Marketplace Liquidity: Why Is It Important and How to Measure It?

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When defining metrics that influence marketplace success, experts list a number of them including monthly active users, conversion rate, and gross merchandise volume. One of the metrics experts always point out is liquidity. In this article we hope to help you answer:

·       Definition of liquidity

·       Types of liquidity

·       Aspects that influence liquidity

·       Ways to measure liquidity

·       Ways to increase liquidity

 

Knowing the liquidity level of your marketplace, you can move forward with valuable insights to increase its revenue viability. Ready to find out how much liquidity is in your marketplace? Let's begin.

What is marketplace liquidity?

Marketplace liquidity is a critical financial health metric for a company, and it's important to make sure you’re getting the most out of this part of your business. You can do this by looking into additional layers of support that many companies find helpful - like the operational assistance provided by top specialists, or e-commerce tools that were specifically designed with marketplace operators in mind.

You want to make sure that you can maintain a competitive edge when it comes to what is offered in your industry. To do this, you have to ensure that vendors are providing exactly what your customers are looking for. If they aren't, you need to find out why!

What is liquidity for different marketplaces?

Liquidity is a bit of a tricky thing. It's just as important to be mindful of marketplaces that offer high liquidity for customers and/or sellers as it is to consider those that offer little and what the effects of such may mean for your business over time.

No matter how liquidity is expressed on different platforms, it’s a metric one should track because it helps you better understand:

·       if your marketplace meets the needs of your customers

·       if they benefit from using your platform. how satisfied your marketplace users are

·       how the supply and demand sides match on your platform

If you study the following information, you'll understand how a marketplace operates and if there's something that can be improved to make it more profitable. Know that a market is a fluid ecosystem where the volume of goods exchanged influences its volume of trading.

Aspects that influence liquidity

Creating a marketplace is highly dependent on several factors. You should consider them when managing your e-commerce business, as these factors have the potential to affect the volume of trade that comes through your website.

Factor #1 Marketplace model

There are three different types of marketplaces depending on the party initiating the transaction.

Double-commit marketplaces are platforms where both the supply and demand sides should agree to cooperate. As an example, let’s look at Upwork. For a transaction to happen, a freelancer and employer should first post their offers. Next, they should look through each other’s offers until they find one that fits what they're looking for each other right away.

Markets can be divided into two main categories: buyer-picks and seller-picks. In a nutshell, the difference is that suppliers post their offers and buyers choose who they want to buy from while in a buyer-picks marketplace, travel agents post the availability of houses while travellers finalize their decision on where they want to stay by comparing similar listings and reaching out directly with questions or for more information. Airbnb is one such marketplace that works by matching customers looking for accommodations with owners or renters of such accommodations.

Marketplace-picks marketplaces are sites where the primary method of matching customers with vendors is automated instead of making direct connections between them. A good example of this kind of marketplace is Uber. The Uber system sees every request and automatically matches a driver to a customer. Matching happens within minutes, which increases liquidity thanks to the quick availability of both service providers and clients thanks to the marketplace.

Factor #2 Category concentration

If your startup's marketplace offers products or services in several or even a dozen categories, you want to track the category distribution. Let’s say you run a pet-related business that offers dog walking, grooming for pets and drop-in visits and the most popular category is dog walking.

When you promote your platform, the majority of people who find you come to order a dog walking service from your business. Consequently, the concentration in this category will be the highest, and you’ll receive orders faster. As for the other remaining categories, it may take some time to get enough demand before you take action on promoting them.

To make customer concentration work for you, you should concentrate on getting the highest potential return. By promoting your products in popular categories it’s possible to achieve higher levels of liquidity as well as less expensive cash outlays for acquiring customers.

Factor #3 Density

If you target a particular location, try to get as many users from that area as possible. Traditionally, you want to capture at least three times the total number of users you already have to create the kind of high concentration you need for vendor and buyer density. It’s important to focus on one location and build your customer base there before expanding elsewhere. For instance, if you started in New York and amassed ten million registered users so far, by increasing their numbers in that city even just by 15%, then your marketplace will snowball into one that can be used by anyone anywhere in the country or beyond!

Liquidity refers to the ease of buying and selling an asset. Higher liquidity means that investors can buy or sell their assets more quickly without affecting prices. However, simply knowing what influences liquidity isn’t enough to know if it has increased or decreased in your marketplace. To measure liquidity, you need to know how to calculate its various factors.

How to measure liquidity

Money flow is essential for any business to work well. To measure the money flowing through your marketplace, first set some measurable metrics. We describe each of these metrics below.

Buyer to supplier ratio 

The buyer to supplier ratio is indicative of how many buyers are available during any given period of time. You can calculate this ratio by using the following equation:

Depending on the industry, this ratio will vary widely. For example, for companies that provide driving services like Uber, there are approximately 50 times as many drivers as there are customers. In real estate, the investor to buyer ratio is usually more even at around 1:1. Knowing these ratios gives entrepreneurs an idea of whether the supply is greater than demand or vice versa.

Customer acquisition cost

When calculating how much money you spend to acquire a customer, first you should take into account that if a company has a high churn rate or a small number of customers that might be willing to make purchases at any price - your company may paying too much. You’ll need to perform the following steps:

The cost to acquire new customers includes the monetary expense one incurs to bring in business, including advertising spend, salaries of your marketing team, and other expenses you direct towards acquiring new clients. Also, remember to calculate CAC over a period of time — for example, a month or year.

The customer acquisition cost should be less than the profit brought by each client; otherwise, your marketplace liquidity will be lower.

