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We recently held the opening session of our Marketplaces Journey (Trilha de Marketplaces), a presentation of the Astella Expert Network (AEN). Speaking to a select group of entrepreneurs operating the marketplace business model, Lucas Abreu of Astella presented Astella’s Marketplaces AEN, and Laura Constantini of Astella shared what we learned from our research survey Seven Lessons on Marketplaces.
To provide specific content we invited Gustavo (‘Guga’) Fino, co-founder of Nana Delivery and Zé Delivery, and Tiê Lima, co-founder of Enjoei (ticker ENJU3:BZ) for a frank and transparent conversation, full of the tips and learning they had gained from their journeys constructing important Brazilian marketplaces.
In this post, I am sharing some of their key insights and lessons that improved my understanding of marketplaces – such as the question of Cold starts, construction of the Network effect, the importance of an efficient balance between supply and demand, recurrence, and Heavy Users.
The first thing we noted is that both founders commented on the importance of a knowledge exchange initiative, such as our Marketplace AEN, due to the importance of understanding the dynamics of this business model, which is complex from the start, and the need to balance the various sides in the same operation. They both concluded that if they had had this content available to them beforehand, they would have understood earlier that it is possible to grow in a more sustainable manner, avoiding the anxieties associated with the need for exponential growth at the start of their journey.
The Cold Start and the quest for Liquidity
In the case of Zé Delivery, understanding the supply side was key. Before starting operation with their present brand name, they made tests in a major satellite city of São Paulo state, Campinas, where they registered more than a hundred distributors – but since they did not yet have liquidity, they received only a few orders per client. Due to this low demand, these various distributors left the network and stopped accepting orders. At the conclusion of this test, the outcome they saw was that only a small number of distributors were accepting the great majority of the orders.
This learning phase enabled them to start Zé Delivery with a better-controlled structure on the supply side, with only one distributor, and initially serving only one region. This made it possible to focus all their support in such a way that this partner delivered the value proposal that the founders believed was possible, and feasible for the network in the long term. And this strategy enabled them to unlock the first deliveries with quality, and grow demand from that base.
In the case of Enjoei, the first major challenge was to create liquidity. Due to the traffic and content that they had built up in the publication of their blog – which was where the idea began – they sought to balance demand with supply operating ‘manually’, ensuring that products made available were promptly sold. Also, to create more liquidity, they sought at all times to reduce friction in completion of transactions by manually curating and choosing products to be presented, and by creating tools that enabled buyers and sellers to negotiate price.
Construction of a network effect
Guga commented that it is vitally important to have a very clear view of exactly what the value proposal of the business is. For example, at the time, for Zé Delivery, the value proposal was to have: (1) a service available at any time that the buyer wanted; and (2) a range of products able to meet the needs of the related public, (3) at accessible prices comparable with those of a supermarket. However, this value proposal did not directly match the way that the partners functioned at that moment. That created a need to offer the distributors a specific support proposal, some system of incentives, and advantageous access to the value chain in the beverage industry, enabling the needs of these partners to align with these three aims.
This was how they created an environment of deliveries for the platform’s services – without already having the critical mass to achieve scale. By being able to deliver a superior value proposal in the market, they began to attract users through word-of-mouth, and were able to grow by a factor of more than 150 times in a few years.
The inflow of users created a natural desire on the part of distributors to be part of the Zé Delivery ecosystem, but now with the platform having greater bargaining power, and no longer needing to provide any systems of incentive. Finally, the flywheel generated increasing power as the entry of new members further increased the platform’s value proposal – more availability, wider range of products, and good prices – adding operational and logistical scale gains, and thus strengthening the various network effects.
Balance of supply and demand as the journey progresses
In the case of Tiê and Enjoei, it’s important to understand what initiatives generated the most return for the platform’s supply-demand balance, and the resulting network effect over the long term. The answers can change, and are never trivial. There has to be a rapid way of testing and creating processes to identify any that don’t add value, and thus avoid inefficiency.
Initially they brought in many users through paid media, thanks to Facebook, which had a low acquisition cost, and generated better unit economics. However, in recent years, these costs began to grow. So they studied what they could do to create a better balance and generate a level of liquidity that was good for both sides.
For example, during the pandemic, they concluded that bringing more sellers would be more sustainable for the unit economics than investing directly in acquisition of new users. With the higher level of purchases (during the pandemic), and since their shelf rates were healthy, they became conscious that with the presence of more buyers, it became more interesting to stimulate more recurrence among them, rather than look for new clients.
This had the effect of organically attracting more sellers, providing both a healthier balance and new growth in the marketplace. Having more sellers also produces improved logistical efficiency, and other effects such as improved user acquisition cost, further building the sustainable network effect, and the unit economics.
Unit economics
Guga Fino, when discussing unit economics, says that it is of key importance to understand what is temporary – what is causing some momentary benefit for the network effect – and what is a permanent benefit to the business model of a marketplace over the long term.
An example of something temporary is when you reach your scale objective and eliminate any subsidies – this should not affect user behavior, such as buyer recurrence or desistence by distributors.
If what you have achieved is permanent, and not sustainable for your business model, you should look for other places to offset or compensate this economic inefficiency of the model. One example would be the higher freight cost for faster deliveries, which is usually subsidized by platforms – they ought to be capable of capturing this value in some way or on another front to offset this effect.
In other words, the benefit of the subsidy should be based in the construction of the network, in engagement and in the value proposal that remains over the long-term, and it should not subsidize any aspects that will not benefit from scale.
Recurrence, and Super Users
Both of our speakers believe that it was essential that they built a system for identifying users, enabling them to map the different user profiles within their networks, and their behaviors in terms of use and engagement. They concluded that the more a marketplace expands, the clearer these different profiles, and the specific needs of each one of them, become. Based on this consolidation of conclusions and analysis, founders learn where to focus, and the various forms of engagement that will work best for each user profile in the marketplace.
“Heavy users” – the profile of those that generate disproportionate value to the network and its liquidity – are crucial for marketplaces, on both the demand and the supply sides, and this is governed by a power law. Both of our speakers believe that managing this balance can produce more liquidity and profitability. The proportion of heavy users can be up to 15% of the total user base, and they may even represent more than half of the total volume of purchases.
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The notes above, a partial summary of the first conversation, are an outline of what we have learned in the Seven Lessons on Marketplaces, which you can read by clicking here.
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