5 lessons I learned while building and scaling a category in the marketplace business
strategy, marketplace, category launch, technology, product, metric, business model
Dear Readers,
Not posted anything in the last few months but I hope that you enjoy reading this new post, a self-reflection if you will. Look forward to your comments and inputs.
But first thing first, I want to quote Henry David Thoreau —
I do not propose to write an ode to dejection, but to brag as lustily as chanticleer in the morning, standing on his roost, if only to wake my neighbours up.
Here you go,
I was involved in building and scaling wearable technology under consumer electronics category (CDIT) - marketplace business model.
The basic idea of marketplace is similar to that of existing players in the market - The marketplace platform connects supply-side to the demand side (Third party sellers (3P sellers) to customers) and monetize through the take rate on GMV and other services i.e. advertising, fulfilment services etc.
Here is what I have learned by laying down the ground-work of sub-category launch, from the successes and failures, and the observations.
1. Get the staging right
For the launch, we introduced all the sub-categories in the market at once. There was no specific TG (target segment). We wanted to serve all the pin-codes in all the cities (18K+), whether metro or non-metro, or rural ! We wanted to have all the product offerings at all the price points (200 INR to 40000+INR)! We wanted a big-bang launch.
The problem with this approach was that we were not fully prepared to manage the complexities involved in the operation. We didn’t anticipate the problems that would occur at multiple stages of order life-cycle and ready for them beforehand and plugged them afterwards.
While we were aware of the larger issues, we had planned for a big promotional event that could have and had worsened the situation. Since everything was manual till the date, the system was not able to manage the flux of the orders and processes around the order fulfillment.
Once the perception of the experience is built in the mind of your customers, it becomes challenging to regain the trust.
86 Percent of Consumers Will Leave a Brand They Trusted After Only Two Poor Customer Experiences.
As it is a multisided platform, building and retaining trust on both supplier-side and demand-side is critical. It’s a business of credibility.
What could have been a better approach was to launch with few pin-codes focussed on cities with right infrastructure in place and few categories and as soon as the problems becomes apparent, hard yet necessary measures should have been taken with the long-term view in mind.
An excerpt from - Are you sure you have a strategy?
In erecting a great building, foundations must be laid, followed by walls, and only then the roof.
Digital Marketplace, in the simplest form, exists to reduce the friction and improve transactional efficiency between suppliers and buyers. This comes from product and technology. Without this, you just have a website and you are selling online. You need a minimum viable product before you scale (at least to validate your business model).
This brings me to my first lesson - get the staging right.
What should be my parallel and sequential moves in order to launch the business?
What should be the order and pace of the activities that I need to carry out in order to launch the product or business in the market?
What all do I need to do before scaling the business?
When and how to expand in the market?
Staging decisions should be driven by several factors—resources, urgency, credibility, and the need for early wins. Because few firms have the resources to do everything they’d like to do immediately, they usually have to match opportunities with available resources.
Let me take you through one example.
As a part of the initial sub-category launch product portfolio, we went live with high ASP (Average selling point) products. But the infrastructure required i.e. insurance, seller-facing reimbursement guideline, logistic partners capable of managing high value items, open box delivery etc. was not ready.
Moreover, there was no deliberation on the target segment and accordingly, traffic planning and marketing investment to attract such HNI customers. Customers who is buying 10K+ product would require a superior service delivery experience compared to the customers who are buying grocery items from the platform. Those guardrails were not put in place when we launched high ASP products under sub-category launch.
Another example,
We have launched fulfillment services without understating product-market fit. We haven’t acquired a critical mass of target customers or sufficient sales, which is crucial for the success of the fulfillment business model. For this model to function well, additional incentives to sellers such as low return, free liquidation, reporting system, automated pricing control, tools to manage excess inventory, visibility, traffic, is required. The backbone of this model is product and technology, not the pressure tactic to sellers. It should be a viable business model to them.
