On November 13, 2012, Bill Gurley, a partner at Benchmark Capital, posted a remarkable essay on his blog. In it, he described the, “10 factors to consider when evaluating digital marketplaces.” Given the tremendous value marketplaces create and how hard they are to get right, I found this essay to be a goldmine of insight.
I teamed-up with my friend and blogger Sangeet Paul Choudary, to digest Bill’s post into a more memorable format. The result is this brief checklist we hope will help take some of the luck out of evaluating marketplace businesses.
As Bill wrote, “It is unlikely that you will find a marketplace opportunity that would score ten out of ten with respect to this list.” But according to Bill, the odds of success improve the more of these characteristics the business exhibits.
If you are viewing this post over email and having trouble seeing it, click here.
Nir’s Note: In this guest post, Ryan Hoover, Director of Product at PlayHaven, utilizes my thinking on the “Habit Zone” to shed light on where Turntable.fm fell short. Ryan blogs at ryanhoover.me and you can follow him on Twitter at rrhoover.
Remember Turntable? When it first launched in May of 2011, the music service seemed to own the internet, growing from zero to over 420,000 monthly active users (MAU) only two months later . Unfortunately, that growth didn’t last long as many of its early adopters ditched the service. It is now estimated to have only 20 – 50,000 MAU’s, a fraction of its early peak .
As I described nearly two years ago, much of Turntable’s success was due to its well-executed social engagement loop; however, that wasn’t enough. So what went wrong?
Turntable failed to create long-lasting habits , leaving it vulnerable to competitors who more quickly became a daily part of users lives. Nir Eyal, a researcher on habit design and blogger at NirAndFar.com, posits that habits form when users have a high perceived utility and use a product frequently. The most sticky products are used multiple times a day. How often have you checked your email or Twitter feed today? In other words, users need to value the product and use it often to form lasting habits and enter the “habit zone” as represented by the graph below.
One of the most common complaints about Turntable is its demand for attention. It is both its greatest strength and weakness.
A few years ago, Joe Marks, then Disney’s vice president of research, visited Tokyo Disneyland and was puzzled by a particular behavior he observed there. Park visitors were standing in line, often for many hours at a time, outside a shop in the park’s Frontierland. Marks found out that they were waiting to buy an inexpensive (less than $10) leather bracelet on which they could have a name painted or embossed.
Why were the bracelets in such demand? Joe wondered. And why weren’t other stores in the park selling the same bracelets, so that Disney could improve visitors’ experience by reducing their wait time? In Joe’s mind, the company needed to make the popular product more easily available.
As it turned out, Joe’s intuition, though supported by standard economic theory about supply and demand, was wrong. The visitors he observed usually were standing in line with their sweetheart or spouse. The couples’ willingness to patiently wait for the bracelet was a signal of their strong commitment to each other, for according to a Japanese tradition, exchanging leather bracelets is a sign of bonding. It was the very act of waiting for the bracelet that made the product so popular.