In our last blog, we wrote about the key marketplace metrics that business leaders should pay attention to in order to thrive.
The blog ‘Marketplace Liquidity: Unpacking The Metrics That Matter’ gave a general overview of all of the information needed to measure the health of a marketplace.
Now we’re going to take that concept a little bit further and expand upon one of the key yardsticks that the vast majority of marketplaces have in common and that is, buyer liquidity.
But first, let’s recap - what exactly is buyer liquidity?
Buyer liquidity is defined as the ease with which goods are easy to buy and hard to sell. For buyers, that product is liquid. But for sellers, the same goods or services are illiquid, due to them being difficult to sell. This is what is often described as a buyer’s market.
So you can think of buyer liquidity as the likelihood that a request or a search leads to a transaction. We call this, the search-to-fill rate.
A buyer’s market may not seem very favorable to the majority of businesses, because it means that supply exceeds demand and therefore increases competition among sellers. However, for marketplaces, this may actually be a good thing.
The increase in supply, combined with competitive prices offered by sellers is likely to attract more buyers onto the platform.
On the other hand, a seller’s market describes the opposite. Seller liquidity, for example, is defined as the ease with which goods are easy to sell. In a seller’s market, this means goods are easier to sell than they are to buy. Essentially, it is when demand starts to exceed supply.
For most businesses, a seller’s market is good news because they have the ability to raise prices simply from knowing that there will be enough interest to meet that price. This gives sellers more freedom to pick and choose between multiple offers.
For marketplaces, this may also be good news. If their platform consists of sellers that are able to provide for a very high number of customers, then seller acquisition will be the most important priority for those businesses. However, if sellers can only serve a limited number of buyers, then buyer liquidity should be much higher up on the totem poll of priorities.
Here’s the thing. Buyer liquidity is not just one single metric. Think of it more as a collection of measurements that assess how buyers are faring on your platform.
We’ll get into that more in just a short while. But first, let’s answer the most obvious question: why should you care?
The main reason is once you understand how buyers interact with your marketplace, it is an indicator of future success. If you’re a marketplace that depends on attracting a high volume of buyers to keep transactions going, then of course, you will definitely want to ensure those buyers are able to buy goods and services easily on your platform.
Furthermore, while many experts have failed to solve the ‘chicken and egg’ problem of marketplace liquidity, nearly all agree that the more buyers you have on your platform, the more you will attract sellers.
Even for marketplaces that benefit more from attracting high-volume sellers, understanding buyer liquidity will help to balance both the supply and the demand side.
If you are, then you should definitely pay attention to buyer liquidity. But this will probably make more sense if I tell you what a buyer-picks marketplace is. The simplest definition is that it is one which allows buyers to book a service or make a purchase without having to interact with the sellers.
For this type of marketplace to be successful, it must have a high search to fill rate.
After all, buyers are notoriously fickle. If they cannot find the service they need on your marketplaces, they’ll simply jump ship.
For buyer-picks marketplaces, buyer liquidity is one of the most important metrics. At least, it should be.
So let’s jump right into the different measurements that come under the banner of buyer liquidity - especially for buyer-picks marketplaces.
The utilization rate is understood simply as the percentage of stock or usage of the supply side. The utilization rate will look different for different types of marketplaces.
For example, on ecommerce marketplaces, the utilization rate can be defined as the number of products and services utilized on the site. Other types of marketplaces, specializing in property listings for example, might define the utilization rate as the number of properties that are booked. On the other hand, recruitment marketplaces may measure the number of candidates that are matched to recruiters on their website.
So in many ways, the utilization rate depends upon the type of service that is offered on the marketplace.
While sellers are important to most marketplaces, buyer picks marketplaces should focus on a specific type of seller. These are the high volume sellers that can serve a large number of people. This metric is most commonly known as the buyer-to-supplier ratio.
It represents the number of buyers that one supplier can serve within a given time frame. The sweet spot is to have a greater proportion of sellers that can each serve a large number of buyers.
This means that you won't have to constantly try and attract new sellers onto the site.
Essentially, it helps you keep the balance between both sides of the marketplace and make better decisions when it comes to choosing which side you should focus on scaling.
Another type of marketplace that should pay particular attention to this metric is double-commit marketplaces. These types of marketplaces have a high degree of standardization on the supply side where the number of buyers that sellers can serve is relatively limited.
If the supply side is non-standardized, the emphasis should be on diversity of supply as opposed to quantity.
You might be wondering: how do you measure user satisfaction? Short of creating a survey, this can be puzzling to some businesses. Well there are 5 key metrics that broadly come under the banner of user satisfaction.
This measures the likelihood of customers recommending your brand. You can measure this in several different ways. For example, you can ask customers to rate the likelihood of them recommending your brand on a scale of 0-10. A score of zero means that they are unlikely to promote you. These are known as detractors. The ones who give you the highest score are known as promoters.
