Josh Breinlinger, Managing Director at Jackson Square Ventures, shared a long list of actionable tips for marketplace entrepreneurs at the Marketplace Conference in San Francisco. This is the third article in a series covering our favourite talks and key learnings from the conference.
The Marketplace Conference unites marketplace founders, VCs, and subject matter experts to discuss the present and future of marketplaces and network effects. The first conference was organized in San Francisco in March 2018, with Sharetribe as one of the sponsors.
Our two previous articles covered talks given from the point of view of marketplace operators: Sarah Rose discussed UrbanSitter’s geographic expansion, and Jessica Tiwari shared Upwork’s tools for building trust. Josh Breinlinger’s talk combines his expertise in marketplaces from both the perspective of a marketplace entrepreneur as well as that of an investor.
Maximizing Liquidity and Transaction Quality
Josh Breinlinger has worked with marketplaces for over a decade. He co-founded Rev, was one of the early employees at oDesk (currently Upwork), and has been involved with a wide variety of marketplaces as managing director of the VC firm Jackson Square Ventures.
Breinlinger’s talk is a great collection of observations and tips on how to build successful marketplaces. It is well worth watching in its entirety and offers a good summary of the topics Breinlinger discusses on his popular blog.
- 1:12 to learn the characteristics of Breinlinger’s perfect marketplace.
- 4:38 for a discussion on horizontal versus vertical marketplaces.
- 7:14 for a breakdown of different marketplace match types.
- 8:30 to learn what your best providers and Silicon Valley developers have in common.
- 9:20 for tips on teaching your users.
- 10:26 for Breinlinger’s praise for community forums.
- 10:50 for a discussion on network effects.
- 12:30 for lessons on tiering your user base.
- 13:56 to learn how to tackle disintermediation.
- 15:36 to learn how to build virtuous cycles.
- 17:28 for lessons on liquidity hacking (and to find out, once and for all, whether the chicken or the egg came first).
- 19:34 to learn about the fraud curve.
- 20:40 for a discussion on Breinlinger’s Master Marketplaces.
- 21:59 for the Q&A.
Next, we’ll discuss three points in Breinlinger’s talk in more detail: horizontal versus vertical marketplaces, user retention, and the fraud curve.
Don’t copy Uber
According to Josh Breinlinger, a general rule of thumb among platform businesses has been to only build vertical marketplaces: marketplaces that focus on a single category or product. Widening the focus horizontally to multiple categories or products too quickly is, indeed, very often a failing strategy for young marketplaces. Breinlinger points out, however, that it is fundamentally flawed to assume only vertical marketplaces can succeed.
For Breinlinger, making the decision between a horizontal and vertical approach should depend on two metrics: frequency of purchase and the size of the transaction. An Uber-style marketplace, with quick, seamless and simple transactions, works well for transactions that are high in frequency and low in transaction size. Copying Uber’s platform solution when these two metrics differ is a mistake.
Take, for instance, marketplaces built around transactions that are low both in frequency and in value—Breinlinger mentions different household maintenance services as an example. In such cases, grouping the various services under one marketplace would make more sense: a horizontal platform that combines the different household services would help drive up transaction frequency and customers wouldn’t have to download a different app for each of the infrequent purchases they make. A real-life example of this approach is Upwork, which offers freelance services for all types of work that can be done remotely.
For infrequent purchases that are high in transaction value, the needs for the marketplace platform are also different. “Nobody wants an Uber for buying a home”, says Breinlinger, and notes that for high-value, low-frequency purchases, qualities like searching, browsing, and variety are significantly more important than the types of features that made Uber’s platform successful.
For marketplaces that combine purchases that are both high in transaction value and in frequency, Breinlinger thinks opportunities are ample. He anticipates a wave of B2B marketplaces he calls “industry procurement platforms”, where businesses tend to make high-value purchases of products and services very frequently.
For the full discussion on horizontal versus vertical marketplaces, jump to 4:38.
Keep your best users
Josh Breinlinger talks about the importance of retaining the best users at various points in his talk.
First, he notes that high-quality providers will not be willing to go through a lot of trouble in order to make a transaction happen. This means that attempting to improve quality on the platform by introducing obstacles like heavy profile setups, tests, or certifications in the onboarding flow could risk driving away the best providers.
Breinlinger thinks that, overall, many marketplace entrepreneurs spend too much time screening their users in the beginning and neglect the more effective tools that can be used to optimize the distribution of work and retention of the best users.
At Rev, says Breinlinger, tiers have been introduced to ensure retention of the best users. Everyone starts at the same tier, but repeat transactions, consistent high quality, and on-time deliveries enable the user to rise to a new tier. The reward for entering a higher tier is premium access to new jobs—the company wants their best providers to work as much as possible, so allowing them to take their pick of new arriving jobs an hour before other users both keeps them busy and motivates them to stay on the platform.
Breinlinger also discusses the problem of disintermediation. He finds that a common challenge for marketplaces is that customers who increase their usage of the platform finally end up outgrowing it.
This, for Breinlinger, is essentially a death sentence that can only be tackled by either increasing value or lowering prices. Many marketplaces offer a significant addition of value in the upfront matching of a customer and provider, but as times goes on, the perceived value declines. Lowering rakes for long-term engagements could do the trick to increase retention. Breinlinger’s ultimate weapon for user retention, however, is increasing the productivity of the work that takes place on the platform—if a marketplace manages to do that, rakes can be left as they are without fear of losing heavy users.
A further important point is quickly expelling the worst users. Even though kicking out users might feel difficult, for Breinlinger, it is a crucial activity in order to eliminate unnecessary noise and foster a virtuous cycle of high quality.
Balance your fraud curve
When marketplaces reach a certain scale, Breinlinger states fraud is virtually inevitable. At the early stages, it is possible to block all fraud completely, but the moment a marketplace starts to gain traction, zero fraud is close to impossible.
At this point, Breinlinger says that it is easy to overcorrect: the experience of being virtually “ripped to shreds”, taken advantage of, and losing money may lead to actions that do more harm than good.
For many, the natural reaction to the emergence of fraud is to introduce a range of different screening techniques and verifications, but in Breinlinger’s opinion, this tends to compete with growth. In fact, though the balance between protecting against fraud and being open to ensure growth is delicate, Breinlinger thinks a successful marketplace with no fraud at all tends to indicate the platform is too restrictive.
For the full discussion on the fraud curve, jump to 19:34.
In the next article, we discuss a talk where NfX’s Managing Partner James Currier shares a whopping 19 tactics for solving the chicken and egg problem.