So here we won.
And this video, we will talk about all the important things you need to understand in a marketplace
business model.
So in this video, let's talk about the fundamental difference between offline marketplace and the online
marketplace.
So in offline marketplace, you can simply visit our retail shop.
You can touch and feel the product even before you purchase it.
You have proper trust and safety because you can always go back and return the same product if you're
not satisfied with the quality and on the shopkeeper side.
If they are getting more demand from the customer, they can increase the price.
So in the offline marketplace, those people have already solved the problem of touch and feel trust
and safety, return and demand and supply.
Let's understand how do you solve all these problems in an online e-commerce store like Amazon?
So let's talk about all the important things you need to understand in the online marketplace business.
So I broadly classify these things into four different categories.
In the first part, we will talk about marketplace economics.
And in that part, we'll understand how do you manage growth in a marketplace business model?
How do you balance out the supply and demand and how do you increase the price of a product?
The second part is marketplace science.
And in this part, we will understand how Amazon will recommend you the product.
So in this part, we will understand about the recommendation engine of Amazon that will recommend you
the product.
And in this part, we will also talk about marketplace liquidity.
And third part, we will talk about marketplace conversion optimization.
And in this part, we will talk about your funnel optimization and how a marketplace achieved network
effect.
So in that part, we will understand about growth loops and flywheel concept.
In the fourth part, we will talk about marketplace trust and safety.
So how do you build trust and safety between your customer and your reseller?
So in this section we'll talk about disintermediation and how do you keep the bad actors out of the
business.
So let's start with Marketplace economics.
So how do you manage growth in your business and how do you balance out demand and supply issues?
Now, let's say if you're starting out your marketplace business and you don't really have a lot more
customer on your ecommerce site, then the seller may not show interest in listing their product on
your platform.
And same goes with.
Customers as well.
If these customer are not able to find multiple products on your platform, they will not purchase it.
So you have to solve the problem of.
Onboarding more number of seller and customer at the same time.
And that's how you solve the chicken and egg problem.
And all the marketplace companies like Amazon or Uber or Airbnb.
All of these companies have solved this problem.
So if you are onboarding more number of sellers on your platform and they are listing more number of
product, in that case you are adding value to the buyer.
And if you are adding value to the buyer, in that case, you end up attracting more number of customer.
And if you have more number of customer, you will end up attracting more number of sellers as well.
And that's your chicken and egg problem.
And this was solved by almost every single company, you know.
So you have to ask questions like, do you have enough supply to meet the demand and to make your customer
happy?
You have to generate two sided growth with a good balance of supply and demand.
So if you are working in Amazon, then you need to make sure that you are balancing out the demand and
supply across all these different categories you have.
So you have to maintain demand and supply in beauty, in electronics, across all the locations you
have.
And in case of fiber, you need to maintain demand and supply across all the different skills that people
are looking for.
And that's your demand and supply and maintaining the growth engine as well.
Second thing you need to understand in marketplace economics is your price equilibrium.
And to oversimplify this topic, let me give you a very simple example.
If you have used apps like Uber or DoorDash to order food online, you may have seen a surge pricing,
especially at the time of evening, which means the price will normally go up during the moments of
peak demand.
And that's your surge price.
And that's one of the strategies that is used by almost every single marketplace.
So on x axis, you have demand, on y axis you have price.
And these platforms use something known as dynamic pricing, where the price of the product will increase
if the demand of that specific product is increasing.
Because the final goal of any brand is to make sure that they are generating the maximum amount of revenue.
And the way you can calculate revenue is by multiplying your price with the number of product that you
can sell.
So if you are able to sell more number of product, you have to increase the price so that you can balance
out the demand and the supply in the marketplace while making sure that you are generating the maximum
amount of revenue.
Now, there are some companies who use this dynamic pricing more often than the other.
If you look at companies like Uber or DoorDash.
So in Uber, you will see a peak demand, especially between 6 p.m. to, let's say 8 p.m..
In case of DoorDash, you will see the peak demand, especially around 8 p.m. to 10 p.m., because at
that time people normally order food.
And that's why these food tech companies normally have surge pricing or dynamic pricing during the moments
of peak demand.
And if you're working for a company that is using marketplace, then you have to work on this as well.
The second thing you need to understand in marketplace is the marketplace signs.
So you need to work on algorithm and data science model to make sure that you are recommending the right
kind of product to the end customer.
Or let's say if you are working for dating app, in that case, you have to pick the right kind of tag
or interest profile, and then you have to match both the people.
Because the main aim of your company is to make sure that people get what they want in the shortest
duration of time.
And that's why you work a lot on this recommendation engine or recommendation model.
Now, I may not have enough time to cover all the different types of recommendation model, but I have
made a course on retail management and in that course I've made a video about Lyft that is used by Amazon
in their recommendation engine.
So if a lot of people are purchasing bread with butter, then the lift of bread and butter is very high
and then the algorithm will start recommending both the product that if you like this, you might also
end up liking this.
So that's why they recommend the similar kind of product that have a higher lift.
But let's not talk about that.
Let's understand a little about how Amazon recommend product based on the rating of a product.
