Hi everyone,
In the last e-mail I sent, I introduced my practical guide on marketplace economics. These concepts can be applied to products across problem spaces: digital advertising, social media, e-commerce, ride sharing, and travel. If you have a take-away from the last post you want to share or a question on how to apply it in your current role, message me.
Marketplace product management cannot be exercised without understanding the drivers of marketplaces (microeconomics) and the businesses that they support. I wish I had a resource like this when I was starting out. While there is relevant economics literature, much of it in college-level textbooks, I have not found holistic material for what to actually do with the theory when you are responsible for building and managing products. There will be six parts to the series:
fundamental concepts of economics: supply and demand [link]
[this post - assumes you have read the first one] marketplace dynamics
metrics (trees, liquidity, matching) and measurement [link]
external factors to consider
pricing [link]
summary [link]
Each part will also contain a list of actions worth taking.
Marketplace dynamics vs product lifecycle
Typically, in product development, there’s attention paid to where you are in the lifecycle: MVP, early growth, growth, and mature. Depending on where you are in the lifecycle drives the product adoption goal. However, the lifecycle serves as the background for marketplace work because the task at any given time is to maintain optimal balance with respect to the business goal. In other words, you can set a roadmap based on marketplace dynamics: the constant interactions and balancing act among supply, demand, user behavior, and external factors.
Let’s take a brief detour on what the lifecycle stages mean before detailing marketplace dynamics:
MVP: you’re looking for product-market fit (adoption alongside qualitative feedback is useful). Meaning, making sure your product solves a real problem for your target users. The goal here is to validate that the market actually wants what you’re offering. Adoption metrics are useful, but qualitative feedback is just as important. You want to hear directly from users to understand whether your product is addressing their needs and form a plan for how to improve it.
Early growth: looking for the ‘large majority’ user base. Growth rate per population segment is an important indicator. This is typically when passionate or advanced personas start using your product. Sometimes those advanced personas are influential and can help accelerate you towards the Growth stage.
Growth stage: you’ve found product-market fit and are looking to grow adoption via better engagement. Meaning you have acquired users and now the work is about keeping them active and ensuring they are using your product regularly.
Mature: you have a large share of the market and growth is stabilizing. You’re looking to deepen engagement and decrease churn. Churn is not limited to users leaving your product, ending their subscriptions or switching to another solution. You can also measure churn on an engagement basis, like the rate at which a DAU turns into a MAU.
As I mentioned above, the lifecycle serves as the background for marketplace work because the task at any given time is to maintain optimal balance with respect to the business goal. You can always change demand or supply regardless of whether the broader business is in a growth stage or has settled into a mature stage. Concretely, the chart below shows that the product adoption level at any point in time is equal to users x transactions. Transactions are the function of supply and demand. The level of supply or demand available can be changed by product actions (see previous note) among other levers.
How to read the charts
Most of the time, you’ll report the chart on the lefthand side but let’s apply a marketplace lens to it. Take Netflix as an example. At any one of those points, it is true that: product adoption (total watchtime) equals users x watchtime per user. A unit of transaction for Netflix is watchtime per user or how much content each user watches. See previous note for tips on how to define a transaction. Watchtime per user is the result of videos matched to users or supply matched to demanding users. Therefore, you can ask whether to focus on supply (video titles available, the genre catalog, languages available, age of content), demand (more viewers, expand to additional distribution channels), or the matching mechanism (efficacy of matching algorithms, the UX of discovery, etc). Whether growing the supply of international titles to increase product adoption is the right set of actions to pursue for Netflix vs improving the efficacy of personalization depends on the business priority (should be set by Director+ in large organizations).
Note that it is possible to effectively increase supply without adding new products or acquiring new content by improving the personalization algorithm. There may be slices of remnant supply - titles - that aren’t being surfaced to the users most likely to click-through to and engage with them. In Netflix’s case, there may be niche films or shows that are buried in the catalog, and by improving the recommendation engine, Netflix could better match these titles with the viewers, better utilizing supply. From a viewer’s POV, they will both perceive and engage with more supply. So as a Netflix employee, if you apply the lens of marketplace dynamics, you can increase supply without spending even one cent.
