Last week, while speaking with a founding team building a new marketplace connecting buyers to suppliers, I mentioned offhand that it can actually be quite detrimental to actively advertise one’s platform as the cheapest. The insight took them by surprise and after some discussion, felt it was worthy of unpacking a bit in a post.
Here’s some context: a couple of years ago Bill Gurley flew down to spend the day with a company we’d invested in. They are a dual sided marketplace that connects buyers with independent merchants. I asked them what their biggest takeaway was from the day of dialoguing with a veritable marketplace expert. They responded: “he kept emphasizing to make the merchant the star.”
That advice has stuck with me for a long time. The truth is that many marketplaces – especially if they remove layers of middlemen or if they better optimize underutilized assets – are in fact materially less expensive than the competition. It’s therefore tempting to advertise one’s platform as the “cheapest” or that buyers can “save 25%,” both of which are extremely compelling value propositions.
But the problem is that merchants, who are typically comfortable with the status quo, and have conducted their business in a consistent fashion for a long time, are consequently hesitant of new selling channels. And they’re even more cautious if they feel that channel is focused on affecting the pricing and margins they’ve always needed to maintain their independence. No one wants to become a commodity.
That framework has always brought me back to Gurley’s comment: “make the merchant the star.” Specifically: what tools, products, data or reach could you provide to a merchant – whether a seller on Etsy, a restaurant on Grubhub, or a business on Yelp – that allows them to demonstrate themselves or their products on a level previously inaccessible to them.
Consumers are smart. If they’re used to spending $50 on a product that is now available for $35, they’ll quickly recognize they’re getting a bargain. Within our portfolio, we’ve seen companies outmaneuver their competitors – and win the loyalty of the supply side – by communicating to prospective buyers benefits such as convenience, breadth of product, or quality of suppliers. All of those messages are still compelling value propositions for the consumer that do not directly threaten the merchant.
All that said, marketplaces that sell a commodity experience such as Uber, or a managed marketplace that is its own seller should certainly focus on discounting as a consumer value proposition and aim to reduce take-rates to the point they can’t be undercut. But marketplaces that connect buyers to any form of unique merchant or product would be well served to make them the star.