Supply-side variety and disintermediation

The world’s most successful marketplaces share one core characteristic. Transaction frequencies, average transaction values, and the resulting market sizes are very important. However, for the impact of these attributes to be amplified rather than contracted, one condition must be met. This is that the demand side of the marketplace must benefit from interacting with a variety of suppliers.

Passengers in a car hailing marketplace want to access the nearest car. That’s always a different car so there’s a benefit from supply-side variety.

Guests in a short-term peer-to-peer home rental marketplace need places to stay in the different cities they visit. They benefit from supply-side variety.

Diners ordering from a restaurant marketplace want different food options. Eating the same thing over and over again gets boring for most people so there’s a benefit from supply-side variety.

The advantage of operating a marketplace where demand benefits from supply-side variety is that it keeps demand coming back to the marketplace for repeat transactions. This is in contrast to marketplaces where demand doesn’t want supply-side variety. Examples of this include marketplace providers of home cleaning and elderly care services. In these examples, once demand finds a supplier it likes, it wants to continue working with the same supplier. As a result, repeat transactions are likely to take place off of the marketplace. In other words, the marketplace is likely to be disintermediated.

Marketplaces where demand doesn’t want supply-side variety can still be successful. They can achieve this by taking steps to avoid disintermediation. Examples of such steps include building tools to handle payments, scheduling, security, and communications.

However, it’s an uphill climb. And as a result of this uphill climb, marketplaces that don’t benefit from supply-side variety tend to not get as big as ones that do benefit from this variety. The latter are running downhill.

Also published on Medium.