Sri Batchu explains when marketplaces should launch sponsored listings: you need fragmented product categories and enough GMV to attract advertisers. Instacart hit $20 billion GMV during the pandemic and became viable; at $5 billion it wasn't. Advertisers won't commit if minimum spend is too high or inventory too thin.
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My question is about kind of the prerequisites that a marketplace needs to sort of have in order for sponsored search to be sort of a good monetization strategy. And my second part of that is like, are there any sort of blockers? Are there things that you see that just completely kind of knock that strategy out of the set of viable ones?
I mean, I think the 2 things are what you would expect that are most important to make like a sponsored listings ad work, right? One is fragmentation of players on the platform. And 2 is critical mass of ad inventory that you can solve. And so I'll get into both in a minute. So Instacart doesn't have a ton of fragmentation, but there's still a lot of brands, right? That are, so we, these things are more competitive in certain areas than others. For example, in ketchup, There's only like 2 players, right? Well, 3 maybe. But so in those categories, you tend to find that the ad yield is lower versus like sparkling water. There's hundreds of players. And so the yield on ads there is much higher. So how competitive is a given category for search matters a lot. So if you've got a lot of competitive categories with fragmented user base where discovery will be important, the advertisers will spend a lot. And so the ad product will work well. And then in terms of the critical mass of inventory, what's interesting is, you know, Instacart in 2019 had a little over $5 billion in GMV on the platform. And you would think that's a lot of, you know, GMV, like that should be building a good ad product. But honestly, it wasn't that much because if you look at Coca-Cola, You know, the amount of sales on Instacart were still pretty small compared to other channels that they were selling in. And so it just didn't, it was close, but it didn't quite hit the, oh, we have to advertise on this platform and think about it. But the next year with the pandemic, when Instacart crossed $20 billion in GMV, all of a sudden it became a lot more interesting for all these advertisers. And, you know, Instacart has the contractual relations with retailers But the ads business we had to build from the ground up. Like we were messaging, you know, brand managers on LinkedIn to be like, hey, like we've got a new ads platform. Do you want to come and talk to us about investing? Even though we were a big company in other respects, we had to do everything from the ground up. And so the critical mass of impressions matter. So the first thing that they'll ask is, okay, like how much can I deploy in this channel? And if the answer is like $10,000 max, Which that might be okay actually, that might actually be a win because they're like, okay, it's fine, whatever, small amount test budget, I'll throw it in. But if it's like max is $100,000, then it's kind of like neither here nor there. Do I really want to add this additional channel to manage across all of my channels? And it's like above my test budget. So, you know, it's gonna be harder to convince somebody potentially.
