Skip to ContentReforge logo

4 Tips for a Strong Marketplace Strategy

Marketplace dynamics make strategy and decision making particularly challenging. You are trying to serve two different customers - supply and demand - simultaneously.

It’s incredibly hard just to have enough supply for the demand, and enough demand for the supply; but even that isn’t enough to be a thriving marketplace!

As a product leader, you need to understand how to use metrics to enable your team and ensure the health of the marketplace. You need to understand supplier value and cost, and know when to make difficult decisions to preserve quality. If you come from a SaaS background, you also need to shift your framework around how to involve cross-functional stakeholders.

In this article, Kleanthis Georgaris and Ben Lauzier pool together their experience to share 4 tips that can up-level your marketplace strategy.

Meet The Contributors

Ben Lauzier

Ben Lauzier

Ben was the VP of Product & Growth at Thumbtack where he rebuilt the Product team and Thumbtack's Growth levers, re-architected the revenue model, and helped 3X Thumbtack's Growth within 3 years. Prior to Thumbtack, Ben was at Lyft for 6 years (employee #30 until IPO) where he primarily led the Supply side of Product to reach 1% of US workers driving for Lyft every month.

Kleanthis Georgaris

Kleanthis Georgaris

As Toptal's SVP of Product since 2017, Kleanthis has been instrumental in driving hypergrowth at one of the world's leading talent marketplaces. With expertise in marketplaces, he boasts a diverse background from Microsoft and McKinsey, involvement in various early and late-stage startups, and experience founding his own venture.

1. Define Your Marketplace Health Metrics

In a marketplace, the goal is liquidity: the ease and speed at which supply and demand can transact. Often, you measure marketplace growth by the number of those transactions. If you’re Airbnb, you want more and more bookings. If you’re Lyft, you want more rides.

But when you dig a level deeper, you’ll realize there are many different ways to get to a certain number of rides.

Supply utilization rate is a critical input into a healthy marketplace: What share of total available supply is used by demand?

For example, imagine if Lyft wanted to get to 1000 rides a day, and each passenger on Lyft takes one ride a day. They could reach 1000 rides a day with 1000 passengers and 10,000 drivers. This would be great for the passengers: they would barely have to wait to get a driver since there are 10x more drivers than passengers! But, drivers wouldn’t be thrilled, because at best, even if each passenger had a unique driver, 9,000 drivers would go all day without giving a ride and therefore not making any money.

On the other hand, the match and fulfillment rates are also important: what share of demand is able to find a match and successfully complete a transaction?

At Lyft, we could think of still having 1,000 passengers, but only 100 drivers. To get to 1,000 rides, each driver would give 10 rides a day. That’s great for drivers, they are being well-used and making money! But that is not great for passengers. The wait times are likely to be long if they can even be matched with a driver.

4 Tips for a Strong Marketplace Strategy

This is what leads to the idea of a marketplace health metric: a metric that can help you make fast decisions correlated with how much of supply is being used and how successfully demand is matching with supply.

“So what is the right ratio of supply and demand? How do you know if you have achieved it? This is where measuring marketplace health and defining a healthy range or target comes into play. Your marketplace health metric should correlate heavily with your demand/supply ratio, and with retention/engagement of your supply and demand.”

— Ben Lauzier, former VP of Product & Growth at Thumbtack

Estimated wait time was this metric for Lyft. It correlates with how many drivers there are relative to number of passengers, how likely the passenger is to request a ride based on how long they assume they have to wait, and how much a driver is likely to make in a market at that time. This one metric with a target range of what the ideal estimated wait time should be allowed Lyft to move very quickly across many dynamic markets.

When you’re balancing a lot of data, a lot of uncertainty, and the interconnectedness of supply and demand, a single marketplace health metric can help you make decisions fast and prioritize resources effectively.

2. Don’t Try to Prevent Disintermediation Directly

Disintermediation is when a supplier and buyer move off of the marketplace platform to interact. So while the marketplace puts in the effort to match the two, the marketplace doesn’t get its piece of the transaction.

Losing this revenue hurts. Many leaders who are newer to marketplaces fall into the trap of trying to impose controls.

“Trying to prevent this from happening through measures is a waste of time. People will always find ways to circumvent your system.”

— Kleanthis Georgaris, SVP of Product at Toptal

Instead, it is critical to understand that disintermediation is caused by a mismatch of the value people get and the cost they have to pay. This can also change over time. For example, there might be very high value in the first interaction in a marketplace, but far less after 6 months. If the cost remains the same, there is an imbalance.

“For the longest time, we [Thumbtack] wouldn’t give pros the customer’s phone number partially in an effort to prevent disintermediation. But we realized to address disintermediation, we had to reconsider the value we were offering. We couldn’t charge customers beyond the value we were providing.”

