There’s a fraction too much friction: What’s the problem marketplaces solve?

There’s a fraction too much friction: What’s the problem marketplaces solve?
October 10, 2016 Zara_Merlo

There’s a fraction too much friction: What’s the problem marketplaces solve?

“Friction is key to understanding whether an entrepreneur even has a hope of starting a viable multi-sided platform business. The reduction of substantial friction is a necessary condition, but not a sufficient condition, for a multi-sided platform to succeed.” – David S. Evans and Richard Schmalensee, Matchmakers: The New Economics of Multisided Platforms

What do we mean by friction?

For consumers, friction is generally equated to resources like time and money. As a consumer, we’re happy when a product or service saves us time or money, or it creates positive benefits like fun or educational experiences. Put simply, our life is made better in some way because frictions like inconvenience or expense have been reduced.

For businesses, friction is also about resources. As a business manager, we’re happy with a product that can help us sell more to customers or reduces our costs. Put simply, our business is made better because it is more profitable or sustainable. The issues of how to get our products to market and the costs of doing so are the main sources of friction for business.

How does a marketplace reduce friction?

In Matchmakers: The New Economics of the Multisided Platform, Evans and Schmalensee write:

“Fundamentally, multisided platforms create value by reducing frictions. They are more valuable to all parties the more important the frictions they address are, and the greater their success at reducing them.”

In the case of an online marketplace like TiniTrader, which specialises in children’s products, frictions are being reduced for both consumers and vendors.

TiniTrader has identified that parents are short on time and looking for value along with quality. The friction for parents in shopping for children’s goods is that it takes time to browse the numerous e-commerce retail offerings available and compare across the key determining categories of price, availability and quality of products. By aggregating online retailers as part of its online marketplace, TiniTrader reduces the friction of having to visit several online stores in order for parents to find what they want. The marketplace acts as a matchmaker and intermediary for parents and retailers.

TiniTrader co-founder and CEO Kerri Turner says the children’s goods category is a “really high involvement purchase decision” for parents, which meant they put a lot of time and thought into buying products.

“People put in a heck of a lot of thought into buying children’s products. There is lots of research and consideration to set themselves up for children. Really there was no place to shop to get that simplified experience for mums,” Turner says.

A marketplace delivers value for its customers – e.g., vendors and consumers – when it removes friction. Online marketplaces have to be able to show substantial benefits for all participants in order to prosper. The benefit in the case of using TiniTrader for parents is that it helps simplify the shopping process, which is valuable for people who are time-poor.

For the vendors on TiniTrader, being part of the marketplace opens up a vast number of potential and qualified sales leads. It opens their inventory to new customers who may not have reached them via their standalone ecommerce store, especially in the case of smaller and speciality retailers.

“What we found a year ago was there were key products not being widely stocked by retailers. These might be artisan sort of products, artwork, whatever it happens to be, but not just those sorts of things, it might be just pram brands that aren’t in stores widely,” Turner says.

“But what it means is we’ve added a whole bunch of what we call specialised sellers, who are selling direct and who are just available online, which was really there to complement what was available from the existing retailers.”

By doing this, TiniTrader was able to reduce friction points for specialty retailers, which now had access to another channel through which to go to market, as well as for parents looking for specialised products that might have been difficult to find. Vendors could get their specialty products to consumers ready to buy them.

Frictionless transactions

Identifying friction and how it can be reduced for participants is essential for successful online marketplaces. Marketplaces have to carefully weigh how they incentivize involvement for one set of participants, e.g. vendors, against the incentives used to attract another set of participants, e.g. consumers. Being part of a marketplace has to reduce significant frictions and provide enough benefits for all participants for a marketplace to grow and scale.