Ben Blomerley 26 Mar 2018

Market Leakage

The fundamental role of a marketplace is to connect buyers and sellers. In general, you don’t place yourself into the value chain. It’s pretty much ‘Marketplaces 101’. If you are stepping between a buyer and seller in order to make your margin – once the introduction has been made, why do they need to keep using you? Why don’t they move away from the platform and lose the middleman? Here lies the next big challenge to the business model: leakage.

The varying types of transactions that occur on a marketplace will encounter the challenge of leakage in different ways. Simple transactions are the easiest and most common in a marketplace, but even those risk leakage. A simple transaction is one that requires little direct input from the seller, and are usually a straightforward one-time process. Purchasing a retail product or subscribing to a static service are examples.

Complicated transactions are more susceptible to leakage because they require more interaction with the seller, often outside of the platform and even face to face. Why pay the marketplace when the tradesman has had to come to your house to quote (“If you pay in cash I’ll give you a great deal”). Signing up to SaaS services or purchasing a new piece of software for your business are good examples here.

What do you provide?

Understanding what you bring to the party is the first step to working out what the risk you face is. You need to ask yourself questions like:

  • How much interaction is there between buyer and seller before the transaction takes place?
  • Does the seller need to provide a quote to the buyer?
  • Will the buyer and seller physically meet?
  • How bespoke is the product or service being provided?
  • Is the buyer likely to be a repeat customer of this particular seller, or the marketplace in general?

What can you do?

The ways in which to protect yourself against leakage can be grouped into three broad groups, and the best strategy is a combination of all three. They are:

  • Push – keep buyers and sellers onto the platform, so they must use the marketplace to complete the process.
  • Pull – lure the buyers and sellers in, making it a place they want to use and be.
  • Alter – adapt your offering so you are not simply charging a commission on the price of the product, and therefore are harder to remove from the equation.

Many of these push/pull/alternate strategies are determined by what kind of marketplace you are, as discussed in building a marketplace, which offers a in-depth look at the steps needed to create a powerful marketplace.

Examples of push strategies include:

  • Prevent easy identification/communication with the seller – so that it becomes uneconomical to connect directly. For example – ebay stops users from providing contact info like phone numbers and emails via its messaging service. This is to stop buyers and sellers transacting away from the ebay platform.
  • Put in place contractual terms limiting seller freedom. For example, some marketplaces expressly forbid sellers putting their own marketing materials into packages sent out (“including your own branded materials may constitute a breach of data protection legislation laws”).

Examples of pull strategies include:

  • Having a stronger brand or better customer service than the underlying seller, so that customers prefer to shop via the marketplace than directly. Amazon has benefited strongly from this, as have comparison websites.
  • Provide benefits to the customers that make it more economical for them to be loyal to a single platform, rather than connecting with sellers individually. This can be in the form of cashback, loyalty programmes or discounts.

Examples of alternate strategies include:

Moving the marketplace model beyond the simple listing fee and commission-based model is one of the best way of protecting your revenue, but of course one of the hardest. Some interesting examples of seen include:

  • Have sellers pay for leads, rather than take a commission of the transaction. ‘Rated People’ do this with their tradespeople, because their transactions are by definition complicated and physical.
  • Provide alternative services to sellers – so that they don’t just view you as a commission – but a way to do business. This can set you down the path of becoming a SaaS business, not just a marketplace. For example – you could provide invoicing services or job management.

Leakage can be one of the most dispiriting results of operating a marketplace, with the efforts you’ve made not necessarily getting the reward you feel they deserve.

Taking the time for self-reflection and thinking about where you currently sit in the customer/seller relationship can keep to diminish and control wasteful leakage.

This is the fifth in a series of articles and case studies investigating the current and evolving state of the online marketplace. Do consider also reading parts one, two, three and four.