INSIGHT VENTURE PARTNERS
PERIODIC TABLE OF MARKETPLACE METRICS
Online marketplaces have proliferated due to their success in displacing inefficient legacy distribution channels within
large consumer purchase categories.
• Transportation: Uber, Lyft, BlaBlaCar, Parking Panda
• Hospitality: AirBnB, HomeAway, Dog Vacay
• Consumer goods: eBay, Alibaba, Invaluable*, JD.com
• Food: DeliveryHero*, Seamless, Just-Eat, Instacart
• Home services: Homejoy, Handy
• Delivery and Professional Services: TaskRabbit, Postmates, UpCounsel
• Crowdfunding: Indiegogo*, Kickstarter
• Digital Imagery and Design: Shutterstock*, 99designs, Fiverr
• Handmade consumer products: Dawanda*, Etsy
*Insight investments
High-performing marketplaces deliver a strong value proposition for both buyers and sellers, while also providing
lucrative business model economics for operators.
• Buyers and sellers are attracted to the convenience of online marketplaces as a platform for expanding the
depth of transaction options and partners (more things to buy, more people to sell to) as well as the reduction
of search and transaction costs that effective marketplaces provide.
•
Marketplaces have high long-term profit potential (once a critical mass of buyers and suppliers becomes selfsustaining, and the business can ramp-down marketing spend), driven by high gross margins that result from
having low service costs (typically just platform maintenance and hosting) and no inventory holding costs.
•
Marketplaces leverage network effects to create barriers to entry: once a site has a critical mass of buyers and
sellers, it becomes difficult for competitors to capture market share. Utility for consumers, pricing power over
suppliers, and enterprise value scale as a function of nodes and volume in a marketplace.
The complex, two-sided nature of a marketplace heightens the need to understand and monitor critical metrics that
provide insight into a platform’s health and trajectory.
• Growth: Momentum and growth should be measured within each facet of a marketplace (supply, demand, and
gross merchandise value) in a highly segmented fashion to truly understand where a business is gaining traction.
•
Customer Behavior: Granular analyses of traffic, conversion, and purchasing behavior are fundamental inputs in
the continuous process of optimizing marketing efforts and website architecture to maximize marketplace value.
•
Sustainability: Retention, activity, and satisfaction metrics provide the most critical measures of marketplace
health and long-term viability, as repeat users typically become the primary profit engine of platforms at scale.
Depth of TAM (Total Addressable Market) can serve as a limiting factor to the size and profitability of a
marketplace; although, many platforms succeed in expanding underlying TAM by reducing transaction costs.
•
Profitability: A sophisticated understanding of value capture tactics along with customer-level economics (CLV
vs. CAC) enables financial forecasting and visibility into the full-potential profitability of a marketplace.
•
Key Success Factors: While not directly measurable, we have identified several ubiquitous traits and
competencies that are necessary for establishing and growing functional, liquid marketplaces.
Insight’s Periodic Table, definitions, and commentary summarize the key metrics we use to evaluate marketplace
businesses, along with benchmarks we’ve observed in public and private companies at various stages of maturity.
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INSIGHT VENTURE PARTNERS
PERIODIC TABLE OF MARKETPLACE METRICS
Customer acquisition cost (average)
2
Growth Metrics
Seller / Supply
Growth Rate
Definition
Low
Median
High
Annualized percentage increase in number of active
sellers and / or units of supply (listings) in marketplace
< 10%
100%
< 200%
•
Building out the supply side of a platform is typically step one in establishing a marketplace – goods and services
must be available for purchase in order for transactions to occur! However, on a unit basis, seller growth rates
tend to lag buyer growth rates, which is simply a function of the natural, one-to-many buyer / seller ratio that
evolves within many purchase categories.
•
In addition to seller growth, it is important to consider listing growth, which should be equal to or greater than
seller growth rate, as existing sellers post additional inventory. Each marketplace must determine the
appropriate measure of true growth in their supply offering; for example, number of restaurants on a platform is
the best supply metric for a food ordering site (not number of dishes), while number of courses is typically the
best supply metric for open source education platforms (rather than number of content creators).
•
In certain cases, the seller ecosystem within an underlying market may be relatively small (i.e., rental car
providers), and long-term seller growth can be minimal. This is beneficial in the sense that it lowers Sales and
Marketing costs for onboarding new sellers; however, small seller ecosystems do present some risk if
concentration and dependency on a few key suppliers is high.
