How can marketplaces actually get profitable in 2023?

Village Labs is pioneering marketplace solutions built to improve structural efficiency, automate and bring down costs, while in parallel creating better long-term relationships for suppliers & users.

How can marketplaces actually get profitable in 2023?

How can marketplaces actually get profitable in 2023?

Village Labs is pioneering marketplace solutions built to improve structural efficiency, automate and bring down costs, while in parallel creating better long-term relationships for suppliers & users.

DoorDash, Uber, Airbnb, Upwork and Fiverr, managed just $96m in combined operating profits on more than $150B gross sales in Q1-Q3 2022. 

Still, better than their ~$2.4b operating loss Q1-Q3 in 2021. Private & public marketplaces are pushing for profitability. Here’s a breakdown:

1.

Many platform businesses provide magical services, but they lose boatloads of money doing it. They often burn relationships with gig workers & merchants in the process. It's not sustainable. 

2.

When you look at the filings for a handful of public marketplaces, you get a sense of where all that revenue’s going. It’s a similar story inside many private companies. What are the biggest changes between 2021 & 2022?

3.

Reduced sales and marketing: advertising, promos, and marketing & sales HC is a massive cost. It speaks to the leaky bucket in many marketplaces. Over 30% of revenues, or 50% of gross profits goes into attracting and retaining customers on both sides of the market. There’s been >10% pullback in marketing spend YoY.

4.

Reduced headcount: aka #layoffs. Many teams got bloated and processes are often highly manual and inefficient. That hits G&A, R&D (where tech HC costs land) & Sales and Marketing. 

5.

Increased COGS: things like payment processing, insurance, mobile service fees that are incurred directly in generating a sale have actually gone up YoY.

6.

The real story: aggregated numbers only tell a part of the story. What can we learn from some of the better performers? Airbnb, Etsy, eBay come in with healthy 25%, 14% and 28% operating profit margins (versus Uber -4%, DoorDash -10%, Fiverr -17%). They spend less on marketing and incentives (eg. ~30% of gross profits versus 50-80% across Uber, DoorDash, Fiverr, Udemy). They also usually generate revenue more efficiently: higher average transaction value, and fewer things going wrong that result in support tickets, insurance, refunds etc. 

7.

When you look at the most successful companies, you see a focus on competitive differentiation and healthy, long-term relationships with their best users. They offer a stable, differentiated earnings value prop to workers & merchants, translating to better retention and sentiment (less marketing spend), and higher transaction efficiency (higher AOVs & fewer support costs per transaction). In parallel, they focus on driving this value with smaller teams that pursue automation and great tech.

So can marketplaces big and small actually flip profitable in this macro environment?

Cutting marketing & headcount are obvious & easy moves; making structural changes that actually create more sustainable, better businesses is harder, but the right thing long-term. Village Labs is pioneering marketplace solutions built to improve structural efficiency, automate and bring down costs, while in parallel creating better long-term relationships for suppliers & users. DM me if you're interested.

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