Pursue market in logical sequenceWhat I have learnt from this entire experience is that you do pilots and once you have a viable business model and strong value proposition, Scale.
Build a relationship based on mutual trust and with long-term view. Build the credibility in the market. Build a minimum viable product and leverage feedback loop to improvise. Get the basics right.
Scalability comes from automation and technology. There is a trade-off between technology cost, product quality, and speed to market.
In order to scale, one need to be able to automate manual tasks and set processes in order to achieve scalability. What works in the beginning stages will not work in the longer run when you scale the business.
When we launched the categories with the few sellers on the platform, our workflows were heavily reliant on the excel spreadsheets. For example, payment reconciliation required the seller or the team to download multiple spreadsheets, and make a sense of it by pivoting and all. Similarly, if any SKU is OOS (out of stock), the team would inform the seller to replenish. 90-95% of workflows were manual, tedious, and required 10,000 spreadsheet to fill.
In the short-run, this might be ok. This will not work in the long-run if you are running a marketplace business.
Tools or processes that worked in 0 to 1 stage will not work for 1 to 10 or 10 to 100. Lets zoom out for one second.
Why do the platform business exists? What value digital marketplace bring to all the parties involved? What’s the purpose of their existence?
According to the definition by Scott Galloway which in the context of Marketplace works,
“Platforms are horizontal networks that connect buyers and sellers, speakers and listeners, creators and consumers, to one another, bypassing traditional gatekeepers. The internet is such a platform, of course, and it hosts many others: Twitter and Facebook, YouTube, Etsy, eBay, and Airbnb.”
The seller partners supply inventory and handle day-to-day operations such as delivery and human resources, platform
Generate demands (Traffic and traffic quality)
Ensures transaction efficiency - Payment, insurance, delivery, 3rd party API integration to get inventory real-time updates for all parties involved in the transaction etc.
Reduce transaction cost
and provides the best optimal match via matching algorithm (Search or discoverability, personalization, recommendation functionality)
The matching capability is the core of any platform business. It simplifies the process for customers to find and discover products they are interested in, while simultaneously helping suppliers to identify and target the right set of the customers for their products. This requires tech focus. This requires setting up processes and solutions that can solve problems at scale.
From The platform play: How to operate like a tech company
Just as important is that the business and tech sides of the company work closely together and have the decision-making authority to move quickly.
Back to my learning no. one on staging, The speed of the supporting functions such as finance, supply chain, logistics partners, and customer support should ~ match with the speed of the core business team that drives demand and supply on the platform. Achieving this level of efficiency requires the use of technology and automation.
Note - The size of bubble is indicative of the strength/resource of the team. This is a fictional graph only for illustration purpose with weak link to reality.
it’s important that you are building the tech infrastructure and architecture that could scale from the day 0. The platform should be designed to be modular, pluggable in order to achieve desired experience and speed.
I would love to know what do you think about outsourcing technology.
If you are a marketplace platform business, should you consider outsourcing the technology or should you build in-house capabilities. What are the risks and rewards associated with each decisions?
Seller experience is the input to customer experience. Customer experience is the input to seller experience.
Most problem statements in the platform business fall into two buckets: Seller experience (Supply-side) or Customer experience (demand-side).
More often than not, seller experience (sellers are also customers within the platform business) is frequently overlooked. It's important to recognize that seller experience can't be viewed as an isolated metric of the business.
If the business doesn’t support partners and not address their major and valid pain-points (High return, payment not done), you can’t expect partner to come onboard and demand their business from them. Important to remember that it’s not extraction, it’s a relationship based on trust and cost-benefit analysis.
As long as it’s profitable business for them, they would be willing to do business with you. All your key metrics OOS, pricing, assortment size depends upon how much sales you generate for the sellers.
It was assumed that impact on metrics is linear not circular.
Let me explain this through a scenario.
