Glossary of terms

Leakage

This occurs when a platform’s supply-side and demand-side users utilize the marketplace for discovery, but then complete the transaction outside of the platform, e.g., finding and messaging a service provider on the marketplace, then transacting offline.

This disintermediation can be motivated by price sensitivity (users trying to bypass marketplace fees), convenience (it can be convenient to move the transaction offline), or by necessity (marketplaces may not provide the infrastructure needed to complete the transaction on-platform). (Andressen-Horowitz)

Several ways exist to reduce leakage, including providing constantly update value-added and related benefits. Implementing tiering or certification-based access or supply chain connectivity will ensure that stickiness is improved. From B2C, brick&mortar-to-web traffic and social selling showed that buying behavior can be supported in various ways and that community entertainment can reduce disintermediation.

Liquidity

The ease with which buyers and sellers can find the right counterpart in the marketplace. In other words, liquidity is the likelihood that a seller is able to find a buyer, or that a buyer is able to find the product or service they’re looking for. (Andressen-Horowitz)

While ease of use (one of our Five Rs criteria) still dictate attention span and interaction experience, liquidity is a reflection of match making. In a digital world and collaborative marketplace, traditional marketplace match making feature like company size of the counterparts does not matter anymore as large companies buy from small supplier and vice-versa, or feature like availability as the supply chains are spread globally and marketplaces always on.

Network Effects

Marketplaces have a 2-sided network effect, wherein the network becomes more valuable as the number of users on the other side of the marketplace increases. For instance, in a rideshare marketplace, users derive more value when there are more drivers, and vice versa. Different marketplaces have varying levels of network effects strength. (Andressen-Horowitz)

This is an effect of push-pull, true to M. Porter Five Forces model, although he saw those five first as threats or bargaining pressures. In a more flowing world, bargaining powers of buyers and suppliers can be harnessed as dynamic forces shaping industries companies and their collaborative marketplaces. The effect itself is exponential by the size of the network as it measured to be proportionate to the square of participants.

Search Friction

The time, effort, and money consumers spend to search for the best product or service. In a marketplace, higher search costs create decision fatigue for consumers, as well as lower liquidity. Marketplaces can implement various features to reduce search costs, including curating or constraining supply or automating matching. (Andressen-Horowitz)

Friction reducers are from different categories and can leverage promotions on high availability products, offering optimization and catalog simplification. AI-based tools can also sift through large volume of catalogs of products and offer optimized choices based on measured preferences and marketplace habits.

Take Rate

Take rate is the percentage of the gross merchandise value (GMV) captured by the marketplace. It usually varies from a low single-digit percent to the mid-30s, depending on factors like fragmentation, availability of substitutes, and operational value-add provided by the marketplace. Managed marketplaces typically have a higher take rate because they provide more value to users and cover operational expenses. (Andressen-Horowitz)

While fragmentation or substitution may not be the largest factor in manufacturer-to-reseller relationship, it becomes critical for distribution channels as is availability.

Similarly, value-added and ease-of-use remain a factor to constantly develop and advertise in order to ensure the stickiness of the marketplace visits. All-in-all, the management of KPIs on factors will lead to a larger captured GMV.