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“Liquidity isn’t the most important thing. It’s the only thing.” Simon Rothman.
Achieving liquidity is the holy grail of success when it comes to marketplaces.
In other words, if both your buyers and sellers can find what they want on your platform, then you make money. But if either one of those two groups are having trouble - then so are you.
But what exactly is marketplace liquidity?
Liquidity is the heart and soul of your platform. It can be defined simply as the efficiency with which a marketplace matches buyers and sellers on its platform.
Essentially, the ability to exchange goods and services is the real product that a marketplace offers.
Awesome. But how do you measure it? After all, it sounds like one of those vague pieces of jargon that only marketers or salespeople use.
Well to start with, your marketplace is unique. Actually, that’s what makes them so awesome. The problem is that the sheer variety of marketplaces makes liquidity difficult to pin down. There isn’t a single, defining metric that tells you how great your marketplace is. But there are clues.
You can measure liquidity by looking at the metrics. Let’s face it, metrics has never been the most exciting word in the dictionary, but pay attention to the right ones, and you’ll have your liquidity.
At the risk of stating the obvious, the first rule of thumb is to understand who is using your company, how long they spend on the site and the ease with which buyers and sellers can find what they need on your marketplace.
While some of the metrics are universal to all businesses, together they form the essential building blocks of marketplace liquidity that can make or break your business.
So before we get into the holy grail of liquidity, let’s take a quick look at 3 of the basic metrics that give you an idea of the general health of your marketplace.
MAU (Monthly Active Users)
The MAU are the number of unique users who have visited your site at least once during a certain time period. If this is not growing, then it’s bad news because it means you are failing to attract new users or losing existing users faster than you are finding new ones.
And if this is the position you now find yourself in, then it is time to investigate why. To do this, you’ll want to look at both the buyer and seller liquidity to find out what is stunting business growth. More about that later. Here are some other basic metrics:
Attracting users to your site is one thing. But keeping them there is another. The bounce rate tells you how many people, well...bounce the moment they happened upon your marketplace. If this number is high, then you are either failing to engage users, your marketplace is not intuitive enough or people aren’t getting what they need.
So for the users that don’t bounce from your marketplace, you want to look at the amount of time they actually spend on your site. This is actually not as intuitive as it may seem. For most businesses, the longer they spend on your site, the better right? Wrong. Or at least, not necessarily. For marketplaces, the picture isn’t quite so simple. Users spending a long time on the platform could be an indication that they didn’t find what they were looking for. On the other hand, spending longer on your platform means they may just end up spending more.
Clearly, you need a little more context. This is where we take a deeper dive into the weird world of liquidity.
But before you can even get to the point of measuring that, it is worth noting that the metrics above are not just there to give you a basic picture of the health of your marketplace.
Providers also look at these metrics on comparison sites before they take the leap and land on your marketplace. They’ll use the MAU, bounce rate, and time spent on the site to help them decide whether to stick with your platform or bounce.
Ok, so enough of the vanity metrics, let’s get into the real meat and bones of your marketplace - and look at the figures that truly give you an idea of your liquidity.
There are two types of liquidity: buyer liquidity and supplier liquidity. Buyer liquidity can be defined as the probability of a visit leading to a transaction. Supplier liquidity measures the amount of stock or in some cases services that are utilized by the buyers on your platform.
So for retail marketplaces such as eBay this could be the amount of products sold on the website. For Airbnb, it could refer to the number of rooms booked every night, for example.
To measure buyer liquidity, you will need to track the number of visits and transactions that take place within a particular time frame. You can do this by dividing the number of transactions by the number of visits to get an idea of the percentage of buyers that were able to find what they wanted on your website.
We can call this metric the search to fill rate.
The best way to measure supplier liquidity is to measure the utilization rate and also the search to fill rate. Remember, the unique nature of marketplaces means liquidity may look very different across different segments.
So this will impact what metrics you should keep an eye on. Another easy way to measure this is to look at the listings with transactions and divide it by the total number of listings.
So to take a deeper dive into the inner workings of your marketplace, we’ll also be deep-diving into the buyer to seller ratio, repeat purchase ratio, gross merchandise volume and how this relates to the different types of marketplaces.
You might think there is no such thing as having too many customers, but believe it, or not, for some sellers that’s actually a thing. Think of it like this: one provider can only serve so many customers until they run out of stock. So we measure this as the number of customers one seller can reasonably serve.
For some sellers on the marketplace, this ratio might be as low as 1:1. For example, if a seller has one property or job available. Other types of sellers may be able to serve as many as 10,000 customers - particularly if the services are intangible - such as stock photos, for instance. So in this case, the buyer to seller ratio would be 1:10,000.
The more customers one provider can serve, the more you should focus on supply when you start out. This is because the provider would be more valuable as they can initiate a greater number of transactions.
Moreover, customers that have not purchased in a long time can potentially be detrimental to the business because this may encourage them to look elsewhere.
The next thing you want to look at is how many of the purchases on your site are repeat purchases. For some marketplaces, this can be as high as 80%. Others stand at a lower 30%. Where does your marketplace stand?
As a general rule of thumb, the higher the number, the more capital you’ll have available to spend on acquiring new customers. If this number is low, it might be time to start focussing on your retargeting strategy to entice existing customers to spend more.
Below, are some of the other key features of a strong marketplace:
We referenced this indirectly above. Quite simply, the customer acquisition cost (CAC) is the price you pay to acquire new customers. This is usually closely correlated with advertising and marketing costs.
The lower the CAC, the better. Of course, the ideal situation would be to have a robust referral rate where customers recommend your services to others, without you having to spend additional money.
This is defined as the total sales value of the products or services sold through your marketplace during a specific time period. But if you really want to be thorough, you might also want to calculate your total revenue by multiplying the gross merchandise volume with the commission from each transaction.
This refers to the total amount of revenue you expect to get from each customer. Naturally, you’ll want your CLV to be higher than your CAC to achieve sustainable growth. This metric essentially brings together many of the ones we mentioned above. For example, you’ll need to take into consideration your customer retention rate, repeat purchases and the value of the average transaction.
One of the ways you can learn more about your CLV is to divide the GMV by the amount of transactions per month to work out how much the average order is worth. You’ll then want to multiply this by the average amount of repeat purchases per customer to get CLV.
By now, it’s probably clear that there is no single route to liquidity. Unpacking all of these metrics is in itself a long process and even then, the results will vary widely, depending upon the type of marketplace you have.
But what they do give you is a picture of the overall health of your marketplace.
Crunching these numbers will make it easier for you to identify potential problem areas in your business and at the very least, where most of your attention should be focussed.
Individually, these metrics might not give you everything they need, but they sure do tell your story.
Following the blueprint above for measuring liquidity allows you to identify problem areas - before your customers do. It also takes the guesswork out of evaluating how successful your marketplace is because those numbers will be there in black and white. If your marketplace is failing in key areas - you’ll be able to see that and use it as a basis to make the relevant changes.
And if you’re already flying high - even better. Now you’ve got the solid metrics to present to potential clients and shareholders.
Collectively, all of these metrics will form the stepping stones to the holy grail of liquidity.