Supply Far Outstrips Demand
Friday, Dec 17 (2020) | 3 min read
In my last email, I made the case for starting with Demand Generation for a new idea or existing product that hasn’t yet hit repeatability.
It’s easy to see this in direct models where you have a single customer factory whose job is to convert unaware visitors into happy paying customers.
You can’t make a happy customer (revenue) without first delivering value to them (activation and retention). And you can’t deliver value without first getting them inside your customer factory (acquisition).
But what about multi-sided and marketplace models?
That’s what I’ll cover today.
A multi-sided model is made up of users and customers.
Users use your product to achieve a desired outcome for themselves which generates a byproduct derivative asset. This byproduct derivative asset is then sold to customers.
- users use Facebook to stay in touch with friends which generates rich demographic and behavioral data that Facebooks collects as a byproduct derivative asset.
- This data is then sold to customers (advertisers) through Facebook’s Ad platform.
As you can probably guess, there are two customer factories at play here: A user factory and an advertiser factory.
If you were starting a similar type of business, where would you start?
In other words, which is the riskier side?
Answer: The user factory.
The nature of derivative assets is that their value increases through aggregation until they hit a certain tipping point that causes customers to want to buy this derivative asset.
Think of this from an advertiser’s perspective.
They are already spending money on existing ads somewhere else — making them the less risky side. As long as Facebook can create a “better place” for an advertiser to run their ad, they will switch. For Facebook, selling “better” for advertisers translates to richer data, more impressions, higher click-throughs, etc.
As advertisers typically advertise to sell something (supply-side), they are essentially buying demand for their products and services.
Here, supply outstrips demand i.e. there are more people selling stuff than people buying — making the demand-side the riskier side.
Starting with the user-side is synonymous with starting with demand generation (for customers).
And within the user-factory, the first constraint is still repeatable acquisition (as before).An an exercise, apply the same thinking to other multi-sided models:
- Google search
- A machine-learning company of your choice that aggregates data from users to and sells insights to their customers.
- An impact-driven company of your choice that raises funds from donors in order to deliver impact to beneficiaries.
What about marketplace models?
A marketplace model is made up of buyers and sellers.
Both sides come together to conduct a transaction. As before, there are two factories here too: a buyer factory, and a seller factory.Example: Airbnb.
- Hosts put up their place for rent.
- Guests rent these places.
Unlike multi-sided models where one can focus on the user-side first in order to build up a derivative asset to a tipping point, in a marketplace model, one needs to fairly quickly focus on both sides — as you have to bring both sides together simultaneously to conduct a transaction.
But even here, there is a riskier side.
Can you determine which is the riskier side in Airbnb?
Answer: The buyer side.
A simple way of seeing this is realizing that, here too, supply outstrips demand.
Once you acquire an Airbnb host (supply-side) the marginal cost of listing their place all year round is zero. The riskier side is getting those places booked (demand-side).
A more objective way of determining the riskier side in a marketplace is determining the buyer to seller ratio.
Let’s apply this to Airbnb.
A typical buyer (guest) on Airbnb rents a place once every two years.
A typical seller (host) on Airbnb lists their place for rent for most of the year.
Airbnb measures their buyer to seller ratio at 70:1 i.e. for every seller, they need to attract 70 buyers — making this a demand generation problem. To further make this point, many sellers have multiple properties up for rent at the same time, but buyers only rent one place at any given time.
In most marketplace models, you’ll often find that supply outstrips demand.
There are, of course, exceptions.
Think of housing markets with limited inventory. The riskier side is getting access to the seller and within that factory, acquisition is still the first constraint to tackle.An an exercise, apply the same thinking to other marketplace models:
- We live in a world where it’s easier than ever to build more stuff (supply-side).
- The riskier side is finding customers to buy this stuff (demand-side).
- Supply, more often than not, outstrips demand.
- So focus on demand generation first, unless you’re operating in a seller’s market.
- In that case, focus on acquiring key sellers.
The next email won’t be going out tomorrow (Saturday) but Sunday afternoon (Austin time)…