•
Additionally – in the long run – existing (and successful) sellers in mature marketplaces grow their GMV
contributions at a higher rate than existing buyer purchasing, meaning that the new sellers might not be
necessary for sustained GMV growth.
Buyer
Growth Rate
Definition
Low
Median
High
Annualized percentage increase in number of active
buyers in marketplace
< 20%
100%
> 500%
•
Once a base of suppliers has been added to the platform, buyer unit growth becomes the key driver of success
in the early stages of a marketplace. While we prefer platforms that ultimately become highly reliant on repeat
buyers, growth in marketplaces often requires sustained new buyer additions driven by efficient marketing
investment. For this reason, it’s critical that marketplaces monitor channel growth rates and CAC (cost of
customer acquisition) to continuously optimize user acquisition strategy.
•
Increased demand (number of buyers) is a strong driver of supply expansion, encouraging more sellers to enter
the marketplace. Building scale at a local level or within a particular niche is typically is the most effective way to
kick off the ‘virtuous cycle’ of supply and demand network effects that exponentially increases the size, utility,
and value of a marketplace.
New GMV by
Channel
•
Definition
Low
Median
High
Incremental gross merchandise value (GMV)
generated from new customers added from each
acquisition channel (typically by month)
N/A
N/A
N/A
Many companies find that new GMV contribution by channel is a more precise (and necessary) measure of
growth in the demand side of their marketplace than simply tracking new buyers added. Two reasons in
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particular drive the need for this level of segmentation: relative value of customers across channels and relative
reach and sustainability of the acquisition channels themselves. Frequently, platforms leverage niche marketing
channels to acquire certain types of buyers or to push new buyers to specific product / service offerings on their
site (typically tailored to be lower order value / heavily discounted, resulting in higher initial purchase
conversion rates). However, the expected cumulative lifetime value of these buyers will generally be lower than
the site average (we’ve seen cases where CLV is 30x below average for some channels). Additionally, the
effectiveness of each channel is dynamic: successful early acquisition engines tend to erode over time, and a
platform must constantly evolve its customer acquisition strategy accordingly. Thus, we recommend two key
analyses of New GMV growth by channel to facilitate marketing optimization on a continuous basis: 1) New
GMV per customer, by channel (to assess disparities between channels) and 2) % change from previous period in
new GMV added, within channels (to assess the trajectory of channel impact).
Definition
Low
Median
High
Number of active buyers per seller
1:1
5:1
30K:1
Buyer : Seller Ratio
•
Buyer / seller dynamics vary greatly by market, but each platform should be measuring this ratio to better
understand the ROI of their sales and marketing efforts. For instance, in food delivery marketplaces: how many
net new buyers will be acquired by onboarding a new restaurant? What is the tradeoff between a dollar spent in
field sales to new restaurants vs. a dollar spent in PPC user acquisition?
•
For peer-to-peer marketplaces (e.g., eBay, Tradesy), where buyers can be sellers and vice-versa, the ratio
becomes less important than user activity; i.e., what percentage of users who initially signed up as sellers also
end up making a purchase on the platform, and how many purchases do they make?
GMV
Growth Rate
Definition
Low
Median
High
Annualized percentage increase in gross merchandise
value (total dollars of goods / services sold on
platform)
10%
100%
> 500%
•
GMV growth rates are highly dependent upon marketplace maturity: investment-stage marketplaces should
experience significant GMV growth, above or in-line with marketing spend. Burn rates can be high in the first 3-5
years of building a marketplace and need to be accompanied by sufficient growth in order to build a sustainable
business.
•
GMV growth rates are the best indicator of product / market fit and, hence, long-term businesses viability.
Healthy marketplaces that are gaining traction within their category typically fit within the following growth
curves (by stage):
•
•
Small ($100K-$1M GMV): Growth up to 15-25% MoM
•
Medium ($1M-$30M GMV): Growth at 7-15% MoM
•
At Scale ($30M-$100M GMV): 70% YoY growth
Tactically, successful marketplaces generally focus early-stage growth efforts within a target geography or niche
vertical in order to establish scale and share within a given market, enabling the company to better demonstrate
its value proposition to buyers and ROI for sellers, before broadening marketplace reach.