— Ben Lauzier, former VP of Product & Growth at Thumbtack

There are two ways to address intermediation: adjust cost or increase value.

4 Tips for a Strong Marketplace Strategy

Let’s explore both the cost and value levers marketplaces can use.

Two primary ways marketplaces can adjust costs

When the cost of using the marketplace is in line with the value delivered, there is less incentive to move off of the platform to “save” on the costs.

4 Tips for a Strong Marketplace Strategy
  1. The first way a marketplace can adjust costs is by lowering the fee to transact.Uber and Lyft, for example, have fees that are low enough that most riders and drivers don’t find it worth communicating directly with one another to arrange rides. Marketplaces can also lower the fees through loyalty programs to incentivize enough volume, in a similar way to how airlines waive seat selection fees and baggage fees for their top customers.
  2. The second way a marketplace can adjust costs is by leveraging the fee structure to capture the full value, including future value, of the most useful transactions.

By charging a higher fee where the most value is added to supply and demand, it is easier to reduce the fee on other transactions where the marketplace does not add as much value.

Let’s consider Thumbtack, a marketplace that connects people who do a job to people who want a job done. They realized it would be very hard to prevent disintermediation of a weekly house cleaner. Why would you keep paying a marketplace to schedule following cleanings when you can pay the cleaner directly?

The biggest value Thumbtack was providing was introducing a cleaner to a regular customer as well as a customer to a regular cleaner. They adjusted their fee structure to charge more where they added more value, and less with follow on transactions.

On this side of the scale, marketplaces can adjust how much people pay for the value they receive. However, you can also adjust the value people receive for the level of cost they incur.

Three ways marketplaces can increase value

Alternatively and simultaneously, marketplaces can look into providing more value. The more value that comes from the marketplace, the harder it is to leave it behind to disintermediate.

In general, there are three value drivers of a marketplace:

  1. Helping one side find the other
  2. Helping demand receive what supply is selling.
  3. Building trust that it’s better to communicate and conduct business through the marketplace

Marketplaces can add value by increasing how well they do each of those things.

1.Marketplaces can add value by helping suppliers attract even more demand. This can include things providing analytics, or upskilling suppliers. For example, a marketplace might provide information on how suppliers can price more competitively or market more effectively to their target audience.

Toptal provides talent with ways to get certified in high-demand skills, access to coaching support, and the ability to showcase expertise by publishing in Toptal’s channels.

Thumbtack shares insights with pros on how they compare with competitors in their area around pricing, reviews, and responsiveness.

2. Marketplaces can also add value by making it easier for demand to receive value from the supply. Collaboration tools and managed delivery are two examples of this.

At Toptal, for instance, the marketplace provides tools for the clients to communicate with talent and receive deliverables. This means that clients don’t have to set up their own processes with contracted talent, but can just use Toptal’s. Clients also don’t have to worry about legal documents around non-disclosures and intellectual property; the marketplace provides this.

3. Finally, marketplaces can increase the trust that both demand and supply place in them. Marketplaces can become more trusted if users of the marketplace have higher confidence that they will find what they are looking for and receive what they expect. Vetting suppliers can help demand trust that they will find a certain level of quality. Reviews can help demand determine if the supply is actually what they want.

Marketplaces can also increase trust by reducing the risk of a transaction. For example, Thumbtack started providing insurance to their pros. If they book their jobs through Thumbtack, then they would be insured should something go wrong during the job rather than have to pay out of pocket.

Toptal provides a payment guarantee to its talent. They ensure the talent gets paid even if the business doesn’t pay, and they mediate in case of disputes. For talent, it is of tremendous value to have payment guarantee. They also provide a 5 day risk free trial to clients; if a client is not happy with the talent they’ve started working with, they have no obligation to hire or pay them.

Focusing on the core of disintermediation, the off-balance value and cost, is a much better use of your time than trying to implement measures that prevent it.

3. Choose and Manage the Quality of the Marketplace

Marketplaces are built on trust, and quality is the primary reason for trust.

“If you lose quality, you’re losing one of the two reasons you exist. It’s going to work in the short term, but it’s not going to scale.”

— Kleanthis Georgaris, SVP of Product at Toptal

To be clear, not every marketplace needs to be a high-quality marketplace. The key is to make sure the quality of supply and the quality of demand are at the same level and to maintain the level of quality on both sides.

It is very challenging to regain the expectation of quality once you lose it. So marketplaces that want to be high quality will sometimes need to make counterintuitive decisions, like choosing not to add more suppliers even when there is too much demand.

Managing the Quality of Supply

Many people intuitively understand the need to manage supplier quality if you want to be a high-quality marketplace.

If you bring on suppliers that are below par, demand will have a negative experience. That demand, which used to be high quality, will likely not be willing to pay the same amount for the marketplace, pushing prices down. As a result, the top suppliers leave, and lower-quality suppliers fill their place. It’s a vicious cycle.

