By clicking “Accept All Cookies”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts. View our Privacy Policy for more information.

Leakage in a Marketplace

Samaipata VC
August 18, 2016

Leakage is what happens when a buyer and seller agree to circumvent the marketplace and continue transacting outside the platform. The transaction still happens, but the marketplace loses a revenue stream. For example, you’re looking on Airbnb for a place to stay next weekend. After discovering on the checkout page the 100€ fees that Airbnb will charge for your 10 day booking, you might be tempted to contact the host directly and save the money. Earlier we talked about retention in a marketplace in this post. The related phenomenon of marketplace leakage is something we think deserves special attention, as follows:

The structure of a marketplace can lead to marketplace leakage, even when the marketplace is well-managed at an operational level and the benefits are initially obvious for seller and buyer.

Marketplace leakage is a function of two fundamentals:

  • repetition
  • value added by the platform.

Repetition of the same unique seller-buyer combination risks marketplace leakage. In the case of high repetition categories (although this is initially a positive characteristic) the risk is increased. Marketplaces such as food delivery platforms mostly avoid this problem intrinsically — usually a customer will not eat from the same restaurant every time. In repetitive ‘high-touch’ transactions between two parties, then there can be strong motivation to strike an agreement outside the platform. For example, in the case of marketplaces for gym classes or beauty appointments, the repetitive nature of the transaction — doing the same gym class once or twice a week with the same instructor — means that the customer is buying the same thing from the same seller over and over again. Equally, if you use BlaBlaCar to make the same journey every weekend with the same driver, then you may be tempted to just message him/her directly. The trust required for transactions such as service-based transactions to take place between the buyer and seller, for example a hairdressing service or pet care service, can mean that once a buyer has found a seller that they trust to provide this service, there can be a natural desire to take the relationship offline and away from the marketplace. Just like online dating, once the buyer has found the right match for their needs, there is no further requirement (and indeed sometimes a negative incentive) to keep the transaction within the walls of the marketplace..

Value creation or value added by the platform is a function of:

  • value extracted from supply side
  • value extracted from demand side
  • value added by the platform

Value extracted from the supply side is essentially the take rate, or rake, of the marketplace. When marketplaces take a large cut of the transaction, usually from the supplier, this might not create enough value for the seller and their motivation to take a transaction offline is stronger. As Sam Madden wrote last year in this article about Homejoy, a cleaner had to hand over 25% of their wages to the company, a rake that was too large for any professional worth their salt. This resulted in Homejoy recruiting lower quality cleaners — ones who couldn’t find a job elsewhere, which in turn caused a reduction in their customer retention.

While marketplaces do not usually monetise the demand side, a marketplace must price so that the buyer is motivated to use the platform. If the marketplace is significantly more expensive for the buyer than the direct alternative, then they may instead use it as a lead-generation or product discovery platform, taking subsequent transactions offline. Sometimes this dynamic drives startups to giving up about retain customers and pivot from one monetising strategy based on take rate, to another based on cost per lead.

Finally, the value added by the platform is the key to keeping people in the marketplace. This can be through improved user experience compared to the direct alternative, through ensuring consistency of quality, through a seamless product discovery process, or other factors. For example, if you want to order food from a restaurant with no website, you may have to place an order, give payment details and co-ordinate delivery to the correct address over the telephone — a tedious task. A good marketplace finesses this process by expediting the transaction though a slick interface, usually in an app that already knows your address and billing details. What is more, a customer can use the same app for another restaurant, circumventing the repetitive task of handing over billing and delivery information, thus incentivising you to return to the platform instead of directly contacting the restaurant. In the case of a very simple order market — e.g. booking a haircut, where just time and name are needed — it is more challenging to add value by reducing friction than it is in a complex ordering process, but it remains possible through creating great user experience or scheduling tools for both sides of the marketplaces, etc.

The value creation for sellers also encompasses opportunity cost, or, a term we’re thinking of using at Samaipata, Fear Of being Kicked Off (FOKO). This is a mechanism that works well for platforms like Airbnb, where suppliers are banned from the platform if they are caught transacting outside of it. This is a strong disincentive because, especially in the case of Airbnb, it has the potential to deprive suppliers of large revenue streams. For marketplaces with lower liquidity or less frequent transactions, this may not constitute the same motivation.

In order to avoid marketplace leakage within high repetition markets and thereby maximise customer life time value (LTV), companies must maintain a laser focus on user experience. The good news is that there are all kinds of ways to generate a great user experience and keep customers coming back. Reducing the friction points within a transaction and saving the time of your customers are just a couple of the focus area to keep users in the marketplace.

**

At Samaipata, we are always looking for ways to improve. Do not hesitate to send us your thoughts. We strive to partner with early-stage founders and to support them in taking their business to the next level. Check out more ways in which we can help here or for all our other content here

And as always, if you’re a European digital business founder looking for Seed funding, please send us your deck here or subscribe to our Quarterly updates here.

Latest News

See also

More insights to better the world through technology

Mastering the art of Sales at early-stage startups

Mastering the art of Sales at early-stage startups

In the competitive landscape of entrepreneurship, understanding the nuances of enterprise sales is crucial for the survival and growth of early-stage startups. Paulo Rodriguez, Head of International at Vanta, brings a background including pivotal roles as a B2B Sales Director at Dropbox and an Enterprise Sales Engineer at Google. His extensive experience bridges the gap between technical expertise and strategic sales execution.
Read more
Scaling up: Insights from a Product Expert, with Laura Rueda

Scaling up: Insights from a Product Expert, with Laura Rueda

Laura Rueda, Principal PM Manager at Microsoft and a valued Operating Partner at Samaipata, has shaped product strategies at Typeform, Guidewire Software, Solera Global, and Datacite. In Madrid, she stands as a North Star for startups, guiding them through the complexities of product-led growth.
Read more
Think more critically about the role of AI in your startup, with Julien Simon

Think more critically about the role of AI in your startup, with Julien Simon

Julien Simon, the Chief Evangelist at Hugging Face and a valued Operating Partner at Samaipata, doesn't hold back as he delves into the common pitfalls and strategic imperatives of implementing AI within businesses. With a wealth of experience in AI and a keen eye for the practical applications of machine learning, Julien is here to share his insights and challenge preconceived notions in the tech industry.
Read more
The Hive Summit 2023

The Hive Summit 2023

The Hive is Samaipata's platform that aims to help achieve the success of our founders and seeks to foster a collaborative ecosystem and growth within our community. The Hive Summit 2023 was the first annual gathering for the Samaipata community and took place in Mallorca.
Read more

Unlocking business expansion with this strategic framework

There comes a time within your business where you realise that your team needs additional skill set and expansion. Typically, product-market fit has been established and the opportunity to grow revenue and profit is there.
Read more

Scaling your customer service team: in-house or outsource?

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros.
Read more
arrow icon
arrow icon