Marketplaces are remarkable entities. As they growth they develop a mind of their own. Like an ant colony. They develop their own behavior and set of rules. And as they grow the entrepreneur has less and less power to giver it.
But fundamentally what drives marketplaces is their failure to do what is their exact purpose: to create a ‘match’ between the two parties, supply and demand. It’s their imbalance that drives them and creates the rules of engagement.
Am architects of a marketplace has 3 main levers to pull; and these main levers are all aimed at constantly trying to rebalance and imbalanced marketplace. That’s the name of the game.
By skillfully maneuvering these three, and the many moving parts within each of them, a successful marketplace emerges and grows. And as it grows the network effects get stronger until at some point it overtakes the architect’s power to do very much.
Here I analyse these three levers and I draw on one very interesting analogy which – though seemingly wacky – has a lot of truth in it and has always fascinated me. The behaviour of marketplaces has stark similarities to dating. Why dating as an analogy? There’s probably more analogies to be made to surface the power of these 3 levers, economic policy making is another. But far more people relate to dating than policy making. Plus its far more interesting J
Economics is a social science is concerned with the allocation of resources and their price. That’s what a marketplace does too
The starting point is therefore the relative supply of the buyer and seller and their respective propensity to buy or sell. A buyers market pushes prices up; a sellers market pushes prices down.
In geek talk, if one side of the marketplace is more ‘liquid’ than the other) he scarcer of the two has more choice and therefore more power to dictate price and outcome. That side becomes the main ‘actor’ in the marketplace and the user experience is often crafted around that actor.
Pricing is a big part of that. If you are short of buyers but have ample sellers you are better off charging your sellers. This will reduce friction in attracting new buyers and will control the supply side to rebalance the marketplace.
Who is the main actor in a date? Who does the the experience revolve around? Need I answer?
So how does the Economic axiom here help explain that? Well. Simply. There are – for better or for worse – more males willingly ‘selling’ than women ‘buying’ at any point in the dating ‘market’ lets say. To some the easy explanation is that there’s more randy men than women. Possibly. Perhaps innate sex drive explains part of this. There are – arguably – more polygamous men than women. More taken men are out looking for a date than women so the market size is bigger
So who pays the tab on the date? Exactly. Some may dismiss this argument by saying ‘oh but its just gentlemanly behavior’. I don’t disagree with that. The questions is why has it become a social norms? My argument is that its much like the demand / supply dynamic in a marketplace. The scarcer resource is the main actor. The experience is defined and set around them. And the other guy picks up the tab.
Emotion is as important as economics – often much more so – in defining behavior of marketplaces. It’s the psychology of the dynamic. Much like in normal human interaction, we often take irrational decisions because an emption was triggered in us by some stimulus, either by chance or by design.
The best marketplaces of course make it their business to do that by design. They very skillfully trigger an emotion at the right time to influence your behavior and skew the balance towards the weaker side. Again it’s a rebalancing act.
Gameification is one way of doing this: creating game-like competitive dynamics that prompt people to go the extra mile for a status recognition than actual economic reward. It’s the art of making someone feel special and more inclined to fork out the goods. Need I give an analogy here from the dating world?
Loyalty schemes and discounts do the same by skewing the balance of supply and demand, usually to rebalance the marketplace by creating more liquidity in the more dry or scarce part of the marketplace.
Has a female date ever referred to you getting ‘brownie points’ for doing XYZ – often times that XYZ makes little or no rational sense? (Like driving for an hour out and back to pick her up when you could save both time and cost by sending a car ? Or even a limo!)
It’s exactly the same. And when you collect enough brownie points…something happens. Something that gives you a little bit extra, a freebie, or a discount, or a top up.. all of which are again rebalancing acts.
Another way of triggering emotion is via social behavior to trigger impulse purchasing based on what others have done. In a rational world, why the f** would you care? But you do. Because we are irrational beasts. Vanity and jelousy are emotions that all humans share – in different proportions – but we all share them. And when someone skillfully amplifies them we do all sorts of crazy sh*t.
And no entrepreneur does this better than a woman on a date with the appropriate intent. Entrepreneurs who want to master that should study that dynamic, mimic it and put it online. It’s a killer!
With the Facebook open graph this becomes all too easier. More sites are now showing you what your friends have done as a means to lure you in even though you may not need or be prepared to do that transaction.
Marketplaces are like fine wines, they mature over time and become more valuable and more defensible via the feedback loop. Most marketplaces have some form of feedback loop be it scoring, ratings or qualitative reviews. This helps build up the actors’ reputation and
Reputation matters mostly for the weaker of the two actors in the marketplace. The other is calling the shots remember.
So back to my analogy: how many times do you hear a man being interested in whom a woman dated before.., as a stamp of approval? In most cases they don’t even want to know. I know I don’t!
For women though it matters. A lot! If you date a celebrity that’s it: your dating life is sorted for life. In fact, your total effort to output (the ROI equivalent in the business world) will be much higher in the longer term if you pit all your effort in dating someone who gives you that endorsement. From then on the effort drops exponentially.
In geek talk that’s called onboarding. And it’s the biggest obstacle for most marketplaces to overcome: allowing their users to break that catch-22 of wining to get a reputation, which in turn they need in order to win.
So reputation matters and it matters more to those who call the shots.
My conclusion from all of this is not to take the micky out of dating or marketplaces, or be derogatory to anyone, male or female. Its purely from a perspective of helping entrepreneurs who are out to create marketlace businesses – which is one the of the best businesses albeit one of the toughest to create – by sharing my learning and observation. Marketplaces are complex beasts with lots of moving parts. But the good news is that they resemble and reflect basic human nature. Studying the dating dynamics will give you more chances of succeeded in tweaking the three main defining levers of marketplaces: economics, emotion and reputation.
And if not: well maybe you’ll become a better date! That’s not bad either. Unless your married, in which case pass the learnings to your siblings.