There are many tactics marketplaces can use to ensure supplier quality. When finding and onboarding, marketplaces can impose screening and vetting procedures, ID verification, or mandatory education.

While the supplier is in the marketplace, the marketplace can incentivize quality through reviews, rewards, and continuous education around best practices. Through performance monitoring and enforcement policies, they can also take action to remove suppliers that don’t continue to meet a quality bar.

Additionally, marketplaces can have a minimum bar for the price. That way, instead of the price fluctuating with different quality, instead the marketplace chooses to filter out the suppliers that cannot provide the quality expected at that price.

With quality, you always need to be thinking about the future impact of the decision made today. While maintaining quality can come with a short-term trade-off in volume, compromising quality can come with a long-term trade-off in marketplace economics.

Managing the Quality of Demand

Managing supplier quality is hard, but the problem is well-known. What product leaders often miss, however, is the importance of ensuring quality demand as well.

While it can be easy to believe that anyone that pays should be a part of your marketplace, this can be particularly challenging if you are a marketplace that connects services and people, rather than products. Suppliers that are providing services will be impacted by whom they are providing services to.

If you vet suppliers in a marketplace to ensure high quality, but do not have reciprocal measures on the demand side, you end up with suppliers that are higher quality than demand. This can lead to demand unwilling to pay, or in service marketplaces, supply unwilling to sell to demand. Similar to the issue of having sub-par supply, you then have a downward spiral because of lower quality demand.

With Toptal, they want to make sure that the talent is satisfied with the clients and projects they get through them.

“Not only do we want clients to have a good experience with Toptal talent, but it’s critical for us that our talent has a good experience working with different clients through our platform.”

— Kleanthis Georgaris, SVP of Product at Toptal

There are a few tactics a marketplace can use to manage quality of demand. First and foremost, there needs to be an internal company culture of quality coming first, rather than a culture of “whoever pays is right.”

Similar to the supply side, companies can include vetting processes to verify the buyers, allow suppliers to rate the demand, and have policies that prohibit participation in the marketplace if certain standards are not met.

To contract talent through Toptal, companies (demand) need to meet certain criteria. For example, each project has to meet a minimum length and have a budget in line with the talent rates of the network.

Toptal also seeks to understand the requirements of particular projects that are high quality companies that maintain a reputation of being good to work for. They want to make sure their talent has positive experiences, and continue to choose Toptal.

As a marketplace, you need to think about the value, or cost, of demand beyond the initial transaction on a marketplace. Marketplace quality is about both sides of the marketplace.

4. Cross-functional Partners Play a Critical Role in Marketplaces

A major role of the product team, in any business, is to create cross-functional partnerships to deliver user value. Products that cannot deliver value in a self-serve way usually have an operations team that ensures product and value delivery.

In marketplaces, the value the actual marketplace product delivers is the introduction between two or more parties, and the facilitation of the transaction.

While Lyft or Uber doesn’t provide the direct value of driving a rider from point A to point B, they do provide a rider with the option to find a driver within minutes.

Similarly, eBay doesn’t sell you a laptop directly, but it does provide you with hundreds of sellers that have laptops you can choose from. As a result, the marketplace value is intimately connected to suppliers having and delivering the value the demand side wants.

Operation Teams are the Catalyst

Operations teams can be responsible for sourcing supply, matching supply to demand, and upholding the quality of supply. As a result, the operations teams in marketplaces are not only critical for value delivery, but they are unique and robust sources of input and feedback for the product team.

“The operations team is the one team that is acutely aware of the disconnects between supply and demand. With the right working relationship, operations can feed really sophisticated and complex feedback easily into your product roadmap.”

— Ben Lauzier, former VP of Product & Growth at Thumbtack

Close collaboration between product and operations teams in marketplaces is key.

At Toptal, they’ve put processes and ceremonies in place to ensure that the teams are operating in lockstep. For example, the product and operations teams have shared goals. Each product domain maps to an operational domain to make it easier for both teams to regularly discuss challenges and align priorities.

Even at a leadership level, there are joint calls where each function presents business cases to one another and gets sign off from the other function before moving forward.

Understanding the voice of the customer through an operational lens is a foundational need for marketplaces, and the right collaboration set up between product and operations is a key enabler.

Marketplaces are all about trade-offs

Product organizations know how to make tradeoffs. But it’s critical to understand the increased level of complexity that’s added in when considering a marketplace.

A marketplace strategy needs to enable product teams to make fast decisions, preserve core value propositions, and focus on the most important things. By using the five tips shared by Ben and Kleanthis, marketplace leaders can start to build a strategy that leads to sustainable growth and a strong marketplace flywheel.

To learn more about product and growth, check out the library of content Reforge offers and consider applying for membership today.

Apply To Reforge

Ben LauzierKleanthis Georgaris