Imagine discovering a pile of gold dust in the middle of the road. You know that if you can get it to the local jeweller you will make some good money. You jam the gold dust in your trouser pockets and set off. Unfortunately, your pockets have small holes in them. By the time you reach the jewelry store most of the gold dust has leaked out. That my dear reader, is the equivalent of platform leakage, which can kill your marketplace.
Disintermediation, also known as platform leakage, has hurt the viability of many a marketplace concept. This happens when naughty users circumvent your payment systems and conduct transactions off-platform, resulting in a loss of platform revenue, such as commission or other transaction fees.
Platform leakage is something that especially affects service marketplaces, due to the longer, more complex procurement process. Once buyers have received a quote or proposal there’s nothing preventing them from connecting and transacting with the seller off platform
Thus, the holy grail for marketplace owners is to own as much of the procurement process as possible. This allows them to extract revenue from each transaction. However for this to work there have to be good incentives for users to stay and transact on your platform.
Check your product/market fit
This should be your first stop to prevent platform leakage. How useful is your platform (product) to your target market and are they willing to pay for it?
A marketplace with a good product-market fit satisfies a real need that users might not even know they have. It saves them time and money, by offering easier access, variety and quality of products and services.
A product with a good market fit is something that, once a customer tries it, becomes so indispensable that they can’t imagine trying to do their jobs or lives without it. As a result, they are willing to pay for it via your platform.
The best way to establish product/market fit is by using a minimum viable product (MVP). An MVP is “a version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort.”
Constructing an MVP is not a one-time event; it is an iterative process. You build an MVP to test one assumption in your business model, get feedback, make the appropriate adjustments, and then build a new MVP to test the next assumption. Getting the most from this process requires fast execution. To ensure speed and quality results, most entrepreneurs develop their minimum viable product process using Lean Startup and Agile principles.
There are a number of ways to create incentives for users to transact on your platform. The most important would be to create sufficient value in the process of matching sellers and buyers that they prefer transacting on your platform. Value usually takes the form of discovery (how easy it is to find the right sellers), convenience (the speed and efficiency with which buyers and sellers can connect), and trust (the security provided by the platform).
Lightly managed marketplaces like Airbnb use fast secure transactions, verified users and guarantees to build trust and peace of mind. Uber also qualifies as lightly managed, but relies on the speed and efficiency with which riders and drivers are matched to keep users on the platform.
In a commoditised services marketplace, the consumer doesn’t care as much about the specific producer performing the service. Instead, the consumer trusts that the platform will provide someone capable of performing quality work at a set rate. Think Uber, Instacart or Postmates.
Remoovaz, a B2C marketplace for home removals, is another good example of commoditised services. In order to prevent platform leakage they use standardised fees so that payments can be done at the booking stage. This removes the need for a quotation or negotiation process. In addition, customers are only introduced to their service provider within twenty-four hours before the scheduled service.
However, in a non-commoditised services marketplace, the buyers care more about the specific service provider they are contracting with. On Airbnb, each host’s property offers a unique experience. With platforms like Behance or Upwork, you want to choose the right designer or developer for your project. Thus the selection process becomes key. Your marketplace therefore needs to provide an efficient navigation framework and communication channels (e.g. a quote request mechanism) so that customers can find and connect with the right service provider.
Value-added services that help to keep marketplace sellers within your platform’s payment flow include business intelligence tools (e.g. consumer and product trends), account analytics, digital marketing support, and content services (e.g. Airbnb’s professional photography service). Value-added services can even become a major revenue stream. In 2020, Amazon’s ad revenue of $15.73 billion made up over 10% of the total US digital ad market, for example.
Fintech deserves a special mention. Used car and real estate marketplaces like Cazoo, Kavak and Opendoor have experienced rapid growth by incorporating fintech solutions, such as payment plans and insurance, that reduce transaction friction. Plug-and-play technologies like Klarna and Afterpay, which both manage installment payment plans, have made it much easier for platforms to offer fintech services to customers.
Keep in mind that value needs to be provided to both sides of the transaction. A lopsided value proposition will not prevent off-platform transactions. Affordable Art Fair balances its value offering by giving novice art collectors a safe, easy-to-navigate platform to peruse and purchase contemporary art, while helping artists and galleries showcase, sell and ship their art pieces.
Some marketplaces try to combat disintermediation by creating risk, in the form of legal repercussions or other penalties, for vendors that sell off-platform. This approach may alienate vendors if it is not balanced with a sufficiently high value proposition. It can also be time-consuming and costly to police non-compliance.
Upwork’s approach is to make sure off-platform communication channels are not shared. This includes a warning in their terms and conditions that off platform transactions will be penalised, with the potential for complete termination of access.
MobyPark, a marketplace for parking spaces in several European cities, had to confront the challenge of recurring parkers who tried to work around the platform. The solution was to create an efficient chat feature for on-platform communication. Users are told that for security reasons they cannot exchange email addresses and phone numbers in the chat, since the system blocks this automatically.
This is supported by its terms and conditions which permits the platform to limit, suspend, deactivate or cancel accounts in case of breach. Drivers agree that they will, “not attempt to contact an Owner directly until a Booking has been confirmed; not attempt to book any Parking Space advertised on the Platform, other than through a Booking.”
