The huge opportunity of resource allocation in connected marketplaces

Feb 20, 2013

Table of contents:

1. The power of marketplaces
2. Resource Allocation Optimisation
3. The new wave of companies
4. Common attributes
5. How to create a two sided market business
6. Conclusion

One of the great new opportunities of the Internet is the collective power of networks and marketplaces. Since almost from the dawn of the consumer Internet, people from around the world have been coming together and creating networks of shared interests online. One of the most powerful business opportunities on the Internet is to become the curator and enabler of a marketplace. We’ve already seen websites like eBay and Etsy create these passionate marketplaces, and due to network effects, these businesses are extremely defensible.

However, a new wave of online networks have formed over the last couple of years. Generally grouped together as “Resource Allocation Optimisation”, these marketplaces look to leverage the power of the network to increase the productivity from a traditionally wasted resource.

This theme has dramatically spilled into the real world where new hybrid businesses combine technology and the Internet to utilise resources and handle demand for services in the user’s local vicinity.

In this post I will be looking at these types of online companies, taking a deep dive on the benefits and drawbacks of the business model, and offer suggestions about how you could start one of these companies too.

The power of marketplaces

When you think about online marketplaces, the two biggest and well known examples are eBay and Craigslist. Both of these companies bring together two sides of a market by facilitating transactions. Whilst eBay and Craigslist are two very different websites, you can see that both have clearly defensible attributes.

Both eBay and Craigslist were founded in the mid nineties and have grown to be two of the largest websites online. Both companies managed to survive the dot com bubble bursting and are still the undisputed leaders in their industries despite constant attacks from new startups. However, both of these companies have survived despite better products and services launching and without ever improving their user experience.

A two sided marketplace is very powerful. Both eBay and Craigslist have become massively defensible because there is a wealth of users on both sides of the marketplace. A buyer is far more interested in an abundance of sellers and a seller is far more interested in an abundance of buyers. This makes the switching costs in these types of businesses extremely high.

Resource Allocation Optimisation

An interesting extension of the two sided online marketplace is the new wave of Resource Allocation Optimisation companies.

The smartphone revolution has put a computer in everyone’s pocket. We now carry around intelligent and connected devices that allow us to access the world’s information with just a couple of taps. This unprecedented access has opened a number of exciting opportunities.

Now that we are more connected, and we have access to location aware devices, we can now better allocate resources in the real world.

In the past, time has been wasted, resources going unused and opportunities are lost simply because a better use of these resources are unknown. With connected technology and the augmentation of marketplaces, opportunities can be found in being the connector.

The new wave of companies

The power of creating a marketplace is no great secret as it presents an opportunity to create a really big company. When you are the facilitator of a marketplace, you own the market, but you allow the two sides of the market to organise themselves. Once you reach scale and you can take a transaction cost, the business is free to scale indefinitely and will grow even more defensible.

However, creating a two sided marketplace is extremely difficult. I’ll show you the steps I would take to create one later in this post, but for now, here are a couple of companies who have created interesting marketplace type companies and are at the forefront of the new theme of Resource Allocation Optimisation.

Uber and Hailo

Uber is a private driver service that launched in San Francisco but has since spread to cities all over the world. It allows a user to request a private driver through a smartphone app. The user can see how many drivers are in their local area, their availability and they can watch them arrive on a map. The cost of the trip is automatically taken from the user’s account so no money needs to switch hands.

The Uber model is interesting however because they do not employ any of the drivers. All of the Uber drivers are self employed and so they use the Uber service to find customers. The drivers don’t have to handle money or take credit cards and they are supplied with a regular and reliable source of new business.

Uber has created a marketplace that allows drivers to optimise their time and has created a far superior service for the end user. Drivers no longer have to waste their work time sitting idle because they can tap into the Uber marketplace to find customers. The end user gets a much better service because they can track their driver and payment is frictionless.

Uber is not the only company that is attacking this opportunity, Hailo is a similar service that started in London and has since expanded to 9 cities across the globe.

Taskrabbit

Taskrabbit is a task and errand marketplace that allows anyone to outsource small jobs. A Taskrabbit is someone who applies to join the network in order to be available to do jobs for others. Each Taskrabbit is interviewed and has a background check before being accepted into the network. Once they are approved they can make themselves available to do jobs for others.

As a user of Taskrabbit you can submit a job you want to outsource and say how much you are willing to pay someone to do it. For example, say you didn’t have time to stand in the queue at the Post Office to send a parcel. Instead you could pay someone else to do it for you.

Taskrabbit is an interesting marketplace because it is giving new opportunity to a previously idle work force. There are millions of people around the world where a traditional job does not fit their situation. Young parents, people between jobs or senior members of the community who have been laid off from work are available to do jobs and earn money but they lack the source of new business.

Taskrabbit is a marketplace that allows these types of people to access their customers and get a constant stream of work opportunities without the responsibility of a full or part time job. Taskrabbits can work when they want and pick and choose the types of jobs that fit their lifestyle.

Airbnb

Airbnb is a marketplace that allows “hosts” to rent their additional space or unoccupied residency to other Airbnb users. This means they can earn money from their unused space without the traditional bureaucracy of tenant agreements. For users, it allows you to travel all over the world without the restriction of hotels. Airbnb locations are often cheaper and in better locations than traditional hotels.

Airbnb is a huge opportunity for both users and hosts. For users it has opened the door to cheaper travel and the opportunity to live for periods of time in areas of the world that would of previously been inaccessible. For hosts, it is an opportunity to generate money to pay for their homes or apartments without the hassle of taking on long term tenants.

