#1. Vanity metrics: companies may focus on metrics that are salient but are not meaningful or simply are lagging business development. In the case of marketplaces:
The marketplace that wins is the marketplace that figures out how to make their buyers and sellers meaningfully happier than any substitute. GMV is irrelevant — a vanity metric that can lead you down the wrong path if you chase it.
Much like MAUs is a vanity metric for consumer social companies, I believe GMV is a vanity metric for marketplaces. As we saw with the three case studies, GMV does not get to the heart of whether you are creating enduring value or not. No matter how large an incumbent may be, they are always vulnerable to a new entrant that makes buyers and sellers happier. In other words, happiness — not scale — is your moat.
#2. NPS > Engagement > Liquidity: GMV or MAUs are the lagging indicators. What enables a platform to grow is customer satisfaction, which in turn generates more engagement and, more importantly, lower churn (diminishing CAC), thus generating ‘platform liquidity’. This is what comprises a positive, sustainable growth path. Growth is oblique, the consequence of key value levers you work on. Don’t focus on the lagging indicator.
#3. How to measure consumer happiness? NRR (revenue stickness) doesn’t lie. If you had 100 users last May paying $10/each and next year you only have 50 of those clients, you have an issue - no matter the NPS. Or maybe cross/up-sell was enough to compensate part of the churn.
Companies generally talk about NPS without even mentioning how it is measured. Besides, you can have a small niche (30% of users) with high NPS but CAC-wise you’re spending too much cash inadvertently (maybe a targetting problem?!) and your growth algorithm won’t scale profitably. Focus on what really matters.
First, I’ll admit that “net revenue retention” is not a perfect measure of happiness, but it’s the best single measure I’ve seen. Some people ask about Net Promoter Score, but I’ve never been convinced that it’s useful.
#4. Use ‘signs’ / ‘hacks’ to guide users in order to reduce search costs / ‘friction’, thus increasing platform liquidity. It could be an algorithm or a hack such as an user badge, for eg., $MELI’s ‘gold seller’ badge.
There are two types of loops that work together symbiotically: growth loops, and what I’ll call happiness loops. Growth loops help you drive down your cost of acquisition by leveraging your existing buyers and sellers to help you grow. Happiness loops act like a sorting function on your supply, helping your buyers find the best suppliers (and avoid the bad ones).
#5. Build and dominate, starting from the core. Win a category or a region by 10x the #2 then expand. That's how you mine competitors' chances; by crippling their liquidity.
The insight is clear: it’s not just about being #1. It’s about being #1 by a lot.
But it’s not just enough to outrun the competition in a single market or category. Each city or category you win creates its own tipping loop: they generate more contribution profit, which lets you re-invest that profit into your business, while also amortizing the cost of improvements to your marketplace across a bigger and bigger base. And of course, winning a city or category makes it easier for you to raise more venture capital to further fund operating costs ahead of profit.
In other words, you are now running a race to dominate the landscape and competition. There are three vectors to domination:
First, there is outrunning and becoming #1 by a wide margin in your original market or category (your thimble).
Second, there is expanding beyond your thimble and broadening the buyer use cases you solve for.
And third, there is taking the playbooks you’ve honed in Level 1 and 2 to pursue multi-threaded domination of the map.
Links that inspired this post: