Everyone is now familiar with online marketplaces. From Amazon to AirBNB, online marketplaces have gained significant traction over the last decade by helping customers find and purchase products.
Every now and then within climate and industrials, I’ve seen marketplaces start up with the promise of connecting large corporate buyers with other large corporate suppliers. And time after time, these types of marketplaces become disintermediated, and the marketplace cannot keep their customers on the platform.
So - when are marketplaces effective, and what makes a good marketplace?
The best marketplaces are those that aggregate complexity on both sides. Let’s take AirBNB for example. On the supply side, there are millions of hosts. These hosts are renting their space to new guests for every stay. On the demand side, a guest rarely ever stays in the same space twice.
The millions of hosts are constantly renting to millions of new guests, and each transaction is a unique combination of a new host with a new guest.
Because of this complexity, an online marketplace is needed to help match new hosts with new guests for every stay.
Marketplaces become less effective when the supply side and the demand side are less complex. Let’s take the following example: A Fortune 500 manufacturing company purchases raw materials for its manufacturing process. The raw materials need to have certain specifications, so the manufacturer will work with a well-known supplier and repeat the same purchase from the same supplier every week.
The manufacturing company doesn’t need a marketplace. If they need more material, they’ll pick up the phone and call the supplier that they buy from every week. Occasionally, the manufacturer may use a digital catalog to find a new supplier, but once they do, they’ll contract long-term supply agreements outside of the platform.
Marketplaces are ineffective in industries when the buyer prefers to purchase repeat transactions from the same supplier. Why would the buyer want to use a marketplace (and pay a marketplace transaction fee) when they can just pick up the phone?
So - when building a marketplace, search for industries where complexity exists on both the supply side and the demand side. Find industries where each new transaction is a new combination of buyer and supplier. Greater complexity creates greater need for a marketplace to facilitate connections.