Understanding Vertical Marketplace Innovation

By Guimar Vaca Sittic

It’s already common knowledge that the latest wave of marketplaces are vertical plays attacking horizontal behemoths like eBay or Craigslist. Disruptive online marketplaces not only connect demand and supply but enhance the experience in a way others can’t. Vertical marketplaces provide such enhancing dynamics that give them a comparative advantage versus horizontal ones. The problem is that not all vertical marketplaces are equally disruptive or defensible.

It’s important not to confuse the attack of a vertical which refers to a specific segment of the economy (e.g. cars, books, food,etc) versus a verticalized business model which refers to the vertical integration of production of a service.

Vertical marketplaces have 3 fundamental types of innovation: (i) verticalization (ii) aggregation (iii) automation.

A true vertical marketplace, as mentioned, are those who typically internalize processes in order to make transactions happen. These marketplaces not only aggregate demand and supply but make the matching experience fundamentally better. A good example is Beepi, the end-to-end car marketplace. Beepi not only skips the used dealers to help sellers find buyers but actively participates in the process from inspecting the cars to doing the title transfer and shipping. Food delivery company, Sprig, is another great example of true verticalization as they plan their food menu and manage their logistics network through their dispatching app. The more work these companies do the lower the gross margin from their take rate will be. Nonetheless, such action are typically needed to be able to fundamentally change the way supply and demand interacted before their existence. On the bright side, the aforementioned examples have one of the two key characteristics a vertical marketplace needs to have: either high order tickets or high frequency. Verticalized business models typically work best in segments where the current players have abussive profits like car dealers Beepi or real estate brokers (Compass, Redfin).

The second way marketplaces innovate is through aggregation. As the name suggests, these marketplace provide additional value by aggregating supply and (sometimes) demand. Classpass provides a lot more value to their users by aggregating supply under their unique pricing model. No single gym or chain can provide the same value by itself. Other examples of aggregation such as Cargomatic and Uber have very strong network effects as supply scales. The higher the fill rate and the lower the average pick up time, the more dominant they become. The best type of aggregation marketplace are those whose supply was inaccessible or non-existant to consumers like Airbnb.

There are also aggregation marketplaces with some verticalized components like Doordash or FlyCleaners. Both of them aggregate suppliers, restaurants and dry cleaners, but internalize part of the service by providing the logistics and delivery. In both cases, pure aggregation wouldn’t work because Doordash’s restaurants typically don’t deliver and FlyCleaners’ service providers don’t have the right infrastructure.

The last form of innovation is through automation. These marketplaces typically tackle inefficient markets by professionalizing them and building a trusted brand. Nonetheless, such marketplaces have lower network effects and a feeble customer loyalty. Concrete examples are those of Shyp, Handy and, the now defunct, Homejoy. Before these marketplaces, the customer experience was fundamentally broken with low service quality. This type of innovation heavily relies on stellar execution. A home cleaning marketplace becomes increasingly hard as it scales because it’s harder to keep high quality supply. Unfortunately, Homejoy expanded too fast and couldn’t control supply quality and thus had to cope with churn. Managed by Q is a company that operates in the same segment but a model which is fundamentally better given their cleaners are W2s to ensure quality of service. Managed by Q also understood the benefits of economies of scope in B2B clients that represents less churn and higher average order values.

Building a successful ‘vertical’ marketplace needs:

  • To fundamentally improve the experience for all of the parties involved to be sustainable.
  • Strong network effects as a consequence of user behavior and business model architecture.
  • Have sustainable unit economics for supply and demand at scale
  • Understand market dynamics to choose the appropriate type of innovation
  • Provide on-demand service only when there’s a real need and don’t sacrifice profitability.

Understanding the nuances of the needs of customers is paramount to design the right marketplace infrastructure. Building an online layer is typically better than current solutions but sometimes just not good enough. Truly successful marketplaces don’t simply connect demand and supply, they fundamentally change the status quo.