Search to fill rate

The search to fill rate is also known as buyer liquidity. It’s the percentage of searches or requests that result in a purchase on an e-commerce site.

For example, it's the percentage of availability requests on rental platforms like Airbnb and Vacatia that result in bookings, or the percentage of posted jobs that turn into hires for job sites like TaskRabbit or Thumbtack.

For driving services like Lyft, it's the number of ride requests that result in rides.

To calculate this metric, use the following equation:

Utilization rate

The utilization rate is what you would call a productivity ratio – the total quantity of goods that a company sells over a specified period divided by the production level during that same period. If a company produces five products and then sells six, this gives us a utilization rate from the company's perspective of 100%. This efficiency ratio allows investors to see how effectively a company can turn its resources into revenues.

Time to fill

Time to fill in a very important metric and it happens to be one way (or set of ways) to measure customer satisfaction and as a result, marketplace liquidity. The less time it takes the better, so the happier sellers and buyers are with their achievements on your platform(s).

There's no special "formula" or any really surefire way to count such data - some platforms might offer some tools for this but you'll want some real insight on how longer times could affect each parties' overall satisfaction - do they go slower on purpose because they enjoy shopping there, or is it getting dragged down by something that needs fixing? Usually, just use time tracking systems and check out what your users say about the times involved!

You have to find the time to keep the number of products low since if users can find what they need faster, they will be a lot happier.

If you track your metrics carefully, you'll see how successful your marketplace functions. If you notice that something isn't working well you can try to improve it. On the next page, we're going to show how startups can ensure their marketplaces function as efficiently as possible (and don't forget to stay tuned throughout this guide for more such insights and relevant tips which will prove insightful and educational).

 

How to increase marketplace liquidity

Marketplaces are all about generating profits. For them to do so, they have to have access to large amounts of capital. This is something that might raise concerns when you are in the process of growing your company. But ideally, when you are ready to launch your marketplace business model, your numbers in that regard should be quite high already. Nevertheless, you still have the option of making things easier for yourself in the future by knowing how to increase liquidity.

Choose the supplier-picks marketplace model 

Liquidity is one of the most important factors in managing an online business. When it comes to online marketplaces, dynamic pricing refers to how changes in consumer demand are handled by adjusting price levels automatically without halting transactions. This capacity allows for flexibility when it comes to the available inventory. The supplier-picks model is capable of this dynamic pricing with its quick response time and responsiveness to potential buyers’ needs.

When applying the supplier-picks model to your marketplace, it's important to be mindful about controlling the quality of suppliers. Without ensuring that they meet certain standards, you may end up with inadequate services and continual customer dissatisfaction.

Improve the matching mechanism

If the supplier-picks model doesn’t work with your marketplace and it’s impossible to fully automate the matching process, you still should strive to improve it. Let’s learn several ways you can do that now.

Leverage dynamic pricing

While a lot of app developers focus on what they want to build, it's also very important to take the time to think about who you're building it for. There are two main ways you can get customers. The first way is by creating something so innovative that customers come to you.

Always focus on how your customers will benefit from your product or service. You want them to know that if they don't utilize what you're offering, they're missing out. Marketplaces like Uber connect people who need something done with people who can help them get it done. This takes out the middleman, which usually makes things more affordable for everyone involved - not just customers! Dynamic pricing allows teams at marketplaces like these to quickly adapt prices for products/services based on supply and demand in real-time making sure the marketplace always remains ‘liquid’ (or an appealing place for all parties).

Provide alternatives

If a customer is unable to find a product that they're looking for, whether because it's been discontinued or for any other reason, you can suggest similar products from the same vendor or other vendors on your site. By doing so, you can save a customer from leaving your website and therefore losing them as a result.

Introduce a human element

If you can’t fully automate the matching process, why not turn to humans instead? In double-commit and buyer-picks marketplaces, where it can take a long time for users to match, assistants can help customers make up their minds faster. Moreover, they could influence the matching process by recommending the best providers, thus improving customer satisfaction with the service.

For example, Airbnb Plus is a collection of unique and exclusive luxury Airbnb listings that hosts make an extra effort to maintain. All of the apartments and houses on Airbnb Plus we've inspected by Airbnb representative so travellers can have peace of mind while booking with this service.

Another way that the human touch is working as a trend in the marketplace is Giggster. That's a platform where people can find locations for events such as film shoots and conferences. Other options include booking through a chat option on their website, filling in a form to get more information about available venues, or getting some assistance from an agent.

Optimize customer acquisition

We've already mentioned that acquiring a customer should cost less than the profit you get from them. One way to decrease your costs of finding new customers is by turning them into regular loyal customers who come back for more and more. Here's how:

·       Implement a ratings and review system that will help users get fair feedback about products and services they order.

·       Run an affiliate program to help grow your customer base by encouraging customers to use and recommend your marketplace.

·       Facilitate communication between community members to create an atmosphere of trust

When you have a loyal base of customers, you essentially have a built-in fan base who can help promote your business and spread awareness among their friends and family members. Considering the cost of acquiring a new customer is usually much greater than the cost of retaining an existing one, it makes sense to invest in your most loyal clients by providing them with incentives for being repeat customers that may eventually pay off in more ways than one. If anything this will only benefit those who stick around as your fans as they will certainly continue to buy from you as long as you're providing what they want at a competitive price!

Recap

Liquidity is a crucial metric that allows stakeholders to understand the current success of your marketplace. By using approaches such as defining and measuring liquidity listed in this article, you’ll be able to better understand the current liquidity of your marketplace and get ideas for how to improve it in the future.

 

 

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