A further non-solicitation clause states, “ No User shall not attempt to solicit or perform services for or induce or attempt to induce, any customer, supplier, licensee or business relation of MobyPark or any Driver or other Owner through any communication including written and oral communication made by yourself or a third party to transact outside of the Platform.”
In addition, MobyPark “reserves the right to inspect the Parking Space at any time to verify any fees due.”
Make sure your marketplace payment system works well
Managing the flow of funds between buyers and sellers is one of the most important functions of an online marketplace. A fit-for-purpose payment system is therefore central to protecting your revenue streams from platform leakage.
Due to the complexity of payment infrastructures, most marketplaces use third-party payment service providers like Stripe Connect, PayPal for Marketplaces, and MangoPay.
A payment service provider should tick the following boxes:
- Accepts payments with no need for multiple merchant accounts.
- Easy onboarding for sellers. Minimises documentation and other friction points.
- Offers flexible payment options – credit cards, bank transfers, ApplePay, etc.
- Offers multiple currency options, including exchange rate calculations.
- As Merchant of Record it takes responsibility for the flow of funds and handles credit card disputes.
- Can hold or delay funds until goods are delivered or services rendered.
- Minimises risk through security mechanisms such as fraud filters and encryption.
- Adheres to compliance regulations such PCI and Know Your Customer.
- Can split payments – multiple sellers per cart, or tax and commission deduction.
- Offers reporting tools to sellers and an admin dashboard to marketplace owners.
- Reliability – a stable organisation with a strong track record of service delivery.
- Flexibility – its API allows customisation for your business model.
Use a subscription revenue model to limit marketplace platform leakage
OpenTable did this very successfully by selling subscriptions to its cloud-based reservation software to restaurateurs. This created sufficient supply for diners to flock to their platform without the need to police transactions.
Implementing a SaaS model for your marketplace can be done through payment service providers like Stripe Connect that support recurring payments. With technology like Chargebee platforms can even offer usage-based billing.
Learn more about choosing a suitable payment service provider.
Make sure your marketplace sellers are happy with your payout process
Get your payout process wrong and unhappy sellers will leave your marketplace because they don’t get paid on time, while buyers will inundate you with chargebacks and payment disputes. A nightmare scenario!
On the flipside, offering timely seller payouts and buyer fraud protection can be a powerful incentive for sellers to use your marketplace. The better your marketplace caters for specific use cases, the higher the likelihood users will remain within your payment ecosystem.
For example, using multiple payout triggers to accommodate different types of sellers can be a great selling point for your marketplace. FanPass, an event ticketing platform, offers three payout levels:
A standard option only pays sellers seven days after the event (to prevent duplicate or invalid tickets), while an instant option pays qualified sellers (who meet certain sales and service thresholds) immediately after receipt of the tickets by buyers. A third option caters for large corporate clients who receive monthly bulk payments.
A marketplace payment system must check a number of boxes in order to deliver a seamless seller payout experience. Here are some important aspects to keep in mind:
Seller onboarding. Unnecessary friction points can frustrate sellers and lead them to abandon your marketplace.
Compliance with local and international regulations. You will need to verify the identity of all sellers and/or their companies in order to comply with policies that combat money laundering and other illicit financial flows.
Cross-border transactions. If your marketplace operates in multiple countries you will have to deal with currency conversions and language barriers.
Holding function. Funds should therefore only be released to sellers or service providers after certain conditions are met to combat product fraud.
Seller payout options. Flexible transfer methods can help you reach more potential sellers since seller location, demographics, and sales volumes can all affect preferred payout options.
Split payments. Marketplace transaction flows almost always require separate transfers for seller payouts, marketplace fees, delivery fees or taxes.
Refunds and chargebacks. Product returns and payment disputes are a fact of life in marketplaces.
Seller dashboards. Providing a granular reporting function in an easy-to-manage dashboard promotes transparency and trust.
Learn more about how and when to make seller payouts.
Using marketplace liquidity metrics to track platform leakage
Quantifying sellers’ chances of making sales or buyers’ chances of procuring the right products or services, can help you form a better picture of potential platform leakage in your marketplace.
You want to look at the rate at which buyers and sellers match on your platform. Exactly what gets measured will depend on your business model. Since marketplaces are two-sided, both buyer and seller liquidity have to be taken into account.
Buyer liquidity would track metrics such as the average number of visits, search queries or quote requests that lead to transactions, also known as the Search To Fill Rate. Seller liquidity would focus on The average number of seller listings that result in transactions within a specific timeframe is known as the Utilisation Rate.
Learn more about how to measure marketplace liquidity.
Let’s be clear, there’s no fool proof way to completely seal your marketplace from platform leakage. As we’ve seen though, there are a number of ways to staunch the bleeding to a trickle. Your level of success will depend on how well your platform is designed. An off-the-shelf template may not be enough to protect your precious revenue. CobbleWeb has helped a wide variety of marketplace to establish and grow revenue streams. Get in touch to find out how we can do the same for your marketplace concept.