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Customer Behavior Metrics
Definition
Channel
Conversion Rates
•
% of queries / clicks from online lead
sources that ultimately result in a
purchase from a new customer
Channel
Low
Median
High
Direct to URL
<1%
10%
20%
PPC
<1%
5%
10%
MetaSearch
<1%
2%
5%
Measuring purchase conversion by channel is a critical piece of marketing optimization. Three primary drivers of
conversion are:
1) Quality of lead: Is the visitor a likely buyer in this marketplace?
2) Quality of offering: Are the products / services for sale attractive to buyers in this market?
3) Quality of site architecture: Is the marketplace website constructed to reduce friction in the shopping and
purchasing process and to incentive potential buyers to action?
•
Disparities in channel conversion rates are a function of relative lead quality between channels and the
customer segments most readily reached by those channels. Direct or Brand PPC leads (generally meaning that
the visitor had previous knowledge of the website and a desire to visit it) have inherently higher conversion
rates than MetaSearch – for example – due to the intentionality of the visitor’s actions.
•
We’ve presented conversion benchmarks for three common online channels, but conversion should be
monitored across all channels (e.g., social, email, offline, etc.) in tandem with CAC to inform the allocation of
marketing spend for user acquisition.
Average Order
Value
Definition
Low
Median
High
Average gross dollar value per purchase
$20
$150
$5K
•
Average order value is generally an intrinsic characteristic of the underlying product(s) or service(s) sold in a
marketplace. However, AOV can move due to a mix shift in merchandise sales volume and can also provide
significant revenue uplift if buyers can be successfully incented to purchase bundled or add-on items.
•
Online marketplaces have historically been focused on lower-value consumer purchases (< $500); however, we
are starting to see proliferation and traction of platforms in much larger purchase categories (e.g., cars, houses,
fine art, etc.), indicating that the top end of AOV benchmarks will increase in the coming years.
Purchase Frequency
Acceleration
Definition
Low
Median
High
Average # of orders per buyer in Month 12 vs. Month
1 (post-acquisition)
N/A
2.5x
> 5x
•
For those buyers that remain on a given platform, successful marketplaces generally demonstrate increased
engagement; we measure this as a multiple of initial purchase volume.
•
It should be noted that ‘power users’ (top 10% of buyers) in most marketplaces purchase 3x more frequently
and make 4x larger purchases than average customers – throughout their lifetime on a given platform.
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Definition
Cross Pollination
Low
Median
High
0%
20%
> 50%
nd
% of buyers whose 2 purchase is made in a different
category than their initial purchase
•
For marketplaces that have different categories of listings (i.e., home-goods versus sports equipment versus
office supplies), this metric indicates engagement across the platform. The value-add of a marketplace and
consumer trust in a platform’s curation efforts are best validated by buyers’ purchase activity in areas that were
not of interest when first acquired.
•
To drive cross pollination, marketplaces must: 1) have a wide and attractive breadth of offering, and 2) deploy
clever merchandising tactics (e.g., bundling, discounting, and / or promotions) and an effective recommendation
engine (e.g., Amazon’s ‘people who purchased this item also…’).
Cart Abandonment
Rates
Definition
Low
Median
High
% of sessions on platform where buyers select
products / services but do not complete a purchase
50%
70%
> 80%
•
High cart abandonment rates indicate an opportunity to optimize site design to drive incremental revenue gains
by increasing conversion.
•
There is typically an inherent rate of cart abandonment that is uncontrollable, due to potential buyers’ readiness
or availability to complete a purchase. However, product merchandising, checkout flow, registration
requirements, and timing of ancillary cost presentation (e.g., shipping costs) can have large impacts. The goal is
to make the checkout experience as seamless and easy as possible for first-time buyers and as convenient and
quick as possible for repeat buyers.
Platform Leakage
Definition
Low
Median
High
% of purchases where buyer makes payment offplatform
0%
5%
100%
•
The question of leakage (once a buyer-seller relationship is established, will payments go off-line?) presents a
material risk for many marketplaces and should be carefully tracked. Platforms selling experiential goods /
services (event or usage based transactions) are particularly at risk for leakage issues. KitchenSurfing, for
example, must constantly be vigilant about monitoring repeat meals booked between chefs and patrons as a
proxy for evaluating if / when these transactions are migrating off the site.
•
Many marketplaces defer monetization of all payments to bolster traffic and scale, though it can be difficult to
“close-the-loop” on legacy platform users (e.g., BlaBlaCar).