Non-controllable factors
Now that we’ve established marketplace dynamics are somewhat independent of the lifecycle, let’s focus on non-controllable factors that shape those dynamics. Each factor that you cannot control is typically viewed as a risk in product development. But that framing has limited use in marketplaces. Instead, it is more useful to think in terms of tailwinds and headwinds. Headwinds are obstacles that can slow growth or complicate operations while tailwinds are favorable external factors that can accelerate growth. You want to position your efforts to take advantage of and be as exposed to as many tailwinds as possible. Both are inevitable (not typical product or project thinking which tries to eliminate headwinds).
Continuing with the Netflix example, greater interest in e.g. Korean dramas is an external factor - it’s a cultural trend. However, the MP is well-positioned to benefit from the trend if it can forecast it and acquire content quickly enough to attract and retain the users that first visited to watch it (because it has a good recommendation algorithm). With a first positive experience, viewers are likely to stay and convert into paying customers. I described the trend of Korean dramas as a tailwind for Netflix but it could also be a headwind if the product is not proactive about forecasting the trend or effective at getting its relevant inventory in front of viewers (bad recommendation algorithm) once the trend starts.
Positioning yourself for tailwinds creates additional complexity that needs to be managed via more precise tracking and segmentation of the marketplace. For example, Netflix would need to segment its metrics specifically by content category, such as Korean dramas. Ignoring these tailwinds may seem simpler, but it depends on your overall strategy and whether you’re operating a self-directed or managed marketplace. There is a spectrum between the two.
Managed marketplaces actively manage the interactions among sides through pricing policies and implement safeguards on product quality to ensure trust and smooth operations. Examples are Uber, Facebook Marketplace, and AirBnB. Self-directed marketplaces offer tools for users to interact directly with each other with minimal intervention from the platform itself. Examples are Etsy, where the sellers set their own policies and prices but Etsy adds value through aggregating demand and provides tooling for lists and safe transactions.
The key difference between the two ends is how much intervention the platform operator applies on transactions. Managed marketplaces typically have more complexity because of the additional policies, tooling, and guardrails implemented. Anticipating tail/headwinds though is easier because you can use one of those levers to adapt the product. There are also times when a marketplace may need to transition from being self-directed to more managed, or vice versa, when the current approach is no longer delivering sufficient results. For example, if the platform’s matching system is failing to meet business objectives or user expectations, more levers might be needed to improve the quality of interactions.
Actions to take
Determine whether you operate in a managed or self-directed marketplace. Often, this will not be explicitly stated so start by comparing your product’s structure to examples like AirBnB (managed) or Etsy (self-directed) to understand where you fall on the spectrum. You can do this by analyzing how much control your platform has over interactions between sides.
Shift your focus to marketplace dynamics, away from the product lifecycle. This broader perspective will help you spot opportunities for impact that go beyond typical product development phases. You can do this by:
analyzing the most recent large launches: how did the sides (e.g. buyers and sellers) interact in the feature and after it?
identifying patterns: look for trends in how participants engaged - what worked, what didn’t, and where there was friction.
spot opportunities for improvement: use this analysis to find areas where you can improve user engagement, improve matching, or better facilitate interactions across the marketplace
Proactively seek tailwinds and headwinds. You can do this by:
Investing in forecasting tools that e.g. predict market shifts, such as change in your users’ behavior or consumer behavior in the broader market.
Setting up automated alerts on metrics/KPIs you care about. You can also set-up alerts on Google News or other news websites.
Collaborating with industry experts, third party intelligence sources, or hiring a consultant to give a deep dive on the direction of the market.
Define and start tracking matching metrics for all sides. For example, track how well your platform connects:
Viewer-to-ads (for advertising platforms)
Guest-to-listings (for AirBnB-style platforms)
Shoppers-to-products (for e-commerce)
Patients-to-doctors (for healthcare platforms)
Riders-to-rides (for ride-sharing apps)
If you’ve made it all the way to the bottom, thanks for reading! Consider sharing with someone you think may find this newsletter useful.
Meryam