a high-quality experience, Sundararajan believes that entrepreneurs create sustainable trust.

– We are still in a phase where people are used to trusting brands. A successful peer-to-peer marketplace needs to realize this—simply having a reputation system or Facebook Connect does not solve all of the trust problems. You need to inject some equivalent of brand. It may not be the brand of your own marketplace; it could also be the brand of a trusted third party.

Once you put a third entity between the provider and customer, Sundararajan believes it is natural to ask what they can take care of and what the market can provide itself.

– To some extent, I think we shall wait and see what the market can provide on its own. I have constantly maintained that the role of government in making these marketplaces work is going to change. Take taxis as an example. 20 years ago, you needed the government to play an active role in the taxi business; otherwise, the peer-to-peer model would not work.

Sundararajan currently considers of the government’s role as being more surgical, correcting market failures rather than preventively giving guidelines.

– Honestly, we do not yet know what is going to be needed. It is much easier for a private business to introduce or remove things from its services than to change government policy that has been put in place prematurely.