Definition
Low
Median
High
% of transactions made via a smartphone or tablet
0%
40%
100%
Mobile Penetration
•
Mobile is an increasingly important platform for all marketplaces – not only due to underlying trends in device
usage, but also because mobile allows for constant user engagement and contributes to repeat behavior. As a
result of convenience and impulse purchasing, we’ve observed that mobile buyers typically exhibit materially
higher levels of retention and purchase frequency than desktop-based buyers.
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•
Mobile has enabled the formation of geo-specific marketplaces such as Uber that rely upon location specific
liquidity to deliver “on-demand” services.
•
Additionally, the prevalence of ‘sequential screening’ (using multiple devices to accomplish a task over time)
heightens the importance of mobile activity in the purchasing process: KISSmetrics estimates that ~60% of all
online purchases initially start with some form of mobile search.
Sustainability Metrics
Total Addressable
Market (TAM)
Definition
Low
Median
High
Annual revenue generated in underlying market
(online and offline)
< $1B
$34B
> $1T
•
Marketplace businesses generally require a very large TAM to allow for sufficient buyer and seller liquidity.
Market depth is also a key factor is maintaining favorable customer economics (retention and CLV vs. CAC).
•
In cases where TAM is lower, a successful business will need to establish a significantly dominant position that
allows for higher take rates.
•
The size of a marketplace’s addressable opportunity is frequently the overriding determinant of enterprise
valuation; however, estimates of ‘true’ TAM tend to vary greatly and are generally reliant on managers’ and
investors’ theses of ‘what the world will look like’ in the future vs. today. Uber’s TAM – for example – has been a
contentious source of recent debate and divergent opinions consequently arrive at wildly different assessments
of the company’s value ($5B vs. $17B vs. $40B+).
•
In addition to the current TAM of the market, it is important to consider whether the marketplace in question
will cause TAM expansion. For example, the arrival of Etsy almost certainly expanded the market for homemade
goods by providing buyers with a broader and more convenient shopping experience. As a result, it would be
inappropriate to benchmark Etsy’s potential size as a percentage of total homemade commerce prior to the
company gaining traction. Conversely, a price-comparison tool such as Kayak likely causes less market
expansion, as while it makes price discovery a far-easier process, it does not create meaningful incremental
demand for travel. In fact, the downward pressure on pricing exerted by Kayak and the introduction of fullytransparent market price levels serves to reduce TAM (holding all other factors constant).
Individual Buyer
Retention
Definition
Low
Median
High
Average % of buyers remaining active in marketplace
1 year after acquisition
< 5%
10%
> 50%
•
Perhaps the most telling indicator of long-term marketplace sustainability is buyer retention, especially for
repeatable purchase categories (clothes, food, etc.). A chart of retention curves should ideally show long-term
trends converging to some asymptote > 0% (as a rule of thumb, we like to see 10% or higher). If this is not the
case, marketplace activity will be perpetually contingent on acquiring new (short-term) users, and the
consequent customer acquisition costs might thwart profitability.
•
We’ve shown 12 month retention benchmarks in the table above, but it’s critical that marketplaces be fanatical
about tracking monthly (or even weekly) retention of all buyer cohorts throughout the customer lifetime. This is
generally the key fundamental input required to model long-term financial performance of a marketplace
business.
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Buyer GMV
Retention
Definition
Low
Median
High
Average % of Month 1 gross merchandise value
generated by buyers in Month 12
10%
25%
> 70%
•
GMV retention should also be tracked by cohort, by channel throughout the lifetime of each customer cohort.
•
Although ‘power users’ will increase both purchase frequency and average order value over time, Buyer GMV
retention does not expand at the same rate as seller GMV retention due to characteristic limitations of
consumers’ purchasing habits and budget within a given category.
Buyer NPS
Definition
Low
Median
High
Net Promoter Score:
% of promoters - % of detractors
25%
40%
80%
•
Net Promoter Score measures the satisfaction and loyalty of customers: Marketplaces with high buyer NPS can
expect to have higher retention rates and higher referral rates than those with low NPS.
•
There are no absolute benchmarks for NPS; it should always be viewed through a lens of segment-specific
relativity (how does our current NPS compare to competitors in our industry, in our geography, or our
performance in previous periods?).
•
NPS for a buyer cohort’s first purchase experience is often a highly predictive indicator of customer lifetime
value. NPS can also be measured across buyer demographics to help identify a platform’s target customer
segments within the broader market opportunity set.
