Online marketplaces: What kind of liquidity do you need to grow?

Not all marketplaces are created equal. They all need liquidity to thrive, but liquids come in different flavours.

Chicken and Egg

One of the challenges in growing any marketplace is getting up and running in the first place. Investors often refer to a marketplace achieving "liquidity". Liquidity is a state achieved whereby there is enough supply to attract demand and there is enough demand to attract supply. It's the critical mass that provides the momentum to get the business moving.

Buyers won't visit a marketplace if there is nothing to buy. Sellers won't sell at a marketplace unless there are buyers.

Like a chicken and egg, which comes first?

At any moment in time, most marketplaces need to invest and stimulate one side of the business in order to attract the other. The side that requires investment may change over time.

One thing is for certain; having a large consumer base is a good reason for sellers to want to use the service. The other way around is less certain; just because you have a large number of products on the shelves doesn't mean people will come.

Start simple

Successful marketplaces don't launch everywhere to everyone at once. There's usually a constrained starting point that validates the model with a simple supply base and a narrow consumer base. Only once this is proven does the marketplace expand to a wider supply base with a larger target audience.

For a well known example, think of Amazon. They started with just one product category; books, in one market, the USA. They focussed on building liquidity with books and US consumers, built an early customer base and supply base, built an operating model and later they added additional products such as CDs. Over the years Amazon has increased liquidity by adding new product categories, opening in new markets and has gone on to allow other retailers to sell using it's platform. They didn't do all of this on day one.

Let's look at an example of how another startup addressed the liquidity challenge, Snaptrip. Snaptrip is a travel startup that we invested in at Forward Partners. Snaptrip brings together last minute holiday rentals into a single platform, allowing holidaymakers to find a last minute deal by quickly comparing available options.

In getting started it was important for Snaptrip to find a way to validate their consumer proposition quickly without having to build a large supply base (which would have increased the time to launch). The first step of building liquidity was to create not a large "ocean", rather it was to create a modest "pond". They signed up one accommodation agency in the Lake District (a popular destination for UK holidaymakers) and then they used Google AdWords to serve ads based on keywords used by bookers who were looking for the Lake District.

From this pond, they started fishing. They managed to attract consumers, create bookings for their first supplier and validate their proposition (last minute rentals at great discounts). This phase provided deep insights into consumer buying preferences and supplier needs. The next step was to take this learning, tweak the product and service, then expand their supply region by region to a in order to get national coverage. Note that they didn't go for national coverage on day one.

The early stage challenge; choose your liquidity focus

Whenever I work with or advise early stage marketplace businesses, I always ask what kind of liquidity is needed to grow.

You may not have thought about it but liquidity is not just a generic state. There are different types of liquidity and achieving liquidity at one level can help you power up to the next.

Do you grow your supply on a category by category basis (e.g. Amazon) or on a location by location basis (e.g. Snaptrip)? Do you grow your demand by consumer segment, by neighbourhood, by language or by interest?

Getting this growth model right is an important consideration and can be the difference between success and failure.

Getting a trickle of liquidity across a wide area isn't as useful as getting a torrent of liquidity in a focussed area. This is because liquidity, once it starts to build becomes self-sustaining, delivers economies of scale and provides an enduring competitive advantage.

If a marketplace can be broken down into these units of liquidity, each unit can be treated as a startup in it's own right. Some units will be in a set-up phase, some will be in an investment phase whilst others will be profitable. This provides a roadmap for product development, marketing and commercial focus which would otherwise be lacking in a "do everything at once" approach.

Liquidity factors

Here are some liquidity factors to consider

Supply

• nationwide vs. city vs. neighbourhood density
• cross category vs. one category
• direct vs. indirect suppliers

Demand

• nationwide vs. city vs, neighbourhood
• B2B vs B2C
• interest groups
• language

Let me illustrate the point with a number of examples.

Bookatable - Cities

Bookatable is a leading restaurant booking website and app. I was COO there during the early growth phase. Restaurant bookings are generally focussed on city centres and so we concentrated on building critical mass of restaurants city by city, providing a range of choice and availability to consumers. A lot of search traffic was destination led, so we were able to capture demand showing intent to book a table in London, Hamburg, Stockholm etc. Liquidity was achieved when we became an essential source of bookings for the restaurants in these cities.

HouseTrip - Corridors

When I was at HouseTrip (holiday rentals marketplace) we identified that supply and demand was based around "corridors" between origins and destinations. Origins are countries (such as the UK, France, Germany), destinations are resorts or cities (such as Mallorca, Paris or The Amalfi Coast). UK > Mallorca is one corridor, Germany > Mallorca is a second corridor. As such we built up supply on a destination by destination basis and then worked on building demand from one origin to that destination, then another and then another.

Hassle.com - Neighbourhoods

Hassle.com offers domestic cleaning services. Customers search on Hassle.com for cleaners near them. Hassle.com takes their booking details and sends them to local cleaners who compete for the work. For Hassle.com to succeed they need enough cleaners in each neighbourhood to service the demand in each neighbourhood. This is because cleaners tend to work a few hours at a time and need to have a number of clients without too much travel time between them. It makes sense in this kind of marketplace to build liquidity neighbourhood by neighbourhood, city by city.

Stylect - Languages and retailers

Stylect is a mobile app to to help women discover their perfect shoes (also a Forward Partners investment). It uses a Tinder-like interface where users swipe a shoe to the left or right to like or dislike. Although not strictly a marketplace (it is an affiliate model), Stylect was able to grow by gaining additional app store featuring thanks to the launch of new language versions of the app. To make sure they had product for these new users they needed to add new retailers who sell to these countries. It now has users from over 130 countries.

Unlocking a growth engine

Supply can be a growth lever. Each time a new product category, destination or neighbourhood is added, it gives more choice to the consumer and can increase conversions. (That is, provided you can attract consumers). More conversions equals a better marketing efficiency allowing more money to be invested in customer acquisition at the top of the funnel.

However, adding a new supply category requires a set up phase and for a period of time, investment. Each marketplace business needs to understand how many new supply segments they can realistically onboard at once and what the return on investment looks like for each segment.

Getting this right can unlock a virtuous growth engine. Each new supply segment adds to the liquidity of the overall offering.

A good understanding of what type of liquidity is needed is the first step in building a growth strategy for a marketplace.