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two-sided marketplace

The key metrics to measure when building a two-sided marketplace

A two-sided marketplace is a marketplace where you have two distinct user groups: you have supply on one side and demand on the other, and generally in a hyperlocal area.

Examples around the world include Deliveroo, Uber, OpenTable, Turo, Quiqup, and countless more, with each having thousands, or even millions, of people on one side looking for something in their local area. On Australian platform Glamazon one side of the marketplace is a user looking for a professional to come and do a manicure on demand in their home, with the other side being a manicurist looking for work in their local area.

In order for these hyperlocal marketplaces to scale, it is critical they focus on their unit economics, or the direct revenues and costs associated with a particular business model expressed on a per unit basis.

As Harrison Uffindell, head of business operations at AirBnb explained, “Understanding the unit economics of a marketplace is of critical importance – they’re its vital signs. Every marketplace will inevitably face its own set of unique challenge, however, to ensure a successful business can be built around it, early-stage companies should explore all the nuances of the marketplace model. Building a product then discovering yourself in a low-dollar and low-frequency environment presents an enormous added challenge, usually requiring huge user numbers to get the marketplace off the ground.”

I had a chat to a couple of Australian entrepreneurs building two-sided marketplaces to look at what metrics they focus on:

How many signed up (supply)

For Jenna Leo of Home Care Heroes, the number of sign ups is key.

“As a social enterprise our aim is to make social inclusion more appealing and accessible. The number of Heroes who sign up is not just about increasing our supply, it’s about converting and inspiring people to our mission, getting them to do more and care more about all people in their community.  As our Hero sign ups grow, so does our social impact and community,” she explained.

Cost to acquire a customer (CAC)

The cost to acquire a paying customer allows you to understand how many months a user needs to use your service or how much income is required to achieve profit from a user.

Jake Dimarco of Spare Workspace said understanding the cost of customer acquisition is imperative for any startup, from early stage venture to global unicorn. With this in mind, Spare Workspace analyses CAC across all channels on a daily basis.

“This allows us to not only identify high CAC channels and optimise where possible, however to also identify and capitalise on low CAC channels. For example, in January we assumed it would be quiet due to the Christmas break and reduced resources. However, we identified one of the channels was providing a low CAC so we allocated additional resources and were able to achieve 130 percent of our monthly target. Without understanding our CAC and monitoring this closely across all channels, we wouldn’t have achieved this result,” he said. 

Cost to supply a customer

The cost to supply a customer is just one of the elements which allows a business to accurately measure the real lifetime value required to ensure it is not losing money on each customer. The cost to supply a customer takes in all costs surrounding not only gaining new supply, but maintaining existing supply.

Alexis Soulopoulos of Mad Paws said, “Accurate numerical data showing the total value of various categories of suppliers – pet sitters – and understanding their respective acquisition costs really helps us to make the right marketing decisions and invest where the value for our business and for our customers is the highest.”

Lifetime Value – LTV ($ or months)

Founder of on-demand massage startup Blys, Ilter Dumduz said the entire Blys team understands the importance of lifetime value and is constantly looking for ways to improve that metric.

Unless your customers find you completely organically and you’re not spending anything on acquiring new customers, you need to have a good grasp of the LTV of your customers in order to get the unit economics of your marketplace right. In simple terms, you need to spend less in acquiring customers than the revenue you make from them,” he said. 

“We have a strong data-driven culture at Blys, and always run tests to identify causality and correlations between events and metrics. One of the key findings for us in the early days was the correlation between the quality of our therapists and the LTV. We found out that the better the therapists are – for example, better qualifications and more experienced – the higher the LTV is. With this data available to us, we optimised our recruitment and onboarding process for therapist quality and saw a marked increase in LTV in the following months.” 

Churn Rate (%)

Churn rate is the the percentage at which customers are opting out or unsubscribing from your service over a period of time.

Stacey Jacobs of TidyMe said customer retention is the lead metric her startup uses as an indicator for its success.

“Every week we work to drive our churn rate down and at any point in the day, anyone in the team can tell you exactly where we are and how we are tracking for the month. This laser focus allowed us to halve our churn in 2017, ultimately creating better customer experiences and a far more profitable business,” she said. 

Home Care Heroes’ Jenna added, “Churn on the Hero side is an indicator that we need to learn more about the relationship between users, and what is working and what is not. Like all metrics, it is an indicator to seek more information at a given point in time and from a certain source, so be sure to dig deep.” 

 Taking all of these metrics into consideration allows a business to track whether they are making a profit from money they are spending on their users. If they’re not, then they can see what levers they may have to pull to drive a better outcome. For example: reduce the churn rate of customers by implementing a retention strategy so that customers LTV is higher than the CAC.

Gen George is managing director of tamme, an analytics and advertising automation platform for marketplaces that are hyperlocal and heavily rely on spending where the marketplace has a deficit in supply or demand.

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