Note: This blog was originally posted by Chad as a response to a USV conversation thread titled “What Will Undo Today’s Incumbent Marketplaces?”

The marketplaces of the future will look very different from the marketplaces of today.

Most companies are currently focused on the demand generation side of the marketplace equation. That is logical because if you don’t have users looking for assistance (consumers looking for taxis, small businesses looking for programmers, etc) you won’t be able to get the critical mass needed to get your marketplace off the ground.

However too many marketplaces focus too much on the demand side and forget that it is the quality of the suppliers that will determine long term success. The big winners will be the companies that put the suppliers first and adhere to the following principles: Transparency, Low Fees, Flexible Pricing and Data Portability.

Transparency
Users want to see information about suppliers: bios, social media profiles, pictures, user reviews, etc. Right now many marketplaces resort to presenting an opaque view of their suppliers in a misguided attempt to prevent users from taking transactions offline. They are intentionally subjugating their suppliers so they can enhance the value of their brand (and keep the money in their system), but they are missing out on the fact that the suppliers ARE the brand.

Show your suppliers off by allowing them to interact directly with users and the quality will increase. Full transparency is also the only way to allow both sides of the marketplace to completely trust each other. In the future the protectionist tactics of the status quo will be exposed as more and more marketplaces adopt 100% transparency between their users and suppliers.

Low Fees (Transaction Rake)
The reason the rake amount matters is that with low fees you are able to attract high quality suppliers. If a supplier does $2,000 of transactions in a month they would earn $1,800 with a 10% rake, but only $1,400 with a 30% rake and that is a huge difference for the freelancers that make up the supply side of most marketplaces (for those of you that haven’t read it, Bill Gurley does a great job of illuminating the benefits of a low transaction fee for a marketplace in his blog post: A Rake Too Far). In addition to a low rake, what if you kept decreasing the transaction fee between a user and a supplier the more they conducted business together? That would strongly incent suppliers to continue working with users within the marketplace.

Future marketplaces will realize that setting an exorbitantly high rake is not the only way to make money. Some of them have already figured it out, Peter Frank’s post mentions my favorite example Craigslist and how they charge most users no fee, but only charge for the competitive sections of the marketplace. There are other “in-game” features marketplaces can adopt to make money: charge suppliers for premium access or featured listings (bold, highlighted, prime placements, etc.) and these are just a couple examples of what you can do in a marketplace that has sufficient transaction volume.

Flexible Pricing
Many marketplaces have adopted fixed rate pricing, but future winners will allow flexible pricing on both the user and supplier sides. For example, fixed rate pricing is very prevalent with many writing marketplaces: you pay X for 4 star quality content, Y for 5 star quality content and so on. That model pigeonholes suppliers into a fixed rate, when their true value to a user might be 3-5X more than the established rate. Even more damaging is that low quality suppliers may artificially get paid a premium for their work when they should be receiving 3-5X less than the established price. The only fix for this problem is to allow for flexible and dynamic pricing in a marketplace.

Allowing users to name their own price does come with another set of issues. For example in many marketplaces there is the “race to the bottom” issue where users post projects for low prices hoping to get work from low priced (and in many cases low quality) suppliers. This is a very real problem that prevents many high quality suppliers from ever joining the marketplace. A solution is to empower your suppliers by allowing them to offer their services or goods at the prices they are comfortable with (Etsy is a great example of suppliers setting their own prices in a thriving marketplace).

Data Portability
Suppliers that choose to work in a marketplace must be allowed to create public profiles and to port their data outside the system. Users also want to access data (for ordering, reporting, etc) that is typically locked up in a marketplace. Future marketplaces will create free and robust API’s to allow both users and suppliers to get to the data they should rightfully own.