Why marketplaces are broken (and how you can fix them)

The incentives of marketplace platforms are broken. Here’s why. 

Why marketplaces are broken (and how you can fix them)

Why marketplaces are broken (and how you can fix them)

The incentives of marketplace platforms are broken. Here’s why. 

I spent over 5 years at Uber from 2013 onwards trying to balance driver earnings, the rider experience, and Uber’s bottom line. 

Uber is a once in a generation growth story, but most know we didn’t always get that balance right. 

Fewer realize it wasn’t just an Uber problem – the incentives of marketplace platforms are broken. Here’s why. 

Massive upside for business -- but no so much for suppliers

Marketplace platforms – Uber, Udemy, DoorDash, Faire, Upwork etc – take a cut to facilitate transactions between users & suppliers online. They’ve led to a wealth of incredible consumer products that weren’t even imaginable 10 years ago. 

There’s a problem though. Supply-side users – freelancers, drivers, couriers, talent, creators - usually aren’t happy. Take-rates are too high, earnings aren’t always good, sentiment decreases, they churn to another platform that offers an earnings boost as an onboarding bonus. The cycle repeats. 

OK, so isn’t the answer just paying suppliers more per transaction? It’s not that simple. In fact, if you look at the P&L of large public marketplace platforms - Uber, Airbnb, Upwork, DoorDash, Etsy, Fiverr, Udemy - on average these companies aren’t profitable. Taking less per transaction means even less profit. 

So what’s going on here? A key problem (there are a few others for another time) is that these platforms are spending ~40% of costs as % of revenues on marketing. That’s dollars that are going directly back into the incentives and acquisition costs that are trying to both retain users & suppliers, as well as fueling their movement to other competing platforms. 

So between transaction-based earnings and these incentives, you get a vicious cycle that creates a race to the bottom for both earnings & company profitability. It’s really short-term thinking.

Equity is a great way to incentivize long-term retention & create shared upside. But sadly the current formulation of the Howey Test & Rule 701 of the Securities Act make it virtually impossible to issue equity to platform workers, freelancers, contributors, or creators. (Pretty crazy when you consider a 22-year-old fresh college grad who starts as a salaried employee at these companies can get equity).

Rethinking how compensation and value flows

The bottom line is we need a rethink of how compensation & value flows in platform companies. This is particularly true now as we’re seeing the tide go out on these unprofitable marketplace companies. We need to balance fair compensation for supply-side workers & creators, while also creating sustainable business models (eg. profitable companies). We need to move from short-term transaction-based comp & incentives, to longer-term models that align interests, unlock greater earnings and upside over time, and drive real loyalty & retention to a given platform - unlike the washing machine that exists today. 

At Village, we’re tackling this head on. We use groundbreaking tech to create easy-to-implement programmatic revenue share & other longer-term focused incentive & compensation models. If you’re an existing marketplace company that wants to create a better deal for platform users, as well as increase LTV, & reduce marketing spend, reach out. Our groundbreaking tech does just that. The game is changing.

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