So let's say if you are giving a five star rating to a product, then Amazon will consider that as a
good experience and they will recommend that product to more number of people.
But if you're giving a low rating to a product, then Amazon will not recommend that product to many
people.
And if you don't really have a rating at all, then then they won't be even interested in showing that
product to people at all.
Second thing you need to understand in marketplace signs is marketplace liquidity.
Now, liquidity is a term that is often used in stock trading platform like Coinbase or Binance or Robinhood.
But Marketplace also use this concept of marketplace liquidity.
So in simple terms, liquidity means a seller can quickly find a buyer without having a.
To the asset price to make it attractive.
So when we talk about a buyers liquidity, that means what is the likelihood of a customer?
If he is searching for a product that end up in a transaction, that means if ten people are searching
for a product, how many of them will end up purchasing that product?
That's the buyer's liquidity and Amazon always try to optimize for that.
So if that requires them to drop the price based on the past transaction history, they will always
do that.
So let's say if you have not purchased anything in the last six months or a year and now you are visiting
on Amazon for the first time, Amazon will always reduce down the price so that they can increase the
buyer's liquidity.
On the other side, let's say if you have purchased expensive stuff from Amazon and you are a repeat
user of the app, in that case, they will not reduce from the price of the product and they call it
as search to fill rate.
So in case of Amazon, the percentage of search session over a given month and the amount of purchase
that happens on the platform is your search to fill rate in case of Uber.
This could be the percentage of requests that you are making per week and the number of rides that have
booked on the platform.
That's your search to fill rate for Amazon and Uber.
Now, in case of supplier, these marketplaces also measure the supplier's liquidity, so they will
understand what is the utilization rate of all the products that the supplier is selling on the platform.
So let's say if the supplier was having 100 number of stock keeping unit at the starting of the month
and now he have, let's say, five units remaining, in that case, he has the 95% utilization rate
and that's the supplier's liquidity.
Now, Amazon normally measures the supplier's liquidity as the percentage of stock at the beginning
of the month, compared with the percentage of stock that is remaining by the end of the month.
And that's the supplier's liquidity.
Now, for Airbnb, this is super important because they quickly have to book these rooms every single
day.
So they measures the supplier's liquidity every single day.
So what is the proportion of rooms booked every single night?
And that's their utilization rate.
So you measure these things some maybe every single day or every single week or maybe every single month,
depending on the type of business you have.
Now, the third thing that you need to understand in marketplace is the marketplace conversion optimization.
And I'm sure a majority of you understand the conversion optimization.
So you have a normal funnel at the top of the funnel.
You will look at all the sessions that are there on your app or website or your business.
And at the bottom you will see the total number of transaction or successful order.
And that's your funnel.
In ecommerce, you will track the session, then you will track the individual product page for you.
Then you look at how many people are adding the product to their cart and finally the successful transaction.
Now, in order to optimize a funnel, you have to work on so many different parameters.
Let's say you have to work on user design, then you have to see all the keystrokes or let's say all
the steps that are required to do a purchase on your platform and you have to optimize all those steps,
let's say, which step can you reduce and how can you optimize it further?
So you have to use a lot more product analytics tool to make sure that you're optimizing this funnel.
So now that you know all the important things you need to understand in a marketplace.
Now, let's talk about how exactly does a marketplace business work?
So as you already know, Marketplace is a e commerce site, and this can be an app or a website where
these third party sellers sell their product or service to these customer.
Now, if you look at the distribution of a product in a traditional supply chain and marketplace, you
will find a huge difference in a traditional business.
So if you look at a traditional supply chain, the producer makes the product and then these wholesaler
will purchase these product in large quantity from a manufacturer.
Now, these wholesaler will then distribute these products to all these different distributor.
And finally, it's the distributor's job to distribute these product to all these end retailer.
That are very close to our home.
And then we will go to these retail shop and we'll end up purchasing these products.
And that's the traditional supply chain.
But if you look at a marketplace business like Amazon, Amazon directly on board these wholesaler on
their platform, and then they will take, let's say, 10 to 15% commission.
And then they sell these product to the end consumer at the most affordable rate, and they are removing
distributor and retailer from the supply chain.
And that's how you will always find a price difference.
If you buy the same product from an offline store versus online.
So you can see that if you buy the same product from an offline store, you will find it a little expensive.
Then on Amazon or let's say any other ecommerce store.
And the simple reason is they have removed these distributor and retailer from the supply chain.
So now let's understand how exactly Amazon implement their marketplace strategy.
So Amazon normally reach out to all these wholesaler or sometimes these wholesaler reach out to Amazon
and they will list their product on this platform.
And finally then Amazon sell all of these products to the end consumer like you and me.
Now, once these wholesaler or let's say reseller started selling their product on Amazon, these people
have realized that they don't really have to open a retail store.
So these people started storing all of their product in the fulfillment center of Amazon in traditional
way.
You call these fulfillment center as warehouse.
So they will purchase all of their product from Alibaba, from China, and then they will ship all these
products directly to the warehouse of Amazon.
And it's the Amazon's responsibility now to make sure that they are shipping the product to the end
customer.
And then these reseller or let's say.
Wholesaler will get their cut.