Max Brun discusses how to evaluate whether a marketplace will succeed. He covers network effects, supplier earnings as a key metric, and why Airbnb and Swimply work differently depending on whether network effects are global or local.
another post that you shared in the community more recently, which is around, you know, 6 questions that you ask, you know, when evaluating the potential for marketplaces and also some other kind of considerations such as defensibility. So could you kind of walk us through that post and maybe, you know, even expanding on some of those questions?
Sure. So this post, it's a short post. The good news, this is forthcoming as a Harvard Business Review article, and I think it's the July-August issue. So like in a month and a half or something, and I will share it with the community, but I'm very happy to share here sort of like in advance to go through the questions. So let's see. So might keep me disciplined here. I'm not sure, like I remember the exact order, but if you have it, we can go through it. But essentially, so we start, I mean, the first question is, actually what I should mention, the spirit of these questions, which is very important, is less about strategy and more about evaluating the potential of a marketplace, right? So let's say, Maybe it's most, I would say it's most relevant for investors, but also for founders to sort of evaluate the, you know, the best case scenario of the opportunity they're pursuing. So, you know, you have marketplaces like assuming you do everything right, how big or how, you know, how big and how defensible can this be? That's kind of the spirit. Happy to dig into the strategy questions as well. So the first one is basically saying, okay, well, yes, every marketplace has network effects, but really how strong are the network effects of this particular marketplace you're pursuing? And I mean, the answer to this, I mean, I know there's lots of, so VCs and investors, there's a lot of good measures. So, you know, they always look at total addressable market and things like that. So I think those are useful. I think the difficulty though with marketplaces is like, especially early on, it's a little bit hard to measure potential. So when you evaluate total addressable market, usually what people say, well, let's look at the service the way it's done today and say, well, if we capture, I don't know, 1%, or if it shifts to a marketplace, I think one issue— so I think it's useful, by the way, certainly something useful to do. What I would say is for marketplaces, the idea is like, if the marketplace really works, you're basically bringing online untapped supply. And therefore the market is quite different. So I mean, I'll give you an example. Think about Airbnb. Actually, I like a better one, a more recent one, which I like is Swimply, which is literally Airbnb for swimming pools. Quite amazing. It's doing very well. So with Swimply, you can say, well, what's the, you know, what's the total addressable market of people renting swimming pools from other people? And you might say, well, let's look at, you know, how many people go to swimming pools and how often, how much do they pay at public swimming pools, right? Sure, that's going to tell you something, but I think the behavior that Swimply is enabling is going to be much different. So yes, there's a bit of that, there's substitute, you're going to get some of that, but I think part of it is like, imagine now that you can rent all types of different swimming pools in your neighborhood from private individuals, and those are like really cool swimming pools, and people can put down, they can have a grill and toys and stuff like that. I think the behaviors that's going to be enabled is quite different. My point is actually the the market should be quite larger if it, you know, if it works well. So again, it's, I think it's useful to rephrase these questions as more like what would happen when untapped supply comes online and, and so on. And then the other piece of this question, which I, I always like to ask is basically to translate, is to basically make it very pragmatic, is to say, well, you know, measuring network effects is very hard. How about what's the potential earning for sellers or for suppliers on this marketplace? That's probably easier to get at. So if this marketplace works, how much do you think a typical supplier is going to make, a seller or supplier is gonna make on this marketplace? And of course that number has to be meaningful. It depends on the type of marketplace, but it has to be meaningful in order for you to be able to attract those suppliers, right? It has to be a meaningful economic opportunity.
You mentioned a lot of great points there. So I guess is that kind of covering one of the first questions? If we kind of jump over to the next, can we kind of walk through those?
Sure. The next one would be, say, are the network effects global or local, right? So this is global network effect is Airbnb. Hopefully that's obvious, right? I mean, Airbnb gets better the more hosts they have and for travelers, the more hosts they have in all countries and vice versa. You take something like, I don't know, TaskRabbit or Thumbtack, it's mostly local because you just care about people in your area. Now those are obvious. What's interesting, there's some marketplaces where they're kind of in between and point is like there's lots of shades of gray and again, there's sometimes, you know, for example, you can have people that move between locations, right? So if you have like the same buyers or the same sellers moving between locations, then it's actually your network effects extend beyond your city, beyond local, right? And there's some interesting examples of this. So You can ask, well, how many people are present in different locations? So on. In order to make that, how to say, a little bit clearer, a better way to ask it, I think, is when you move your marketplace to a new location, say you start in a city, let's move to the next city or to the next country or the next region. Do I get any advantage in terms of network effects from my existing cities or regions? And I think that makes it very clear. In some cases you can say, oh yeah, definitely my install base helps me because whatever those buyers and sellers are active across multiple locations and you can measure that. You can say, okay, well how many of these like are present in multiple locations and so on. So I think that's, I mean, that's obviously it's a useful one to have in mind. What else? Another question is around, oh, how much value does the marketplace add, right? So again, I'm sure we can open up to questions. There's lots of ways in which marketplaces add value, but I would boil it down to 2 fundamental aspects. Number one, marketplaces help people discover each other, so they help buyers discover sellers and vice versa. So there's the discovery element. And the second element is once you've discovered a trading partner, they help you transact in a more efficient way, hopefully, than you could otherwise, right? And it's interesting, some marketplaces, by the way, are just pure discovery. So I don't know, like my favorite example is Craigslist. They, they do nothing to help you conduct the transact. There's no payment system, there's no ratings, there's nothing. But it's very good for discovery, right? They just do discovery. Other marketplaces are mostly focused on enhancing your transaction, but there's little in the way of discovery for whatever reason. Either you already know the parties you're going to transact with or the discovery happens somewhere else, right? So I'm thinking like Patreon or Substack or something like that. Sure, you can discover, but People kind of discover their creators somewhere else and then they tell you, hey, come to my Patreon or come to my Substack and subscribe to my newsletter or like pay me there or something like that. So I think it's useful to have those in mind. I mean, ideally if you're a marketplace, obviously you wanna do both. So there has to be both discovery and there has to be, how to say, you have to add value by making transactions on your marketplace more efficient than they would be otherwise. And that obviously enhances network effects and defensibility.
