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How to protect yourself as middleman in a marketplace

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Internet marketplace businesses (ranging from Craigslist to eBay to Airbnb, among many others) earn fees for connecting buyers and sellers. Most early Internet marketplaces like Craigslist were simple listing services, but more compelling transactional and end-to-end models are emerging, and we expect them to dominate over time.

One key risk facing the operators of transactional and end-to-end marketplaces, however, is the threat of disintermediation, which happens when a buyer chooses to work directly with a seller instead of using the marketplace platform (i.e. finding a host on Airbnb and then arranging a stay with them directly). It’s difficult to disintermediate a simple listing site like Craigslist because Craigslist charges for listings and, therefore, monetizes the instant a listing is posted. Listings on a transactional marketplace, on the other hand, are typically free to post, so a marketplace like Airbnb doesn’t get paid until a transaction is completed. If a buyer and seller are able to conduct their transaction “off the marketplace,” they can avoid marketplace fees altogether.

Transactional and end-to-end marketplaces must deter (or, even better, prevent) disintermediation to protect their revenue stream. Through our experience investing in several pioneering marketplace companies, we have observed a handful of clever ways to fight disintermediation:

1. Set the right rake: Determining the right commission for your marketplace is more of an art in experimentation and competitive positioning than a science. The general theory is that there are high-rake marketplaces where the buyer doesn’t know the seller (e.g. Crown and Caliber) and low-rake marketplaces where the seller’s identity is exposed to the buyer (as with Tradesy). It’s harder to charge a high rake in a marketplace where the seller knows the identity of the buyer because there’s more risk of disintermediation, so fees must be set appropriately low. Setting the right rake discourages buyers and sellers from circumventing the marketplace, and it discourages sellers from artificially inflating prices to account for the rake – a practice that could lead to an unsatisfactory buyer experience.

2. Own buyer/seller communication: If a traveler wants to book an Airbnb room, there is no choice but to communicate via the Airbnb messaging tools. Any attempt to do otherwise is cleverly blocked: Phone numbers in messages are detected and erased, and so are email addresses. Even trying to give your last name (so someone could look you up on LinkedIn or Facebook) is often blocked. Similarly, Uber invisibly provides drivers and passengers each with a temporary Twilio phone number, which doesn’t work afterwards (preventing the passenger from calling a specific driver at a later time or vice-versa). Capturing communication on the platform adds value as long as it’s done in a low-friction way, because all of the details regarding a particular transaction can be found in one place. It also allows the marketplace to monitor conversations for abuse, fraud, and hints of disintermediation.

3. Provide “network agnostic” value: Most of the value any marketplace adds is its “network value” – the connections the marketplace enables between its networks of supply and demand. When a marketplace begins to add features for either buyer or seller independently, it becomes even more valuable. For example, sellers on Raise.com, a vertical marketplace for gift cards, get a comprehensive dashboard including their sales, their best selling cards and average selling time by brand. These “free” features are only available for sales through the marketplace. If a seller circumvents Raise.com, they lose the ability to track and monitor that data.

4. Get creative about “policing”: Aristotle Circle, a vertical marketplace for tutoring services, doesn’t want its tutors working for its clients outside official Aristotle Circle sessions. To deter this, the company has regional coordinators in each local school district who help recruit and manage the tutor population (supply). These coordinators are generally well-connected “PTA parents” who have their ear to the ground. If they hear about a parent recruiting one of the company’s tutors to work off the marketplace, they aren’t quiet about it within the community – so the marketplace uses social pressure to ward off potential disintermediation.

5. Have an experience score / review system: Never underestimate the value of a good reputation. If there’s a review system, buyers and sellers will strive for high marks. Off-marketplace transactions typically don’t count toward any sort of experience score and there’s no way to leave a rating or review for the buyer or seller. If the marketplace is designed such that a positive rating or more experience result in better exposure in search results or increased demand flow, this will even more effectively encourage sellers to transact only on the marketplace in order to gather a larger quantity of good reviews.

The most bulletproof marketplaces offer end-to-end experiences. They play such a critical role in the commerce experience that buyers often don’t perceive the company as a marketplace, and, as importantly, don’t have access to the underlying suppliers required to attempt disintermediation. That said, not all marketplaces can be structured as “end-to-end” businesses, so many will need to fight disintermediation using these and other intelligent tactics.

Disclosure: BVP has led investments in Twilio and Raise.

Jeremy Levine is a partner at Bessemer Ventures Partners. He currently serves on the boards of several companies, including MindBody, Pinterest, Raise, Shopify, Wikia, and Yelp, and he led the firm’s initial investment in LinkedIn.

Rafi Syed is a senior associate at Bessemer Venture Partners, focusing on consumer businesses and marketplaces. Rafi currently works with LiveAuctioneers, 42Floors, Raise, Wikia, and OneStop Internet, among others. Previously, Rafi ran the growth product team at Foursquare.

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