The Magic of Online Marketplaces

by | Mar 25, 2015

The magic of online marketplaces

For the last 25 years the Internet has been the single most important (meta) driving force of innovation. As an information systems the Internet is on its way to allow for near-perfect competition breaking down friction in transactions in every single domain and every part of our lives.

A key area where this networked software value chain has and is providing tremendous opportunity by reducing friction is online market places.

Today’s best of breed startups and tech companies Ebay, Etsy(commerce), Facebook (social networking), Uber, Lyft (transportation), AirBnB (Hotel & Travel), Homejoy (cleaning) and Zillow (real estate) come into mind.

Online two-sided marketplaces are platforms where one group (buyers) is brought together with another group (sellers). The most fundamental principle for achieving marketplace eminence is reducing friction. Everything flows from there. From the user’s (buyers and sellers!) perspective this means making the experience of using the platform as seamless and pleasurable as possible. If a marketplace achieves this and network effects kick in then magic happens as Bill Gurley outlines in this seminal post.

Taking hence the reduction of friction in transactions as the basis one can analyze how to improve many different aspects of an online marketplace.

Though every touch point is important there are aspects that are relatively more important than others. We believe companies trying to build a successful online marketplace should pay special attention to the mobile imperative, an ‘invisible’ payment system and creating a level playing field.

Network effects

“The next step in the evolution of the Internet is the iteration from mobile to the IoT”

The mobile imperative, for now
Mind here that the focus on mobile isn’t because ‘mobile is everything and everywhere’, but because it makes perfect sense. Currently mobile is the best iteration of the Internet for the reduction of friction in online marketplaces. Mobile enables marketplaces to offer a user experience that is smooth, logical and coherent that was impossible 10 years ago. It amplifies, as Gurley outlines, Internet’s connective tissue. Making it possible to deliver value to buyers and sellers at the time they want it, at the place they want it. Case in point is the exemplary ease of use Uber offers both the consumers as well as the drivers on its platform.

The next step in the evolution of the Internet is the iteration from mobile to the IoT. And again this is also what the promise of IoT holds: reducing friction in transactions. The breakout use case of IoT might be very well an IoT-enabled online marketplace.

Frictionless financial transaction
A transaction is at it’s core whenever an item of value is exchanged. Because the deal is closed with a financial transaction it’s absolutely critical that the payment process is seamless. In other words, once users and sellers have come to agreement on the online two-sided marketplace they should be able to close the deal instantly and on the fly. As Anand Iyer outlines in this article the more technology can be leveraged to make payment an invisible process, the better.

Level playing field
For online marketplaces it’s a matter of life and death to achieve liquidity a soon as possible. Meaning a critical mass of users and sellers to keep the platform afloat. If the platform keeps providing value network effects start kicking in as it becomes more valuable for every single participant if more users are using it. Case in point is Uber: the more drivers Uber has the more interesting it will become for consumers.

The most important strategy to achieve this is to maintain a level playing field on your platform. Every participant on the platform, whether a buyer or a seller, should have the opportunity to succeed. You should in addition be utterly transparent about how you’re providing everyone the same chances and opportunities. This will enable you to build trust, the cornerstone of every online marketplace.

Do you need help with your online strategy? Contact Gerald!

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