You can calculate the NPS by measuring the difference between the percentage of Promoters and Detractors. The NPS is expressed as an absolute number lying between -100 and +100.
The conversion rate is the number of conversions divided by the total number of visitors. A conversion can refer to any desired action that you want the user to take. So this could include sales and button clicks. It is worth noting that websites with Google Analytics installed can also measure conversion rates.
Another important metric to look at when measuring user satisfaction is the customer churn rate. Luckily, this is a fairly simple equation. To calculate it, first decide upon the timeframe that you are measuring the churn results. For example, you could start by measuring monthly churn rate and compare with previous months.
To calculate churn rate, you can measure the number of customers you have at the start of the period, and divide it by the number of customers at the end of period. Then you would divide that number by 100.
Our example numbers below demonstrates this principle in action:
(100-92) / 100 = 8 / 100 = 0.08.
Nothing says ‘happy customer’ more than a customer that buys again. But how do you track this as a metric?
To start with, add up the purchases from repeat customers and divide it by all purchases on the site for a given date range. For example, if you have 100 customers, of which 23 have shopped more than once, your repeat rate would be 23%.
This is a metric that measures buyers that are also sellers. While this isn’t strictly a measure of customer satisfaction, a client that operates on both sides of the marketplace is likely to be a happy one. They are also more likely to recommend your product if they have also invested the time and commitment into working on your platform, as well as buying from it.
A marketplace with a high buyer/seller overlap often has decreased CAC costs, since you get both a buyer and a seller in one acquisition.
To tell you the truth, there are a whole slew of useful metrics that can help you determine the health of your marketplace. Some of the other important metrics we haven’t covered in this blog include:
Airbnb is arguably one of the most successful property marketplaces in the world. In just 12 years, it now spans 191 countries, with more than 65,000 listings.
So how did they do it?
Well the truth is, there is no one size fits all approach. But there are clues. Its success can be partially deduced from the following steps.
Building trust is key to the successful user adoption of any marketplace. Airbnb has inbuilt trust into its platform by featuring a review system where users can rate properties. After all, nobody wants to book a holiday rental abroad only to find that it also doubles up as a landfill site.
With Airbnb, you get a clue as to what to expect by reading previous reviews and ratings, and perusing the pictures.
It also has upfront and transparent community guidelines, so users know what to expect when using the platform.
Moreover, users on the platform know that should they run into serious problems with other Airbnb members, they can contact its customer service teams, which acts as the final arbitrator should things go wrong.
In some cases, this may result in Airbnb removing listings or sellers that cause serious problems. This of course, not only increases accountability, but also serves to increase trust.
Airbnb also has a forum where guests can share their personal experience of staying in an accommodation. This adds more context to their ratings system and also helps create a network of like-minded users.
In the community forums, users can submit photos of properties. It also allows providers to share tips and advice with other sellers on how to grow their business on Airbnb. In other words, it increases engagement and helps to keep users on the platform.
One of the primary aims of any marketplace is to connect buyers and sellers. One of the ways Airbnb does this is through their chat feature, which allows the two sides to interact with each other.
It also has a messaging feature that integrates Airbnb's core “booking flow” so that hosts can easily share their calendar and listings right on the message thread. Users can accept the proposed booking without going to another screen.
And that brings me nicely to my next point: how user-friendly is the platform? Well, a key feature of Airbnb is its intuitive, user-friendly design. No don’t worry - this is not an ad for Airbnb, but we include this simply to demonstrate the reason why the platform has skyrocketed in just over a decade.
Users can search for a property in a location of their choosing right from the homepage and it will immediately generate a list of accommodations and their ratings, to help you understand what you can expect.
Even a person that has never used the platform can easily find what they need. So marketplaces that are attempting to improve buyer liquidity, should definitely ensure that their design is intuitive.
Personalization builds trust and encourages repeat purchases. This is something Airbnb does really well. Its AI system tracks bookings and shows similar suggestions based upon previous choices.
Of course, there are several other factors that have contributed to Airbnb’s success, but those listed above have only served to increase engagement and trust with their buyers.
What is probably obvious by now is that there is no singular, magic metric that tells you everything you need to know about buyer liquidity on your marketplace. Think of it more as a collection of datasets that serve as important clues as to how well you’re engaging customers on your platform.
For some types of marketplace, attracting more sellers will be the main priority. But even for those marketplaces, understanding buyer liquidity helps them to take a more holistic approach when it comes to improving their product.
Utilizing the key metrics above helps you to identify exactly where the stumbling blocks are on your platform. It also makes it easier to scale the parts of your business that are doing well.
However, if Airbnb and other marketplace giants are anything to go by, then the tried and tested principles of continuing to build trust, filtering bad actors, personalizing your service and retaining open lines of communications will always accelerate the success of your marketplace.