We know that platform is a classic case of chicken-and-egg problem. Without the selection and brands, buyers have no reason to download the app and order. And without the buyers, sellers/brands have no reason to join the platform.
Supplier-side is easy to onboard since additional channel would help them to improve their customer reach. So assume that, you have passed the initial hurdle of chicken and egg successfully to an extent.
The challenge is when you don’t have enough sales for them to stay on. Plus, As the platform increases their workload and intangible costs (such as managing day-to-day operations and dealing with various issues), suppliers are more likely to drop off.
Input metrics (Inventory, selection, price, product quality) leads to output metrics (GMV, NMV). And high GMV, NMV further leads to positive impact on input metrics since suppliers would be more willing to work with you for inventory, pricing and other dimensions. It’s a cycle.
Hence, The most damning thing that you could do for your business is to ignore voice of the sellers and customers.
Especially new businesses would benefited from the feedback look, especially the negative feedback loop, wherein every new addition of user (Seller or buyer) will help in improving the overall product and hence attract new users.
4. Multisided Platform business positioning is more complex than brand or product positioning since it involves interactions between multiple players in the ecosystem. It is an important aspects of the business.
When I started working on building wearable tech category, I had a very vague idea of the overall platform positioning. The positioning of the platform and how the platform is perceived in the market would have an impact on overall category plan.
Platform positioning is trickier than product (i.e. FMCG products) or brand positioning since it requires positioning for both the supply-side and demand-side, and ensuring that both align with the overall platform value proposition. You need to have equally strong value proposition for both parties (Cx ≈ Sx).
For instance, if you are promising exceptional customer service and good quality products for the demand-side, it’s important that on the supply-side, you have brands or sellers who share the similar values and customer service tenets. And it's important to select logistics partners (3PL) that are dependable, efficient, and share your commitment to providing an excellent customer experience.
If 80% of the brands/seller partners on the platform sell inferior quality products, then it is impossible to position the platform as selling branded, quality products or International, high ASP products.
Similarly, if 70% of the buyers are not genuine customers and placing fake orders or with high return, then it would be harder to convince supply-side to play in the ecosystem. And position yourself as a trusted partner. Head and Marquee brands had to manage their brand perception and customer experience in the market. Hence, you have to craft a value proposition aligned to their positioning.
Even if your strategy is to become a “mass market” marketplace, you need to have a product that helps them to discover products that’s just right for them. (Read Personalization Netflix). As a platform business, you can’t just have a multitude of brands and products, and all kind of customers, and call it a day.
Ultimately, platform positioning is about asking these fundamental questions as an organization-
Who are you? What do you want to become? Who are you? helps you to build your brand identity and personality. Values and your unique selling point that differentiate you from the competitors.
What do you want to become defines your business strategy, goals and objective that align with your brand’s identity, vision of the company, and what do you aspire to achieve in the future.
I have learnt that platform positioning can’t be an afterthought and every steps that you take should be in the direction of your positioning strategy.
Platform positioning can not be achieved by one advertising or one promotion, it’s a consistent, 360 degree, and dynamic effort at all aspects of your business telling one unified story. Platform positioning and positive perception is intrinsic to the overall growth strategy.
Metrics are mere tools and not the magical wand. Monitoring and reporting too many metrics is not equivalent to running the business.
At the beginning of the fiscal year, the category team set its objectives and one of the main objectives is to increase the GMV (Gross merchandise value) of the category, a commonly used metric in the marketplace/e-commerce business.
The intense and singular focus on achieving GMV and other targets could lead to unintended consequences and behavioral changes within the team. Under pressure to achieve the goal, team members may begun gaming the system. Because their performance is linked to the target, the team may feel pressured to prioritize increasing GMV over other important factors, leading to a shift in focus that was not aligned with the overall marketplace vision.
For examples,
Increase in GMV by pushing products with high defects, and hence return -
Once the transaction is completed by the customers, it gets accounted as GMV (minus customer cancellation). If the product is later returned by the customer, it gets captured in the NMV (Net merchandise values).