•
Demand-constrained marketplaces in particular should be laser-focused on maximizing buyer NPS. These are
marketplaces in which the primary driver of growth is the acquisition of additional buyers, often associated with
platforms whose individual listings can result in nearly unlimited sales (i.e., an online course versus a car-ride).
Since building scale depends entirely on retaining and expanding the buyer base, delivering an outstanding
customer experience to drive satisfaction, repeat purchasing, and referrals is the key to achieving momentum
and sustainability for demand-constrained marketplaces
•
Please see the ‘Key Success Factors’ section for the primary dimensions through which an online marketplace
can increase the value and attractiveness of its overall offerings to improve the buyer purchasing experience.
Individual Seller
Retention
Definition
Low
Median
High
Average % of sellers remaining active in marketplace 1
year after signing up
25%
50%
75%
•
Seller unit retention is often significantly lower than seller GMV retention as smaller sellers use the platform
more sporadically (i.e., churn rates can be noisy as unsuccessful sellers drop, but aggregate existing seller GMV
still holds up).
•
In many cases, there is an inherent level of uncontrollable seller churn due to the rate of failure in a given
market (e.g., restaurant closures in food delivery platforms).
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Seller GMV
Retention
•
Definition
Low
Median
High
Average % of Month 1 gross merchandise value
generated by sellers in Month 12
100%
250%
> 400%
This is one of the most important metrics to track for marketplaces: Seller GMV retention should be over 100%
one year from join date; this generally corresponds to increases in listed inventory as a result of strong value
capture in the marketplace by successful suppliers.
Seller NPS
Definition
Low
Median
High
Net Promoter Score:
% of promoters - % of detractors
-20%
20%
60%
•
Marketplaces that are fundamentally supply-constrained should focus on maximizing seller NPS. Supplyconstrained marketplaces are those where the primary driver of growth is the acquisition of additional sellers or
new inventory. Generally these marketplaces benefit from viral buyer growth, while individual sellers / listings
can only result in a finite amount of sales.
•
The primary driver of seller NPS is the ability to generate a meaningful income stream. As such, when supply /
demand dynamics are excessively unbalanced in supply-constrained marketplaces (too far overweight on the
demand side), it is often incumbent on a platform to improve the seller experience by increasing revenue
generation potential, thus attracting additional supply and reaching a state closer to economic equilibrium.
Uber’s surge pricing mechanism is a classic example of the often necessary tactical manipulations that supplyconstrained marketplaces deploy in an effort to meet demand and maintain continual functionality of their
services. Inability to service peak demand would be highly detrimental to Uber’s value proposition and ability to
retain users: Why would you remain loyal to a ride booking platform that could never find you a ride when you
really needed one?
•
Buyer NPS is typically higher than seller NPS, as aggregation makes the buying experience easier, and ‘take-rate’
is often paid entirely by the seller.
Repeat Customer
Contribution
•
Definition
Low
Median
High
% of monthly revenue generated by buyers acquired in
previous months
0%
60%
90%
This metric is highly dependent on the category and stage of marketplace (i.e., new marketplaces will generate
nearly all GMV from new buyers); however – at scale – any successful marketplace must rely on repeat
customers to drive profits, unless the economics of the business model and purchase category are such that the
company can surpass on CAC from a customer’s first order.
Supply
Concentration
Definition
Low
Median
High
% of marketplace revenue generated by Top 20% of
sellers
< 5%
60%
95%
•
Generally, we view marketplaces that fall below the Pareto Principle (80% of outcomes driven by 20% of
participants) as being relatively unconcentrated.
•
High seller fragmentation allows marketplaces to retain pricing power and minimizes the impact of seller churn.
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•
Concentration may be higher with contractual seller obligations or a highly differentiated solution that is difficult
to replicate.
Active / Inactive
Seller Ratio
Definition
Low
Median
High
Average % of suppliers with successful listings (i.e.,
selling more than 1 item in a given period)
10%
25%
100%
•
This metric describes the aggregate level of engagement and success of sellers in a marketplace, and is an
important precursor to retention: Successful sellers will likely continue listing inventory on a platform, while
unsuccessful sellers will not.
•
If fewer sellers are able to have success selling on the marketplace, this will likely impact NPS and constrain
future new seller growth. Marketplaces where only a few sellers can generate continuous revenue are at risk of
losing momentum and reducing overall utility provided to buyers.
•
Note that this metric is different than supply concentration because it is not dollar-weighted.
