Marketplaces Connect 2017, the first event dedicated to marketplaces in London, organised by Mangopay and Launchworks, was a resounding success. Over 120 marketplace professionals, from start-ups, scale-ups and mature marketplaces gathered on the 24th of January 2017 to share hands-on experiences and meet the marketplace community.
The iconic Wellcome Collection in London was the chosen venue for Marketplaces Connect 2017
The age of platforms and marketplaces
“In the last few years, marketplaces have taken over the world…”
Benoit Reillier, MD Launchworks
Since the industrial revolution, most businesses have created value through what Harvard Business School professor Michael Porter calls a “value chain”. In this simple linear process, that has powered our economies for the last two hundred years, firms buy raw materials and transform them into products before selling them to customers. For example, companies like General Motors use their value chain to turn steel and plastic into cars.
But in the last 15 years or so, something has changed and we have seen the emergence of a new type of businesses: platforms. Marketplaces are a type of platforms for the exchange of goods and services. Today, the top 5 most valuable companies in the world in terms of market capitalisation are now platform-powered – Apple, Alphabet, Microsoft, Amazon, Facebook.
At the heart of each of these businesses, there is a platform that unlocks the power of networks and communities. Think of Apple with its App store, a marketplace for apps. Instead of having an army of app developers, Apple orchestrates the ecosystem. With the Pokemon Go app, a single game that it barely knew about, Apple made more than $3bn from its share of revenues. Similarly, Amazon Marketplace generates more than 65% of the value of goods sold on Amazon, is growing faster than its traditional e-commerce business and represents 95% of Amazon’s total retail inventory.
The idea of a platform business is of course not new. Traditional platforms include companies like Christie’s Auction House, which for centuries has attracted, matched and connected buyers and sellers in physical locations. Christie’s has enabled them to transact according to their auction rules. But without the internet and mobile technology, such businesses have never scaled in the way that online platforms are now able to do.
Today, many firms are trying to become platforms. Currently, 40% of the investment in the UK above $20 million goes to marketplaces, compared to 20% for Fintech and 5% for e-commerce. So it is clear that marketplaces are where the action is.
The remarkable thing is that in spite of this extraordinary growth, nobody has attempted to formalise how a marketplace works. Everybody has been working with the mental model of a value chain. But that’s not how these businesses operate. That is why Launchworks has created the “Rocket Model”.
So what is different about a marketplace? Firstly, you don’t simply have one set of customers. Instead you have two sides – producers and users. And with that, you need two value propositions. Having to attract -and balance two sides -with two distinct value propositions- is one of the key distinctions between platforms and traditional businesses that only focus on one side.
Then, instead of “transforming” inputs into outputs as in a traditional value chain, you match people in the marketplace in a way that is relevant, timely and filtered. This is the critical thing that a marketplace must be good at, whether it is matching people with rides as in Uber, rooms with guests as in AirBnB or boys with girls with dates as in Tinder.
Once you have matched people, you need to connect them. This is because one party will often have more information than the other which can get in the way of the transaction, such as the market for second hand cars on eBay. To reduce this “asymmetry of information”, potential buyers can ask about previous owners or whether the car has been involved in accidents for example.
Then you get to transact, which of course is the raison d’être of the platform. It is often where the platform receives its share of the value, so it’s important to get this right.
Lastly, we get to optimise – not just the rocket itself, but the entire ecosystem. There must be a balanced ratio of active producers and users to ensure that the marketplace remains healthy.
This is supported by strategic enablers. Similar to the challenge of running a country, governance is key. You need rules and norms to decide who can participate in your marketplace and how you will deal with conflict, in the same way as a country decides who can be a citizen, and when to send someone to jail.
Trust is critical, not only in the marketplace itself, but also between the people who are going to transact. In recent years, there has been a radical change in people’s attitudes to trust. Ten years ago, if you went on holiday for three weeks to Australia and told people you were renting out your flat, people would think you were crazy. But today, people think you are crazy if you don’t rent out your flat!
Further evidence was provided in a survey by BlaBlaCar, which asked people to rate who they trusted on a scale of 1-5. Unsurprisingly, friends and family were most highly rated at 4.7, while a stranger online was rated 1.0. However, with a photo, verified information and positive reviews, trust for an online stranger went up to 4.2! That’s why people are prepared to trust total strangers to drive them across the country, which happens thousands of times every day. And of course, your brand must support that trust in the concept, the platform itself, and the person you are going to transact with.
Then we get to key enablers. IT Infrastructure is fundamentally important, but the technical solution must be driven by business requirements. Payments and the design of a frictionless experience is a critical step to enabling core transactions. Finally the platform has to be focused on user experience. While a large part of this is delivered by participants themselves, the platform can influence positive outcomes, for example by prioritising people with the highest feedback in search results.
When all these aspects work successfully together, marketplaces can deliver what people are looking for: great selection, a long tail, convenience and best of all: value. This is why we have entered the age of marketplaces and platforms. And this is just the beginning…
Photo credit © 2017 Anthony Upton