In my last post, I explored how to think about building community into the center of the marketplace. The related question is constructing and setting the marketplace in motion.
Simon Rothman, an EIR at Greylock, identified two key issues in a fantastic recent post: liquidity and centralization.
Liquidity
Rothman’s first rule concerns liquidity: the reasonable expectation from the demand side of finding what you are looking for and from the selling side of selling what you are offering. He says:
Marketplaces strengthen with scale and scale comes from liquidity.
Liquidity isn’t the most important thing. It’s the only thing.
Until you reach liquidity, you’re vulnerable. After, you have the opportunity for dominance.
My comment on this, and this is one of the big changes that I have seen from the approach in the late 90s and now, is that emerging marketplaces I have seen are very careful in the beginning to keep access controlled so that transactions are few but they all clear as the kinks are worked out.
Centralization/Decentralization
The second key issue is what functions of the marketplace are centralized (platform makes choices and does the work) or decentralized (user makes choices and does the work). Rothman argues:
At a high level, decentralization gives you speed, but the cost is an inconsistent and possibly poor user experience. When you structure your marketplace you need to evaluate each action and decide whether it should be centralized or decentralized.
There are numerous actions that can be centralized or decentralized and a choice has to be made about each. These elements can include: customer support, payments, ratings, reviews, photos, pricing, metadata, fulfillment, transaction terms, communication, location, user and supplier verification, insurance, and on and on.
Again, my impression is that emerging marketplaces today are much more centralized (Apple versus PC) than they were in the late 1990s. The reason to be centralized is to develop and engrain a consistent and magical user experience at birth. On first glance, it does not make sense in terms of growth, because, for example, how do you scale if you’re managing the picturetaking for properties that folks want to list (AirBNB)? It turns out sometimes that there are answers to these questions, and one of the lessons of so many marketplaces is that you may never have the chance to scale if the platform starts off on the wrong (and messy) foot.