Profitability Metrics
Definition
Relative Market
Share
Company’s market share divided by market share of
2nd largest industry player (if industry leader) or
market share of largest player (if not industry leader)
Low
Median
High
<.5x
3x
9x
•
Online markets have a tendency to evolve into ‘winner takes all’ arenas. Due to the impact of positive feedback
loops in supply / demand growth, along with the network effects realized by growing the number of nodes in a
marketplace (see Metcalfe’s law), marketplace scale at the early stages of industry maturity can actually serve as
a powerful driver of growth acceleration (i.e., for a given set of new competitors in a nascent market, the players
who succeed first in building scale benefit greatly from the ‘virtuous cycle’ of virality, increased utility, and
stronger supply and demand, helping them sustain higher growth rates than peers – even off a larger base). At
the point of industry maturity / market saturation, there are typically only 1-2 players of note in a given space.
•
Acknowledgement of a zero sum end-state is often the impetus for extremely high levels of marketing spend
(and burn rates) during the founding / growth phase. Relative market share ultimately becomes not only a
competitive and strategic asset, but also an important source of pricing power over sellers.
•
An important point of clarification is that market share must be defined in terms of GMV, NOT net revenue.
Transaction volume that passes through a marketplace is the ultimate determinant of marketplace value, while
net revenue can fluctuate around GMV as a function of a marketplace’s monetization tactics (e.g., higher take
rates or high levels of revenue from listing fees). We’ve seen many early-stage platform businesses trap
themselves in a pure listing / directory model, where 100% of revenue is generated by charging sellers to be
listed on the platform. These businesses are often seen as ‘first movers’ due to a quick spike in revenue that
precedes any real momentum in transaction volume expansion (which can take longer to build at the outset,
since it requires investment and traction in growing both sides of the marketplace). Unfortunately, incentives for
listing model businesses are not properly aligned: many are able to grow net revenue while paying little
attention to truly building out a healthy and active marketplace (as defined by the aggregate value of goods /
services passing through the platform). Ultimately these businesses either change their monetization strategy
and operational focus, or they find themselves quickly ceding true market share to competitors.
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Take Rate
Definition
Low
Median
High
% of gross merchandise value (also called gross
revenue) that the platform charges as a commission
fee on transactions (GMV x take rate = net revenue)
N/A
10%
>70%
•
Take rate measures a marketplace’s share of value capture and is highly dependent on the intensity of market
competition as well as the acceptance of a platform’s ROI / value proposition by the party paying the take rate
(typically sellers).
•
In projecting long-term take rates, Insight evaluates whether competitive entry and / or potential threats of
substitution will create downward pressures on a marketplaces in the future. Again, market leadership (as
defined by relative market share, breadth of offering, and customer experience / NPS) is the primary driver of
pricing power in any purchase category.
•
Low take rates can be used initially to drive transaction volume and then raised as a marketplace achieves scale
and share and demonstrates value for sellers (thus exerting pricing power).
•
Take rates often vary by the ASP of items available for purchase (even within a platform), with take rates
generally declining as ASP increases.
•
Broadly, we are seeing the top end of marketplace take rates for quasi-monopolies across a variety of purchase
categories converge around 30% (e.g., Apple’s iOS App Store). However, it is important to note that in select
cases where sellers are completely dependent upon a marketplace with dominant share, such as Shutterstock,
the take-rate can exceed 70%.
Listing & Placement
Monetization
Definition
Low
Median
High
Percent of revenue derived by charging sellers to list
good / services on platform or to purchase premium
product placement
0%
-
100%
•
We’ve already discussed the risks of the directory or listing model (see Relative Market Share), but, for some
marketplaces, charging sellers for a listing fee and for ‘premium positioning’ (i.e., listing at the top of the page)
can provide lucrative additional revenue streams. Ultimately, however, this revenue can only scale in line with
supply growth (which trails the expansion of transaction volume) and is a much more limited source of income
than commission fees.
•
These value capture tactics are generally more appropriate for supply-constrained marketplaces where
additional options for posting may improve supplier satisfaction and profit potential.
•
Marketplaces should carefully weigh the additional income from these advertising streams against potential
drops in buyer conversion that may offset their benefit.
