Two-sided marketplaces need metrics beyond standard conversion rates. UrbanSitter shows how adding babysitters doesn't help parents until transaction costs drop enough, then supply growth suddenly drives parent retention. Founders should measure cross-market elasticity: how supply-side growth impacts demand, and vice versa.
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as far as, you know, some of the challenges that kind of come with scaled liquidity. So it would be great to spend some time maybe talking about that. And as you mentioned, some of your evolved thoughts.
Yeah, that's, so one sort of like advertisement I want to put out there is I'm going to be teaching a couple-hour live course at Stanford sometime in February that's going to be, you know, open for people to sign up for. So look out for that. I'll probably announce it on LinkedIn at some point. And part of what I'm testing out the waters with here is some of the thoughts of things that I'll, you know, I'll try to mention on that. on that call. And so one thing I want to talk about is metrics. That's, you know, talking about sort of what's, how do you know where you're at as a founder? You know, so I think one way to think about it is if you start a company, what are metrics you're gonna care about, right? So one metric you're obviously gonna care about is something like conversion, right? Growth. You'll look at daily active users, you know, retention, right? So all the usual metrics. If you go like to ChatGPT, you say, I'm starting a new business, what are the top 10 metrics I should look at? The thing is, those 10 metrics are gonna matter to you whether you're a marketplace or not. So what's important is what metrics are different because I'm a marketplace. And the kinds of metrics I want people to focus on are metrics that are testing the sensitivity of one side of the market to the health of the other side of the market. So what does this mean? When you start, you're gonna be in a place where if you increase the number of suppliers on the opposite side of the market, that's actually not having a huge impact. on the behavior on the demand side of the market. Simple example, I mentioned UrbanSitting, I think in the podcast with Lenny, it's a babysitting marketplace. You have parents, you have babysitters. When UrbanSitter started, if you added 10 babysitters, this wasn't going to change anything about parent behavior. Parent behavior was entirely just constrained by the friction of booking and paying babysitters, not determined by the liquidity on the opposite side, right? When they get bigger, you get to a place where now suddenly you realize, oh, you know, if I can add another 100 babysitters, I'll have much better retention of parents. I'll have much better conversion of parents. And those kinds of things, they only happen when you get to a place where the limiting factor to someone's engagement with your platform is whether or not they feel like they're seeing enough on the opposite side of the market. And I think it's counterintuitive. You might imagine, well, obviously when you're young, that next babysitter is hugely valuable. The problem is that can't be the case because You're not at a place where people are coming to your platform for liquidity. They're coming to your business to solve a different problem. That's what I talk about in the podcast with Lenny. There are other transaction costs that you're dealing with, not liquidity. And so early on, ironically, the early additions you make on the opposite side of the market, they're not the reason you're getting more people. So the metrics you want to be paying attention to are how does one side of the market respond to growth on the opposite side of the market? And when does it start to seem like the response of growth to the increases on the opposite side of the market is positive? How could you see this? You can look at marketing investment and growing the opposite side and ask sort of what's the impact of that marketing investment on, let's say, the, you know, you invest on the driver side, what's the impact of that on my rider side, right? And vice versa. So these kinds of metrics are what I call cross-market metrics. And those are the things, you know, certainly if you're an economist who thinks about, you know, market design, network effects. These are the things that those papers are all dealing with every day. But I came to realize that, you know, if you were a founder, that just looks like a jumble of metrics. These don't look any different to you than conversion rates, right? In a way, it is a conversion rate. And I'm sort of asking myself as a, you know, what's the conversion rate of a user against the supply side? What I'm trying to say is, well, actually it's not that obvious, you want to split that apart a little bit. You want to ask just what's the raw probability customer buys something from my business? But then you actually are here asking about a derivative of that with respect to the rate of change of the opposite side of the market. And I think it's that kind of thinking, this kind of cross-market elasticity is the term that an economist would use, that I think is very important to distinguishing when you are versus are not a marketplace in the sense that I've been talking about up to now in the call.
