The Hierarchy of Marketplaces
What I learned from Sarah Tavel's Hierarchy of Marketplaces, and how it can be applied generally
A few weeks ago I came across Sarah Tavel’s The Hierarchy of Marketplaces. Sarah is a VC at Benchmark who invests in marketplaces (among other things).
The details of what she wrote are key for anyone starting or funding a marketplace business.
The big picture is vital for all business.
I wanted to break down the post into two parts: First, a summary of her major points. Second, an application of these points for just about any businesses.
The Summary
Sarah breaks down the hierarchy into three goals:
Goal 1: Minimum Viable Happiness
The first thing any marketplace business should solve for is consumer happiness. Find a customer base and maximize their happiness. Unless you’re doing that, nothing else matters.
Sarah recommends picking a constrained problem (and making sure it is not a dead end). If the customer base is small and/or the market lacks competitions…those are good things.
For example, many marketplaces- ride share, food delivery, etc.- started local, serving one geography to perfection before moving on.
Sarah mentions the best metric is revenue retention, which is really just another way of saying “consumer happiness”. Don’t worry about growth. Growth will come when you maximize happiness.
Goal 2: Identify and Maximize Tipping Loops
After you found a small customer base and maximized happiness to a point where you are appreciably better than any substitute, the market will begin to ‘tip’ in your direction.
The key to growth is maximizing one of the two following loops:
Growth loops- drive down acquisition costs by leveraging existing buyers and sellers to help the marketplace expand (think Uber promotions where drivers and passengers are paid to refer friends)
Happiness loops- help buyers find the best suppliers and improve the experience for both sides of the marketplace (think AirBnb where reviews reign king)
Goal 3 Become #1…By a Wide Margin
Once you have 1) maximized happiness and 2) tipped the scales in your favor, you are ready to dominate. Sarah talks the following process:
Become #1 by a wide margin in your original market. In other words, keep maximizing happiness. Competition will come.
Expand beyond your market and broaden the use cases (this could be Uber moving from city to city at first, then moving from UberX to UberPool).
Repeat- while keeping your brand consistency in mind.
In other words, keep doing what got you to the top of the hierarchy…and do it elsewhere.
Applying the Hierarchy of Marketplaces to any Business
What makes Sarah’s hierarchy so great is it’s simplicity. She’s an expert in launching and scaling marketplace businesses. But this also makes her an expert in launching and scaling any business.
Her hierarchy can be broken down into the following game-plan:
Find a small customer base you can make incredibly happy.
Make them incredibly happy.
Find a way to continually improve 1) happiness or 2) customer acquisition
Repeat for other customers.
And if you want a simpler game-plan:
Make customers happy.
Repeat.