Hierarchy of Marketplaces — Level 3
Level 1 and Level 2 were all about single-threaded focus. If reaching Minimum Viable Happiness is hard enough, reaching the second happiness threshold that gets the market to “tip” in your direction is even harder. You need incredible focus to achieve both.
If you’re ready for Level 3, your cohorts are performing stronger and stronger, and you are seeing more and more organic growth. Congratulations, the market is tipping towards you. But we can’t declare victory yet.
Schibsted, a Norwegian conglomerate that owns a tremendous portfolio of international online classified sites, did an analysis across its classifieds portfolio and found a causal link between how much bigger a site was vs the #2 in its category/geography, and the profitability of that site. The insight is clear: it’s not just about being #1. It’s about being #1 by a lot.
But it’s not just enough to outrun the competition in a single market or category. Each city or category you win creates its own tipping loop: they generate more contribution profit, which lets you re-invest that profit into your business, while also amortizing the cost of improvements to your marketplace across a bigger and bigger base. And of course, winning a city or category makes it easier for you to raise more venture capital to further fund operating costs ahead of profit.
In other words, you are now running a race to dominate the landscape and competition. There are three vectors to domination:
First, there is outrunning and becoming #1 by a wide margin in your original market or category (your thimble).
Second, there is expanding beyond your thimble and broadening the buyer use cases you solve for.
And third, there is taking the playbooks you’ve honed in Level 1 and 2 to pursue multi-threaded domination of the map.
This doesn’t necessarily mean go after all three at the same time. How you balance between 1, 2, and 3 depends on your competitive context. Level 3 is about making these trade-offs to maximize your chances of domination.
But beware — even if you think you’ve won, many incumbents have been leapfrogged. You can never rest on your laurels.
The key with broadening is to do so in a way that is consistent with your brand and mission. You still need to stand for something in the buyer’s mind. For example, Uber has continued to expand its core SKUs, but all are a means of transportation.
Etsy was an example of when this can go wrong.
There was a period of time when Etsy, I suspect chasing GMV growth before its IPO, stopped limiting supply on Etsy to handcrafted goods. As detailed in this Wired piece, “How Etsy Alienated Its Crafters and Lost Its Soul”, buyers didn’t know whether they were looking at handcrafted or mass-manufactured goods, and the creators who were getting underpriced by mass-produced goods revolted, eroding trust and total happiness on both sides. Not a good situation.
Thankfully Etsy realized what was happening and went through a process of cleaning up its supply-side, reversing the decline. But it’s a reminder that growth that is inconsistent with your mission and brand does more harm than good. Yet another reminder to chase happiness, not GMV.