Customer
Acquisition Costs as
% of Net Revenue
•
Definition
Low
Median
High
Total annual sales and marketing dollars spent to
acquire new customers divided by annual net revenue
< 25%
50%
> 100%
This is another metric highly dependent on marketplace maturity and growth rate; new platforms inevitably
outspend short-term dollar returns in order to build scale. Depending on marketing channels and ‘virality’ of
adoption, some early-stage marketplaces can manage this burn to be quite modest (or nonexistent), especially if
they target efforts at a small, accessible niche of core buyers.
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•
As companies scale, customer acquisition must ramp down in order to achieve profitability. Again, this expense
in aggregate is a function of buyer retention, which determines how much a marketplace is required to spend to
sustain momentum.
1 Year CLV
Return on CAC
Definition
Low
Median
High
Average cumulative net revenue generated in a
buyer’s first twelve months as a customer divided by
average cost of customer acquisition
< 2x
5x
> 10x
•
CLV and CAC should not be evaluated in separate silos, since the relative size of each metric is what matters.
Even though CAC may be high, high CLV may justify increased spend. Think of a marketplace as an engine: CAC
is the price of fuel, and CLV is the rate of fuel efficiency.
•
As many of Insight’s investments are in growth stage marketplaces with more limited historical data, we chose
to benchmark this ratio in terms of 1 year CLV return on CAC. However, where available, a longer-term value of
CLV may better inform long-term marketplace economics.
•
It is important to consider this ratio across different acquisition channels, since – in addition to cost differences –
buyers may exhibit different order value and retention behavior (see New GMV by Channel).
•
In a certain sense, the math that determines whether a given marketplace can be scalable and profitable is
summarized in CLV vs. CAC, as this metric encapsulates the core elements of marketplace success: repeat
behavior, take rate, and efficient customer acquisition. Customer-level economics at scale ultimately determine
the long-term profit potential of a marketplace and are the key input to modeling acceptable overhead costs.
EBITDAM
Definition
Low
Median
High
Net income excluding marketing costs associated with
customer acquisition
-150%
40%
> 75%
•
EBITDAM is meant to serve as a proxy for long-term profitability; when new customer addition slows and
marketing spend decreases, how profitable can the business be?
•
For some companies who have yet to fully ‘close the loop’ with on-platform payments, this metric can be
negative.
Key Success Factors
Description
Trust
Does the platform inspire and maintain trust among the buyer and sellers on the
platform?
1) Quality assurance: Does the platform leverage user feedback to ensure that poor supplier offerings and bad
customer behavior are reduced?
• By allowing buyers to rate sellers (and vice versa), marketplaces provide a strong incentive for participants to
offer the highest quality services and conduct themselves in an ethical manner. A marketplace participant who
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receives a large number of negative ratings may not be able to continue to engage with the platform, as other
participants would be inclined to avoid transacting. While some marketplaces explicitly ban users who accrue a
certain amount of negative feedback, others simply rely on participants to avoid bad actors.
2) Security: Are buyers and sellers comfortable transacting and sharing personal information and goods on the
platform?
• In addition to payment and user information which is naturally a priority for marketplaces to secure,
marketplaces also must provide assurances that allow suppliers to be comfortable sharing personal items such
as homes or cars. Often, the company will provide a comprehensive insurance policy (i.e. Getaround, AirBnB)
designed to protect the seller from the risk of damage to personal property. In addition, these insurance
offerings provide a strong incentive to transact on-platform, which minimizes platform leakage as discussed
earlier.
3) Order fulfillment: How does the marketplace ensure that goods are delivered in a timely manner?
• Some marketplaces (such as Amazon), will handle order fulfillment for suppliers to ensure quality control over
the operation. This also provides an additional incentive to suppliers to join the platform. Others rely upon
individual buyers to fulfill the goods and services, in which case quality assurance is hopefully driven by user
feedback as discussed earlier.
4) Remediation: Does the platform effectively deal with disputes?
• In instances where either a buyer or seller fails to live up to their end of the transaction, how does the company
effectively mediate disputes? Marketplaces are often well served to explicitly outline their responses to
breaches in transaction etiquette to ensure fair and consistent treatment (i.e. eBay policies for items not
shipped as described, or Uber’s set penalties for missing a scheduled pick-up).
Description
Transparency
Does the platform provide the right level of visibility into its operations
Are users comfortable with the platform’s business practices?
1) Processes: Do users understand how the business operates?
• For example, are users comfortable with how the marketplace vets participants or delivers services?
2) Pricing: Are price levels (and the dynamics behind price setting) visible for all market participants? Are users
comfortable that they are receiving a ‘fair price’ relative to the rest of the marketplace?
