Winning the Online Marketplace – Part V ‘Revisiting Importance of the Supply Side’

In my first post about ‘Importance of the Supply side’, I talked about the ‘Chicken and Egg’ problem (Found here – Winning the Marketplace – Part I ‘Importance of the Supply Side’) and how quality supply on-boarding, retaining and incentivizing is key to building a strong value proposition for the demand side. Retaining and scaling high quality supply side is also core to reduce time taken to attain network effects. If this wasn’t enough for establishing the importance of the supply side for an online marketplace, this article will argue that having a ‘unique supply side or unique set of supply side activities that provide for a unique demand side value proposition is core to building a defensible online marketplace business’. Let’s dive straight in – the two key words to remember are ‘Unique Supply side’ and ‘Defensibility’ and following is an attempt to define them –

1. Unique Supply Side – a supply side which remains committed to your marketplace platform and / or there exists a natural barrier for another marketplace to work with your supply side. I will talk about how you can try and build supply side loyalty later in the article.

2. Defensibility – essentially means that your business is insulated from competition. Which means that you have years of solid growth in store, high Return on Capital Employed (RoCE) and hence, a very high valuation multiple (‘salivating already’ read on…)

So here is the learning – “In a competitive online marketplace market, if the demand side and supply side are the same for all incumbent players, then the player with the best operational efficiency and deepest pockets will win” (this assumes that all players have similar team strength and deliver high quality consumer experience) – in essence, if you don’t have a unique supply side, business model will be hard to defend and in that case, you should be ready to become a money raising machine (with a ‘hope in your heart and prayer on your lips’ that competition can’t raise more capital)’

The following is an attempt to test this learning against real world examples –

1. Uber versus Local market Cab Aggregators

Local competition has sprung up against Uber in many countries. Each of these players have felt the wrath of Uber’s deep pockets and have had to continue to raise capital to fight the behemoth. Why? – demand side and supply side is the same! Operational efficiency doesn’t matter in the short run as deep pockets take care of the losses accrued in the name of market share or better put killing competition. Hence, one of the ways or may be the only way for the local players to fight Uber is to build a differentiated supply side which commits to them (Easier said than done but that makes for another post!). In the context of transportation marketplaces, lets analyze the self-drive offering (ZoomCar and the likes) – the supply side here is just a car and no driver combined with the fact that a unique set of activities are required to manage asset ownership or asset financing. Given the supply side is different and the fact that the value proposition to the demand side is also different, such companies are insulated from the wrath of the aggregators.

2. Etsy versus Amazon

Etsy’s built a valuable marketplace company under the nose of Amazon and ebay by bringing online, a unique supply of artisans / creators who were creating handmade products. The company built tools and customized the marketplace rules and regulations (including the very important aspect of Pricing) to cater to this segment. Buyers can be common across Amazon, Ebay and Etsy but their supply sides, marketplace rules and regulations, pricing, processes and tools are very different. Etsy’s ability to hold sellers on its platform is core to its success.

3. Cox and Kings versus MakeMyTrip (MMYT)

An example closer to home. Cox and Kings provides travelers with group travel options in a bundled form which they create on the back of sourcing supply from hotels, local sightseeing operators, airlines etc. C&K sells through an army of inside sales people and franchisees, who handhold the customer during the journey of planning and booking their travel. Cox and Kings closed FY 16 with $ 81 mn in net revenue and $ 40 million in EBITDA , which is 48% EBITDA margins. On the other hand MMYT’s core business is to help you book travel in a matter of ‘4 clicks’ with little or no human intervention. Here the supply side is the same but C&K provides for unique supply side activities which MMYT will find it hard to replicate! Finally the battle between MMYT and GoIbibo, two leading OTAs in India, became a battle of the balance sheet before they decided to merge (- same demand and supply side). Bessemer has a portfolio company Travel Triangle (Disclaimer – Bessemer is an investor in Travel Triangle and I serve on the board on the company) which aggregates offline travel agents who are able to provide customized travel plans to travelers. Here the supply side is different from that of Cox and Kings and MMYT and also has natural barriers as offline travel agents won’t work with Cox and Kings or MMYT given their competitive positioning.

4. Horizontal E-Commerce Marketplaces

The evolution of horizontal ecommerce has been pretty similar in most markets globally. Large number of players enter the market, and only 1-2 players survive to build large valuable companies. The reason is the same again – no difference in supply and demand side. Players that survive have done a great job of consumer experience and raising tons of cash! The players who survive also tend to have different supply sides – JD.com is an inventory led business model (and now a marketplace to go with it) while Alibaba is a pure marketplace which sells pretty much anything under the sun. In the context of product marketplaces, may be its important to analyze why vertical players in Jewelry, Grocery, Furniture, Prescription glasses and Luxury that have found success in a brutally competitive environment online market. Let’s take the example of Grocery (Disclaimer – Bessemer is an investor in BigBasket, online grocery retailer in India) – hard for horizontals to handle perishable products in their existing warehouse facilities and processes, grocery is a very local market and most of the advertising is offline – so all SEO advantage the large players have is lost. Finally, orders are delivered in vans rather than bikes which means re-tooling of delivery infrastructure for the horizontals. Given these supply side challenges horizontals, globally, have found it very hard to crack grocery.

There are multiple other examples that exists – Zillow versus Trulia (they combined forces since there was no difference in their demand and supply side), ASOS versus Zalando versus Bohoo (again very different supply sides and in some cases demand side), famous business school case study on Southwest airlines (unique supply side activities) also point to the fact that this rule applies in the offline world as well.

So what can you do to build a unique supply side? – this is extremely difficult if there is no ‘natural barrier’ for your supply side to work with competition but you could essentially continue to be ahead of competition and use a combination of deep pockets and some of the following points to pull supply in you favour.

1. Workflow / marketing tools – build work flow tools that mirror their systems and processes with the aim of making them more productive or cut costs. Provide tools for better inventory management or sourcing. Marketing tools to make spend more efficient. This is a continuous process of ‘WoWing’ the supply side
2. Rules and regulations of the marketplace customized for the needs of the supply side – this plays into the first point. Develop deep understanding of their supply chain to configure rules and regulations of the marketplace.
3. Incentive Structures – model incentive structure in ‘Carrot and Stick’ form. ‘Carrot’ encourages loyalty and superior customer experience while ‘Stick’ ensures dent in financials if ‘Carrot’ behavior is not met.

Natural barriers are great to have – long tail sellers will not work with large online marketplaces given onerous rules and regulations / compliances, offline travel Agents wouldn’t work with online travel agents, large online product marketplaces will find it hard to play in products that require customization or vertical integration etc.

Finally, if you are building a marketplace which is catering to a large unmet need and has a unique supply side which is committing to work with you and / or has a natural barrier to work with incumbents please give me a shout!