Chapter 1: The Landscape of Online Marketplaces

Online marketplaces are thriving businesses, especially at scale. However, a new wave of startups is working to mitigate the network effects of these marketplaces by simplifying multi-tenanting for suppliers.

Keeping It Real

Since 2020, Andreessen Horowitz (a16z), a prominent venture capital firm, has published the Marketplace 100, which ranks the top 100 private online marketplaces. This ranking is based on various metrics, including app usage, website traffic, and Gross Merchandise Volume (GMV).

Similar to the way music streaming or box office earnings operate, marketplace activity often adheres to a power law, where a small number of companies account for a large portion of overall activity (the 80/20 principle). For the second year in a row, grocery delivery service Instacart led the rankings, representing 64% of marketplace activity in 2022, down from 72% the previous year. A notable insight from this year’s report is that as multi-tenanting becomes simpler for both buyers and sellers, the traditional winner-takes-all model of online marketplaces is starting to weaken.

Source: a16z and Future, The Marketplace 100: 2022.

Chapter 2: Understanding Multi-Tenanting

Multi-tenanting refers to the practice of utilizing multiple platforms for listing or searching. This behavior is prevalent on social media platforms like Facebook, Twitter, and TikTok, as well as in marketplaces such as eBay, Etsy, and Poshmark. It can occur on either the supply side (sellers) or the demand side (buyers). For instance, a consumer who uses both Lyft and Uber is engaging in multi-tenanting. Likewise, a seller who lists products on both eBay and Etsy is also participating in this practice. The convenience of quickly comparing prices, such as for a ride from both Uber and Lyft, makes multi-tenanting particularly feasible in ridesharing. Overall, the widespread availability of apps, smartphones, and fast internet is lowering search costs and facilitating multi-tenanting for consumers.

Source: NFX, The Network Effects Bible, July 2019.

Marketplaces are often keen to limit this behavior, as it can reduce GMV and squeeze profit margins. On the demand side, subscription models have emerged as a common strategy to counteract multi-tenanting. By bundling the psychological burden of sunk costs with benefits such as discounts or expedited delivery, these models increase switching costs for consumers. For example, Amazon Prime encourages shoppers to start their product searches directly on Amazon, much to Google’s dismay. Similarly, DoorDash is attempting to achieve this with DashPass, a $9.99 monthly subscription that offers free delivery on orders over $12, aiming to keep customers from exploring other food delivery services like Getir, GrubHub, and Uber Eats.

Source: How To Discuss, How Does DoorDash Work?, November 2021.

As noted by a16z, a growing number of startups are emerging to assist suppliers in multi-tenanting across various marketplaces. These companies utilize software to enable sellers to operate on multiple platforms simultaneously, significantly reducing the time and effort involved in listing and managing inventory across different sites. Some notable examples include:

• Guesty: A property management platform for vacation rentals that provides reservation management and messaging across platforms like Airbnb, TripAdvisor, and VRBO.
• Mystro: This tool allows Uber and Lyft drivers to easily switch between the two apps, minimizing idle time without fares.
• Olo: Assists restaurants such as Sweetgreen, Shake Shack, and The Cheesecake Factory in accepting delivery orders and payments from multiple platforms.
• OneShop: Enables resellers to list clothing across various marketplaces like eBay, Depop, and Poshmark, promising to “sell on more sites without doing more work.”

To boost sales, suppliers aim to enhance their distribution by listing on numerous sites. Historically, this was a cumbersome process, requiring sellers to upload images, compose item descriptions, and respond to inquiries on each individual marketplace. This can be time-consuming and demanding. A seller's decision-making process often weighs the effort needed to list on a new platform against the potential for additional sales. Companies like Guesty, Mystro, and others are addressing this friction by streamlining the process for selling across multiple marketplaces, essentially commoditizing their complements.

Chapter 3: Supply and Network Effects

Marketplaces inherently possess network effects: increased supply leads to greater demand, and vice versa. Ideally, this creates a self-reinforcing cycle resulting in a winner-takes-all scenario. However, the reality is often more complex. One contributing factor is that multi-tenanting can undermine the defensibility of these network effects. This is evident in social media, where Facebook acquired Instagram and WhatsApp and attempted to buy Snap (and why TikTok poses a competitive threat to Mark Zuckerberg). This concept extends to online marketplaces as well, with Uber contemplating acquiring Lyft. The growing ease of multi-tenanting is diminishing the traditional winner-takes-all dynamics. This shift is beneficial for suppliers but poses a challenge for marketplaces.

Nonetheless, marketplaces still hold an advantage, especially when supply is fragmented. No single Airbnb host, Etsy seller, or Uber driver can significantly impact their respective platforms' business. However, the reverse is not necessarily true: an Uber driver may rely entirely on Uber for their income. This dependency is particularly pronounced in larger marketplaces. As NFX points out:

Because the network is larger, the variety of options will be broader, and users will only resort to competing networks when dissatisfied or as a complement to the value offered by the larger network.

Chapter 4: The Importance of Scale

Etsy serves as a compelling illustration of this business logic. In early April, the platform increased its transaction fee from 5% to 6.5%. In response, over 20,000 sellers staged a strike. Although this created a few days of negative publicity, it is unlikely to have a significant effect on the company's performance. When Etsy raised its transaction fee from 3.5% to 5% in 2018, sellers were also displeased but did not strike. Nonetheless, since that change, Etsy has seen its GMV grow by 3.5 times, while the number of sellers has increased by 2.5 times.

Source: Etsy Quarterly Results.

While most marketplaces may not have Etsy's level of scale, they still wield considerable power over their sellers. However, the emergence of companies like Guesty, Mystro, and Olo indicates that marketplaces will need to exert more effort to attract and retain suppliers. Additionally, they can no longer assume that unique supply will remain exclusive.

Chapter 5: Further Reading

• The a16z 2022 Marketplace 100.
• The Network Effects Bible from NFX.
• Below the Line on Hipcamp and the advantages of unique supply.

Disclosure: The author possesses shares in Facebook.

Photo by Thomas Le on Unsplash

The video titled "Promiscuous" explores the intricacies of supplier behavior in online marketplaces and the impact of multi-tenanting on business dynamics.

The video "What Really Makes Pairing Work - Arlo Belshee, Deep Roots | Craft Conf, 2023" delves into the underlying factors that facilitate successful partnerships in marketplace environments.