This may incentivized people to push low-quality products with high defects because they were still selling on the platform, and their sale contributed to the GMV target. As a result, the team may prioritized quantity over quality, leading to an increase in returns, poor customer satisfaction, and customer trust on the platform.
Increase in selection (Catalogue size) by pushing sellers with unusually high volume yet poor selection
To meet selection goal, people may start pushing one seller with a very high number of selections, sub-standard products with 0 or little product differentiation or low GMV contributor or low priority products such as straps, cables.
For instance, let's assume the category selection target is 3000. Ideally, this should involve onboarding multiple brands to achieve the target, with distribution across sub-categories. However, the team may be tempted to achieve the target by onboarding one seller with 2000 products from a low-priority sub-category that doesn’t align with consumer preference or market trends.
While this may help to achieve the target in the short term, it can derail the company from achieving its long-term goals.
Increase in GMV by selling products that are not illegal yet but morally questionable -
The singular focus on increasing GMV may lead to selling products that might not align with the values of the platform. For instance, if it is observed that the spy camera (Potentially can be used for illegal activities) is popular or counterfeit products and contributing heavily in GMV growth, the team may push for the higher visibility in an attempt to drive more sales to achieve the targets.
Increase in supply-side (No. of Sellers on the platform) - The supply-side can be increased by onboarding suppliers without proper due diligence or miscommunicating about the commission fee component.
Prioritizing a narrow set of suppliers to increase GMV and to manage internal metrics - This way the business may appear to be successful in the short term, but at the cost of long-term growth (Revenue quality, sales distribution) and seller experience.
There were so many other examples of metrics manipulation (Including Inventory, pricing), wherein system could be gamed at the cost of seller experience and customer experience if not proper guardrails and deliberation.
In nutshell, as Goodhart’s law dictates - "When a measure becomes a target, it ceases to be a good measure", the metrics stops becoming a tool to improve the product or services and a tool to aid in decision-making but as a way to manipulate the system.
This reminded me of Cobra effect.
Cobra Effect and perverse incentive
In colonial India, British designed an incentive scheme to reduce Cobra infestation in Delhi. They offered reward to whoever catches dead cobras. This led to unintended consequences when people started farming cobras for the reward. British realized this, and they cancelled the program. Since there was no incentive anymore, Cobra farmers set the cobra free, and that led to increase in Cobra.
Subtext
Context matters. CTRL+C, CTRL+V doesn’t work in the long-run.
(“No battle has ever been won by merely copying others.” - Jack Ma)
Simply chasing the competition is not enough.
Intangible cost such as high friction, operational hassle, lack of transparency also contributes in poor seller experience and customer experience. Learn to measure it by putting right metrics in the place.
Vanity metrics could be misleading and gives you a false sense of achievement, growth, and progress.
Metrics are a shared responsibility among internal stakeholders. It is a collaborative effort where burden is not placed on one single team or one layer of hierarchy.
Don’t overcomplicate your reporting. if the time goes in reporting > > > actual work done, you should relook at your modus operandi.
And finally
Culture eats strategy for breakfast by Peter Drucker. So true and powerful statement.
This brings me to the end of my post.
I would love to hear your thoughts and your experiences if you are building consumer businesses online or otherwise . Would love to connect :
Read more posts from thinking category :
Ref-
https://hbr.org/2019/09/dont-let-metrics-undermine-your-business
https://www.mckinsey.com/capabilities/mckinsey-design/our-insights/made-to-measure-getting-design-leadership-metrics-right
https://abovethecrowd.com/2012/11/13/all-markets-are-not-created-equal-10-factors-to-consider-when-evaluating-digital-marketplaces/
https://www.yalelawjournal.org/note/amazons-antitrust-paradox
https://twitter.com/CChristineFair/status/1656654844059430918?t=1lA2Tgw2k02jmKvWfdvurw&s=08