Why we like marketplaces and marketing's role

So far this year Scaleup Mediafund has invested in two digital marketplaces, Bettercaring.com.au and HeyYou. This has led a number of people to ask us: why marketplaces?

So with that in mind, I wanted to summarise the elements of marketplaces that matter most to us and the role marketing plays in building your marketplace.

Marketplaces are great business models

There is an abundance of literature on this topic, but for us it comes down to three key themes:

• Marketplaces compete for a ‘winner takes most’ end state, typically resulting in two or three players only in a given category.
• Marketplaces generally have low working capital requirements and consequently very high returns on capital.
• The adoption and proliferation of identity and m-commerce makes marketplaces and transactions more viable.

Marketplaces also have the well-documented advantage of ‘network effects’. Network effects in our view is more complex than ‘lots’ of buyers and sellers; it is a ‘density’ of buyers and sellers within a geography, route, time or community.
 

Why density?
 

Because, marketplaces on most occasions must solve the problem of transaction friction (shorthand for time, cost and experience). With reduced friction, true value is created. Hence density is critical to ensure sustainability in the business model and ongoing returns.

Three tiers of marketing

Most new marketplaces are asking buyers and sellers to act differently through the business – this is a change in behaviour, which we all know is one of the hardest things to achieve and where marketing is most valuable. We think of marketing in three tiers:

1. Build SEO and optimise to reach a target level of buyers, sellers, visitation and transaction (usually this is low target and is more about product-market-fit considerations).
2. Next, start scaling through paid marketing that is performance based – most likely SEM, social and referral based.
3. After reaching the next set of KPIs, marketing can push hard and create true density, through awareness and consideration marketing to build the brand. This is where above-the-line-channels (ATL) of television, radio, print, outdoor and display ads play a dominant role.

An investment across all three tiers (at the appropriate stages of your business’ lifecycle) is required to create a large and winning marketplace position.

The role of marketing

Marketing drives density, trust and mindshare.

In our view, a lot of businesses we see need to invest more aggressively to drive supply and demand on platform and achieve a tipping point of density. So why the absence of marketing investment? The answer usually is (aside from capital), metrics where early profitability and unit profitability numbers don’t make sense, i.e. customer acquisition costs (marketing and sales) exceeds margin (transaction take).
It may be tempting to interpret negative economics as symptomatic of an unattractive and non-sustainable investment. But before doing so, remember that marketplaces – by their very nature – require density and once a certain threshold is reached, the network effects will drive unit costs down and business sustainability becomes more obvious. True density will be achieved when all three tiers of marketing are firing effectively.

Trust is a fundamental humanistic property of all successful marketplaces. There are lots of ways to build trust within a marketplace – transparency, community, ratings systems, accreditation and guarantees. Marketing also creates trust by messaging the marketplace’s function and story.
All new marketplaces spend on performance channels (SEO, SEM and Social), but very few spend on radio, television, outdoor or print. Most buyers and sellers attribute little trust to a marketplace that is advertising solely on a performance channel (e.g. SEM). They know that SEM is a low commitment or cheap entry price channel and that the business could be backed by anyone.
In contrast, ATL channels together with PR have the creative and storytelling space and carry weight or substance in consumers’ minds. Advertising ATL implies the marketplace is the winner with depth in its business and real funding, which ultimately instills trust.
Finally marketplace leakage (where buyers and sellers take their transaction off platform) will bleed value. Marketing plays a role here by building mindshare among buyers and sellers thereby increasing switching costs and driving transaction frequently.
Here are some of our favourite articles on the topic of marketplaces if you wish to read on:

http://www.smartcompany.com.au/startupsmart/advice/startupsmart-growth/young-entrepreneurs/the-evolution-of-online-marketplaces-and-why-startup-investors-are-so-in-love-with-them/

http://versionone.vc/marketplace-handbook/

http://techcrunch.com/2015/06/27/from-social-to-market-networks/