Chicken and Egg: Marketplace Supply

How to build supply in the marketplace? 

In the world of marketplace business, where buyers and sellers come together in a digital dance of supply and demand, it is tempting to focus on the shiny allure of customers, the eager buyers who eagerly browse the platform, ready to snatch up the latest offering. Afterall, it seems that a flourishing customer base is the lifeblood of any marketplace. 

Well yes, but that is not the whole story.

Imagine for a moment, a bustling bazaar in the heart of a vibrant city, stalls brimming with exquisite goods, vendors haggling, and shoppers huddled around, eyes gleaming with anticipation. The marketplace thrives because it has something that draws people in - the supply. The variety, quality and availability of goods are what make this place a magnet for customers. 

It shares the same logic as the classic chicken and egg dilemma: do you attract sellers to lure buyers, or do you first court buyers to entice sellers? While there is no one-size-fits-all solution, this blog will delve into the dynamics of marketplace economics, explore real-life success stories and discuss what should be the bedrock on which to build your marketplace empire.

Vinted: the rising star in European second-hand fashion market

Have you ever looked at your closet and wanted to get rid of some fast fashion items that you brought when it was trending on Instagram and only wear it for once or twice? Typically, they will end up in the trash can, donated to a charity shop, or simply hidden up in the closet for some time longer… but now, fashion enthusiasts can get some money back, with the largest and fastest growing C2C second-fashion platform, Vinted. 

Vinted enables individuals to sell unwanted items easily and for free, while for buyers, it is an infinite wardrobe for economical and sustainable fashion purchases. 

Vinted has a winning business model: unlike its competitors such as Depop and Poshmark, Vinted charges no sell-side fees. Instead, sellers can optionally pay for item promotion services that increase the visibility of the item to speed up the selling process. This model creates a long-term dominant platform via bottom-up pricing disruption, removal of listing/sales friction and democratization of supply. 

The rationale for removing seller commission is simple, Vinted users are highly price sensitive, no selling fee encourage more people to list items on the platform, thus increasing the depth and width of options, attracting more potential buyers and facilitating more transactions (on which they charge a “buyer protection fee for shipping, insurance and customer assistance). 

Interestingly, Vinted’s German business, Kleiderkreisel attempted to impose a seller fee in the early 2010s, and unsurprisingly, users revolted heavily against the company. 

With a stable and rich range of supply in place, Vinted has the capacity to work on improving buyer experience and optimising buyer-side fee to boost demand, and now it has entered a positive cycle. At scale, marketplaces develop large moats driven by network effects. The chicken and egg problem in which supply drives demand and vice versa makes it difficult to compete with established incumbents.  So far, new initiatives from players like Zalando didn’t have much impact on the business and more generalist players like Facebook Marketplaces or Ebay lack the vertical focus to offer a better value proposition. Vinted operates a winner takes all/most business models.

Ponhu: vertically integrate into the supply chain

Turning the spotlight to the Chinese second-hand luxury marketplace. There is a consensus among second-hand luxury product marketplaces: they are more worried about “having nothing to sell” than “having no one to buy”. 

Supply of pre-loved luxury items is extremely volatile, people tend to cherish their luxury product much more than “regular” clothes or bags, with an average product life cycle of ranging from 3 years up to a lifetime. Meanwhile, the pure peer-to-peer model struggles in this market because of customer’s concern on the authenticity of the items. 

At establishment, Ponhu operated a simple C2C model, like Vinted, where they charge a take rate for every transaction made. Quickly they realised, this model does not work for the luxury end of the market: low frequency of transaction + high customer acquisition cost + low customer retention = loss making business. 

In 2017, the company underwent a strategic transformation of its business model: split and conquer the C2B2C model. 

On the C2B end, Ponhu focused on controlling the upstream of supply: they established partnerships with over 2,000 local second-hand stations that cover luxury items. To maintain motivation and stability, Ponhu was paying them upfront after a remote authentication and valuation process. Although each station is small in scale, the combined network is substantial. This decision ensured sufficient supply and variety of SKUs, largely improving the transactional value of the platform. 

To keep the sellers interested, demand needs to be on track. On the B2C side, Ponhu introduced remote Authentication Service in partnership with China Certification and Inspection Group to solve the concern of luxury product authenticity; a once-a-year free cleaning and maintenance service for bags and watches, lifelong free battery replacement, etc. Finally, any item purchased from the platform can be bought back within six months at 80% of the purchase price.

Uber: fighting for supply as a first step

Uber is famous (sometimes infamous) for its aggressive driver recruitment tactics. 

As described by Guardian, “there is no Uber without a critical mass of drivers”. As a very first step of conquering a new city, the company always aggressively recruits drivers – its supply – with every possible way. From the generous signing-up and referral bonus to lure drivers away from traditional taxi companies, to the Vehicle financing and leasing programmes targeting people who do not own a car, Uber was trying to cast the widest nest possible to ensure a stable and sufficient supply of driving service, to achieve its mission of “transportation as reliable as running water”. 

To win the talent / supply fight, Uber has also allegedly engaged in some “unconventional” business tactics. For example, they attempted to poach drivers from other ride-sharing services by deploying its sales representatives to order rides  and  then  try  to  convince  the  drivers  to  defect  to  Uber  with  offers  of  monetary  bonuses and other incentives. Uber’s arch-rival, Lyft accused Uber of ordering and then canceling more than 5,000 rides from Lyft in order to make drivers think the service was less reliable and to drive passengers looking for available cars to Uber. On top of that, Uber retained the drivers after initial registration by mechanisms such as guaranteed minimum earnings, buying precious time for them to acquire customers and make the wheel spinning.

Although Uber has denied or not responded to some of the accusations, it adds some color on the importance of ensuring stable and sufficient supply for Uber. 

The story after that… not happy everafter

Yes, acquiring and maintaining supply is a significant part for marketplace business, however, it is not sufficient. It serves as a foundation upon which a more sophisticated structure is built. Marketplaces often begin by nurturing the supply side, a strategic move that buys them the time needed to acquire customers. This initial focus on supply acts as a catalyst, setting the stage for a powerful phenomenon: the network effect. As supply and demand interact and multiply, a marketplace gains momentum and builds a formidable moat.

For more discussion on how to build demand/moat for marketplace business, stay tuned for our next blog!

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