Hierarchy of Marketplaces — Level 2
In the Introduction and Level 1 of the Hierarchy of Marketplaces, I laid out the core insight that drives the hierarchy: that the tireless pursuit of happiness (not GMV) is ultimately what distinguishes the marketplaces that endure.
This is not to say that you shouldn’t pursue growth when building a marketplace. Indeed, to increase happiness marketplaces need to grow. But the growth must be in service of increasing happiness. This is what Level 2 is all about.
If your goal in Level 1 was to kickstart transactions and reach “Minimum Viable Happiness”, Level 2 is about reaching a new happiness threshold where you are just so much better than any substitute that the market “tips” in your direction.
To do this, you need to find a scalable and systematic way to grow that lets you create better and better matches between buyer and sellers over time. This means identifying and maximizing “tipping loops” — loops that create momentum for you systematically.
There are two types of loops that work together symbiotically: growth loops, and what I’ll call happiness loops. Growth loops help you drive down your cost of acquisition by leveraging your existing buyers and sellers to help you grow. Happiness loops act like a sorting function on your supply, helping your buyers find the best suppliers (and avoid the bad ones).
But beware: not all markets are susceptible to tipping. I cover six hurdles I’ve seen that can stop a marketplace from reaching that magic happiness threshold.
Happiness loops are incredibly powerful.
They reward the suppliers you want to retain — the suppliers that are leaning in on your platform and providing the best experience for your buyers.
They help buyers get to better matches, leading to more happiness and higher buyer retention.
And lastly, they help you scale without degrading the buyer experience by sorting out the suppliers you want to reward with a greater share of buyers, and the ones you are fine if they churn.
Airbnb actually introduced the Superhost badge as a way to help their best hosts feel “recognized”. But in doing so, they codified what makes a great host, reinforcing what hosts need to do to create a great guest experience.
There are three positive “superpowering” effects of doing this:
First, it provides even more clarity to ambitious hosts of what behaviors are expected and rewarded on Airbnb, creating a better experience for guests, even for guests who stay with a newer host who hasn’t yet earned the Superhost badge.
Second, it creates what I described in Level 2 of the Hierarchy of Engagement as an “accruing benefit and mounting loss” to hosts. Once they achieve the badge, they get more value on Airbnb from having it, and don’t want to lose it, both leading to more retention of the host. Favoriting is another way marketplaces like Etsy do this very successfully.
Third, guests now have an easy way of knowing who the great hosts are on Airbnb without having to read dozens of reviews, leading to a happier experience.
The more you reduce friction in the transaction, the easier it will be for you to scale beyond your early adopters.
This truly is a never-ending process. For the life of your marketplace, there will be ways to reduce friction in your transaction. Never stop looking for and prioritizing those opportunities.
If you face competition, you can’t rely on loops alone to tip the market. You’ll need to continue to iterate on your marketplace design and experience to unlock step-function improvements in happiness.
Subsidies may be a temptation here (as it was for Uber and Lyft), but be careful: subsidies are a happiness crutch and if you can use them, your competitors can too. Better to unlock more sustainable means if you can.