• As a starting point, users will initially compare the service or good that they receive off-platform to benchmark
the platform’s price point. While successful marketplaces often lower the costs of delivering a service, some,
such as Instacart, may disguise fees such that the price of the underlying quantity appears to have increased (in
exchange for the value-add of delivery). Others, such as Uber, employ variable pricing that seeks to balance
supply and demand. While price increases ensure that usage can continue uninterrupted, this strategy may be
perceived negatively by consumers who resent paying a higher price for a service that they have received in the
past at a discount.
3) Fees: Is it clear what part of the transaction price is being diverted to the platform?
• Often, the “take-rate” is clearly defined for the participants who are paying (i.e. 10% of service value), while the
side not responsible for paying is unaware of the fee structure. However, as mentioned earlier, some companies
such as Instacart incorporate part of the fee structure by pricing groceries differently from the actual stores from
which they are delivering. While this may reduce friction in the transaction process, companies must be careful
to avoid creating resentment in the future among users who may not have been aware of this strategy. StubHub
provided an interesting case study in the mechanics behind this decision, as switching to a more transparent fee
structure as a result of customer complaints resulted in declining sales.
4) Risks: Are risks both carefully mitigated and disclosed?
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•
While we have discussed the ways in which insurance and feedback on a platform can mitigate the risk of bad
service, inevitably customers will still have bad experiences. In this case, it is important to disclose any potential
risks up front, as well as act quickly to resolve issues should they arise.
Description
Utility
Functional ability to deliver a consistently useful service that satisfies buyers’ needs
1) Breadth of offering: Does the platform provide a sufficiently expansive set of product / service options to be viewed
as a comprehensive (or nearly comprehensive) marketplace for its respective purchase category?
• While generally we would consider a more comprehensive offering to be beneficial for acquisition and
retention, it is important to consider the point of diminishing returns. For example, would it make sense for eBay
and Etsy items to be integrated into a single feed, or would this simply overwhelm the buyer?
2) Searchability and / or matching efficiency: How easy is it for a potential buyer to locate the good / service they
need?
• Overall website layout and navigation affect searchability in addition to specifically-designed features such as
categories, tags, and search bars. Reducing the number of available options is often the most effective way of
improving searchability and enabling buyers to find the goods / services they really want or need, which is why
the highest-performing marketplaces along this dimension often completely hide low probability sellers and
inventory from individual buyers (e.g., only showing options within a certain proximity to the potential buyer or
within their stated set of preferences).
3) Liquidity: Is there a stable supply / demand dynamic and sufficient volume in the marketplace to reliably provide a
platform for facilitating transactions?
• Put simply, is marketplace breadth and volume large enough to allow average buyers and sellers to regularly
execute successful transactions on the platform? Without sufficient liquidity, marketplaces do not present a
strong value proposition for participants on either side of the supply / demand equation.
4) Relative value (vs. next best option): Does the marketplace provide a materially better experience – and a stronger
value proposition – for buyers and sellers?
• It is important to compare relative value versus other online marketplace competitors in addition to legacy
(typically offline and intermediated) options for completing transactions within a given purchase cateogory.
Description
Merchandising
Organization and presentation of product / services, along with tactics that
contribute to sale
1) Supplemental information: What additional data does the website present to inform a buyer’s evaluation of their
likelihood to be satisfied with a given product or service?
• As with any form of online purchasing, buyers in online marketplaces are often faced with a great amount of
uncertainty about what they are actually receiving. To enable better purchasing decisions – and to inspire faith
in the quality of their offerings – websites supply a wide variety of product information (detailed descriptions,
photos, videos, customer ratings and reviews, etc.). The main thing to focus on from the perspective of the
marketplace is to ensure that this supplementary information serves to reduce friction in the purchasing process
rather than distracting potential buyers.
2) Curation: Are potential buyers presented with a properly vetted set of products and / or services that appeal to their
specific needs and interests?
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•
As the platform continues to gain new offerings, it can be difficult to ensure that buyers can consistently find
appropriate items, and that sellers can continue to be successful. For example, platforms Minted.com recognizes
the difficulty users have in finding card designs. As a result, the platform carefully curates top designs to help
buyers have a top-notch experience.
3) Incentives: Does the platform effectively deploy tactics such as bundling and discounting to drive increased
purchasing behavior?
• These tactics are not specific to marketplaces, but good practice across nearly all e-commerce businesses.
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