Common attributes

What are the common attributes of these types of business that make them work? As I mentioned at the top of this post, creating a two sided marketplace is incredibly difficult. But two sided marketplaces have many of the same characteristics no matter what type of market it is or what type of transaction is facilitated.

The new wave of Resource Allocation Optimisation marketplaces also benefit from a number of the same technological advances.

Here are the 3 common attributes of these types of business

1. Supply and demand

An obvious first step to creating a successful two side marketplace is having healthy supply and demand. With both supply and demand, the marketplace will simply not work.

Another problem of a two sided marketplace is the chicken and the egg situation. Without supply, you have no demand, and without demand you have no supply. Both Airbnb and Taskrabbit used interesting techniques to solve their chicken and egg situation which I will cover in my suggestions for creating this type of business at the end of this post.

2. Transactional

The second key characteristic of these types of businesses is that they are transactional. Two sided marketplaces are difficult to create because you need both sides to maintain interest. The real value of these types of companies are only realised once both the supply and demand have compounded for a period of time. Maintaing interest and keeping people coming back is an important thing to consider.

One of the best ways of doing this is to turn your opportunity into a way that massively benefits the users. In each of the examples above, the supply side of the market is an opportunity for these people to earn significant money. When you create a new way for people to earn a living, you have found something that they will be passionate for. A new generation of people are growing up trying to escape the rat race. By augmenting this opportunity, you can create a passionate group of users.

Transactional businesses are important because you create an opportunity for your supply side to earn a living, but it also enables you as the curator to sustain the growth of your business as the marketplace grows. If you are looking to create a two sided marketplace that is not transactional, see if you can rethink the opportunity to introduce a transactional model that greatly benefits your users.

3. Analog to digital

And finally the third key characteristics is that they are combining analog and digital. Uber, Hailo, Taskrabbit and Airbnb have only been possible in that last couple of years because of the connected opportunity of the Internet. Without the widespread adoption of smartphones, Uber, Hailo and Taskrabbit would not be possible. Without the internet, Airbnb would never be able to find the critical mass.

Smartphones now come equipped with a range of sensors that can turn analog signals into digital intelligence. GPS, a camera and a constant connection to the Internet allows services like Uber, Hailo and Taskrabbit to optimise the idle time of resources by connecting them to consumers.

How to create a two sided market business

From looking at the experiences of companies like Uber, Hailo, Taskrabbit, Airbnb, eBay and Etsy amongst others, you can start to synthesis what these companies did right in the early days to encourage the growth of their marketplace.

Here are three of the things I think all of these companies did right that enabled their growth. Now of course, there is much more to creating a high growth company than these three simple points. As I’ve emphasised throughout this post, this is a difficult opportunity to get right, so this is really just a starting point.

1. Don’t be scalable at the outset

The first important thing to remember is, you are a startup, not a large company. When you begin this journey, you can probably imagine what your company will be like once you reach scale. Much of the technology and process of your company will need to be sophisticated and automated to handle the volume of transactions and activity.

However, you are no where near this part of the journey if you have only taken one step.

To create this type of company, you need create a loyal group of users who love your marketplace and will actively invest their time and money because they are passionate about it.

Take being small as an opportunity to do unscalable things. Email every supplier, talk to your customers and find out their problems and how you can solve them.

Being small is a big opportunity to really understand what will make your company great once it reaches scale. Don’t neglect the opportunity because you only have eyes for the end goal.

2. Leverage existing incumbents

When you are creating a new company, you will already have existing competitors even if you believe you are attacking a completely new opportunity. If you don’t believe you have any competitors, you aren’t solving a real problem.

For example, before Airbnb, many people would advertise apartments on Craigslist despite it not being a good place to do it. When Airbnb were looking for suppliers and customers, they created the technology to automatically post to Craigslist.

For every opportunity, there will be people out there who are currently using the broken tools available to solve their problems. By find these people and leveraging their existing solutions, you can guide them from their current makeshift solution to your marketplace that is specifically designed to solve their problem.

Just because you are attacking a new space, does not mean you don’t have competitors. Find how your target customers are solving their needs and then use those tools to grow your company.

3. Create a low friction experience

Part of the benefit of creating a mobile first company is that your user experience is inherently simpler. With restricted real estate, you are forced to create a simple and low friction experience.

When you are creating your product’s user experience, you want to make it as frictionless as possible. In two sided marketplaces, the supply side is often going to be heavy users of your product. You don’t want them to suffer through a needlessly laborious experience because they just won’t come back.

Taskrabbit make good use of this through their mobile app. The Taskrabbit app allows you to quickly and simply take a photo, describe the job and set how much you are willing to pay. The Taskrabbit side of the app allows you to quickly source new jobs based on their location.

Part of the problem of eBay and Craiglist is that they have not updated their user experience in the last decade. Despite this they remain undisputed category leaders. If you are ever going to topple these incumbents you need to provide a much better experience.

However, as eBay and Craigslist have both proven, a good user experience won’t assure success. But as a new entrant to the industry, you have the opportunity to completely rethink how the process works and try something completely new.

Conclusion

Two sided marketplaces have huge potential to become large, scalable companies. The power of the two sided marketplaces means these types of companies are incredibly defensible.

The wave of technology advances on the Internet and through smartphones has opened the door to the new opportunity of Resource Allocation Optimisation. By connecting analog signals to the connected digital world, a whole new wave of opportunities are just waiting to be started.

This is an excellent time to start this type of company.