There is a lot of misconception about marketplaces, and I wanted to summarize my response to benefit more entrepreneurs.
A Superstore Is Not A Marketplace
Real marketplaces are much more potent than just a collection of stores. Amazon, for example, is a Super Store, not a marketplace today. eBay and YouTube represent more fundamental marketplace principles – and as a result – fascinating growth.
Marketplaces are a favorite topic these days, perhaps spawned by sky-high valuations for social-media platforms such as Facebook and Bebo. A social-media platform, you know, is nothing more than a marketplace in which personal attributes are traded (through the use of social applications).
Winner Takes All
Marketplaces are attractive because, if implemented successfully, provide massive user adoption and winner-takes-all leadership positions, fantastic traits for any investment portfolio. A marketplace is highly disruptive in a market where the premium opportunity, the Super Store model has been exhausted – or does not exist. Some markets, because of their highly fragmented nature, cannot be captured by a high margin and exclusive access and a marketplace is the only way to leverage its total size.
I have written extensively about marketplace criteria in specific markets and its origination about 600 years back so that I won’t cover that specifically here. But so many other markets are ripe for marketplace macro-economics delivered by technology. Virtually any market characterized by unique transactions between large amounts of sellers and buyers is a candidate for free-market principles. The life-cycle of proprietary markets is dramatically shortened by the Internet, a distribution medium that instantly removes artificial boundaries such as geographic location and limited access.
Here are eight rules that make a marketplace succeed:
1/ Un-arbitrated participation
No seller or buyer should be banned from participating in the marketplace. A key fundamental of a marketplace is that it grows itself and that the quality of the buyer and seller is a reflection of the market, not controlled by the market. After all, the purpose is to connect The Long Tail of supply with The Long Tail of demand.
2/ Un-arbitrated transactions
Apart from exchanges that are illegal by law, no transactions should be banned. People come to a marketplace to perform a unique transaction, one they could not act on in a premium market.
3/ Free pricing mechanisms
Pricing models and terms are defined either by the seller or buyer or by both. Not by the marketplace. Pricing models can include such transactions as sell, auction, reverse auction or subscription – or even a combination of those. Pricing, including free, is completely and independently determined by or between seller and buyer, predetermined or negotiated. The marketplace takes a simple transaction fee off of the transaction value.
4/ Predictable behavior
Marketplaces need to establish the trust to survive and thrive. Pricing models and behavior of the marketplace need to be predictable and follow (not dictate) the goals of buyers and sellers. The marketplace should follow the needs of the market, not the other way around.
5/ Transparency of transactions
Marketplaces rely on a vast new influx of sellers and buyers to grow to massive size. That means the marketplace must operate with transparency that shows new buyers or sellers how to become successful as most of its users are greenfield participants.
6/ Meritocracy builds reputation
Trading favors and segmentation can be established but only based on mechanisms that are derived from real transactions, not plainly from user opinions. Opinions are useless if not supported by a proven reputation within the marketplace. Transactions based on reputations provide long-lasting stickiness to the marketplace.
7/ Support for intermediaries
For existing markets moving from premium to a free-market, its existing intermediaries need to be able to continue to represent their sellers or buyers. A new technology marketplace should not want to disintermediate or alienate those agents.
The marketplace cannot itself participate in the marketplace by providing its own transactions or even participate in – or act on behalf of – transactions between sellers and buyers. Apart from the fact that the business models don’t jive, a marketplace cannot be trusted when it simultaneously participates and facilitates an impartial exchange.
So, a simple method to determine whether a marketplace has massive market potential is to hold it up against the rules provided here. These rules are macroeconomic principles that dictate how markets behave and grow, and the technology implementation must support those principles to have a chance of making it big.
It’s a free world after all.