Founders Briefs: 5 Metrics to Decipher Two-Sided Marketplace Dynamic
When deciphering the dynamic of a two-sided marketplace startup, including the use of measuring market efficiency, revenue growth projection, and resource allocation, it is necessary for founders to extract relevant data and calculate the following metrics. Founders can then use these metrics to gauge the attractiveness of their marketplace business to both sides of users and explore how to use company resources in the most impactful way to grow their business.
Market liquidity: Simon Rothman of Greylock Partners defines liquidity as “the reasonable expectation of selling something you list or finding what you’re looking for.” Generally, your market liquidity will reflect the relevance and speed of your matching system.
- Seller (provider) liquidity: percentage of listings that move to contracts, which lead to transactions within a suitable time frame (ex. hourly, daily, monthly, quarterly), depending on the nature of your business.
- Buyer (finder) liquidity: the probability of a visit from either a buyer or finder, excluding those who quickly left (bounced), that will lead to contracts or transactions. This can be calculated as total contracts or transactions per month divided by total unique visits per month.
💡 Manage customer expectations: avoid employing a subscription revenue model when the marketplace is 1) low in stock/listings 2) low in traffic 3) lagging behind a reasonable transaction time frame established by competitors or traditional business players in the same industry, due to low matching relevance system or tractions.
Net Promoter Score (NPS): an indicator of growth, created by Fred Reichheld, Bain & Company, and Satmetrix, NPS extracts insights from answers to a simple question given to customers — “How likely are you to recommend our company to a family, friend, or colleague?” (On a scale of 0 to 10, 10 being the most likely.) To calculate NPS from that data, take the percentage of total customers who rate 9 and 10 (the enthusiasts and promoters) and subtract from that the percentage of customers who rate 6 and below (the detractors, who would spread bad word-of-mouth).
💡Calculate NPS separately for both your buyers (finders) side and sellers (providers) side. According to the article “The One Number You Need to Grow,” NPS has a high correlation to revenue growth, unlike customer satisfaction rating or retention rate, which show little correlation. Growing NPS means increasing both top-line revenue growth and bottom-line profitability while incurring less customer acquisition costs.
Concentration: By applying the Pareto principle (also known as the 80/20 rule), we can assume roughly 80% of your company revenue is generated by 20% of your users (sellers or buyers). Or, 80% of revenue on your platform is generated by 20% of product categories.
💡Who are these top 20% revenue generators? It is crucial to apply your resources to delight these users. Have your customer success team touch base with them on a regular basis(monthly or quarterly), so you can anticipate and fulfill their needs. Regular and personal contact with the top 20% will aid in growing your business as you help to grow theirs, while also managing your customer concentration risks. Similarly, consider the top 20% revenue-generating product categories (or talent categories in the case of a hiring platform)? Allocate most of your marketing investments to these.
Transaction per Active Seller (Provider) / Transaction per Active Buyer (Finder): the number of transactions per buyer to the number of transactions per seller (provider). “Active” is defined differently by different companies.
💡Uncertain which side should you focus on? It is important to generate supply for the side that has a higher number in the ratio to create more transactions. For example, consider an employment marketplace platform where candidates might get a new full-time job ( a contract) once every one or two years with employers that could hire for several positions yearly. Say on average, you have a ratio of 50:1 between the number of transactions per seller (job provider) and the number of transactions per buyer (candidate). While employers often list the job across several platforms or channels consistently for a period of time, candidates will most likely stick to the platform they got their last job with. Similarly, if candidates don’t find anything on your platform and transact on a different new platform, they will most likely never return to yours. This early experience is sticky, and its dynamic is intensified as the ratio gap grows. In this case, your team should focus on expanding the side with a higher number in the ratio — the employer side of the pool.
Buyer/finder and seller/provider overlap: number of buyers (finders) who are sellers (providers)
💡While organic buyer-to-seller conversation doesn’t take place in all types of marketplace business, it is highly beneficial to both revenue growth and reduction of customer acquisition costs if this already occurs your platform. Watch the presentation by Brian Rothenburg from Eventbrite to identify when this dynamic is organically happening and how to spur its growth.