Great birthday wishes from Dazeinfo: Happy Birthday Fabrice Grinda: The Extraordinary Tech Entrepreneur

Dazeinfo wrote a really nice article for my birthday full of surprisingly accurate information. I recreated the blog post below for your reading pleasure. You can find the original at: http://dazeinfo.com/2015/08/03/happy-birthday-fabrice-grinda-extraordinary-tech-entrepreneur/  

Happy Birthday Fabrice Grinda: The Extraordinary Tech Entrepreneur

Swathi R M on August 3, 2015 @SwathiRm
Venturing into unknown with known strategy is always been the unique selling point of the entrepreneur Fabrice Grinda. Developing an investment strategy is not an easy task nonetheless it demands commendable efforts and relentless hard work. Though, he has termed to be the Midlife crisis Tech Entrepreneur he has led the way in his style to give birth to few successful ventures and to reap profits. At this middle age he has $300m in exits and 150 investments under operation
Date of Birth: 3 August 1974
Net Worth: $100 million (As per 2014)
On the occasion of Fabrice Grinda’s 41st birth anniversary refreshing few less known interesting facts that render an opportunity to get to know him closer.
1. Unlike other entrepreneurs he stands to be unique and takes the road less taken. Prior picking up an opportunity he follows his 9 business selection criteria before investing into one. He is the favorite of startups as he always looks forward to figuring out one potential firm that can hold the investment and in turn progress gives multiple figures back. He does not prefer doing anything incomplete indeed he requires everything to be complete even the meager ones per se, his email conversations. He firmly dedicates some part of his time to speak about his failures also.
2. He was born in France and graduated from Princeton University, USA in 1996. Soon after his graduation he joined McKinsey as a consultant to work with them for two years. Being an introvert he always wanted to build something new based on his analytics he ventured on an auction site and co-founded Aucland S.A. in Europe, it was one among the 3 largest auction websites in Europe. In 1999, he raised $18 million for Aucland in exchange of 51% of the company. Later in 2000, the rest of the company was sold.
3. A guy whom he met him during selling his ringtones for $2 each, provoked him to take up the ringtone business hence, came up “Zingy,” after Aucland. As the guy who sold each ringtone for $2 six months later he was noticed to come up with $2 million monthly revenue. In 2001, he moved to US and started off with Zingy, bringing an idea from the European and Asian market into the US market. In 2004, he sold Zingy to fetch $80 million. The blogger also states that the most important innovation that has large impact on the society today is the cell phones and these are the primary drivers of the productivity. While considering his personal life he says, the internet has played a crucial role and most of his life events have been centered on it.
4. Along with Alec Oxenford, Fabrice Grinda cofounded OLX in 2006 with a vision of being a largest free classified in the world though similar to Craigslist, it focused on superior product and excellent content. He met Alec the co-founder in Argentina, while he visited Argentina for the first time in January 2006 both of them spend a good amount of time together climbing, hiking and biking and he chose him to be his perfect business partner and both of them agreed to be the co-founders and co-CEOs.
5. Apart from being an entrepreneur, visionary, analyst, and blogger he is one of the angel investors with 185 investments in 166 companies as a personal investor. Besides being a personal investor as an organization, he has invested in staggering 182 startups with Alibaba group being one of those.
6. Fabrice Grinda was featured recently on the cover of New York Times Styles Section as Midlife Crisis Tech Entrepreneur walking away with a suitcase carrying 50 items and a backpack and it showcased his simplicity in the way of living with limited sources and depicted him to be on the verge of crisis and his traverse from a luxury lifestyle into a simple one. On responding to the post on NY Times, he published a post on his blog stating by virtue of his choice he cut down his expenses and he divided the expenses by 10 with 75% of his income to charity.
With a lot of investments and exits, the futurist now on the verge of giving up he tells “When I looked back at the things that mattered the most to me,” he said, “they were experiences, friendships and family — none of which I had invested much in, partly because I was too busy, and partly because I felt anchored by my possessions.” And these words depict his actions of charity and endorsing his family members with essential comforts.