Developing a growth model + marketplace growth strategy | Dan Hockenmaier (Faire, Thumbtack, Reforge)
Lenny's podcast features Dan Hockenmeyer, Head of Strategy & Analytics at FAIR, discussing growth models and deep marketplace growth strategies. He shares insights from scaling Thumbtack and consulting for numerous startups.
Deep Dive Analysis
15 Topic Outline
Defining a Growth Model and Its Value
Building Blocks of a Growth Model for Businesses
Complexity and Limitations of Marketplace Growth Models
Leveraging Growth Models for Strategic Planning
The Impact of Retention on Business Growth
Improving Retention Through Early User Experience
Why Marketplaces are Good and Interesting Businesses
Key Health Metrics for Marketplaces
Balancing Supply and Demand in Marketplaces
The Nuance of Marketplace Dynamics and Decision-Making
Strategies for Expanding Marketplace Businesses
Marketplaces Adding SaaS vs. SaaS Adding Marketplaces
Opportunities and Challenges of Unbundling Marketplaces
Understanding B2B Marketplaces and Fragmentation
The Future Evolution of Marketplace Models
6 Key Concepts
Growth Model
An analytical representation, typically a spreadsheet, of how a business grows. It forces a deep understanding of the business's mechanics, serving as a tool for opportunity assessment rather than just forecasting.
Liquidity (Marketplace)
A measure of how reliable a marketplace is, indicating how often a consumer can find what they're looking for or a supplier can sell what they're offering. It's often expressed as a dimension the customer cares about, like wait time for rideshares or conversion rate for commerce.
Share of Wallet
The percentage of a customer's total spend in a given category that they allocate to a specific marketplace. For sellers, it's the percentage of their business done through that marketplace, indicating depth of relationship and reducing multi-tenancy.
Dual-sided ROI Equations
Formulas for acquiring supply and demand that fully internalize marketplace dynamics. They account for the cost of acquiring a customer on one side, plus the proportional cost of acquiring the necessary counterpart on the other side.
Marketplace Fragmentation
A measure of how many businesses exist in a space relative to its transaction volume, or how concentrated the top suppliers are. High fragmentation (many small players) is crucial for a successful marketplace, as low fragmentation gives too much leverage to a few large players.
Marketplace Evolution
The trend of marketplaces charging higher commissions over time by doing more work in the value chain, moving from simple demand aggregation (lead gen) to managed (trust generation) to heavily managed (owning logistics, underwriting transactions).
12 Questions Answered
A growth model is an analytical representation, often a spreadsheet, of how a business grows. It's useful because it forces a deep understanding of the business's mechanics, helps weigh different opportunities, and informs resource allocation decisions.
The three core components are acquisition channels (traffic, spend, conversion), retention (customer activation and survival rates), and monetization (monthly or annual fees).
Growth is highly sensitive to customer retention because a healthy, retained customer base directly impacts referrals, content generation, and contribution margin, making even small gains in retention significantly more valuable than larger gains in other areas.
The most effective way to improve retention is by focusing on the early user experience and understanding the customer journey. Identifying and streamlining variability in the first week or month of a user's experience can significantly improve long-term retention curves.
Marketplaces are attractive because they are hard to start and capital intensive, but once established, they build compounding defensibility and network effects. Unlike most businesses, later cohorts in marketplaces often see lower customer acquisition costs and higher lifetime values as liquidity improves.
Beyond basic GMV and unit economics, critical metrics include liquidity (how reliable the marketplace is for users), and share of wallet (how much of a customer's total spend or a seller's total business is captured by the marketplace).
While both are important, demand is ultimately the most critical factor. If a marketplace successfully aggregates demand, suppliers will always be willing to join. Supply acquisition should be framed by how it incrementally benefits the demand side customer experience.
Every decision in a marketplace has second, third, and even fourth-order consequences due to the complex ecosystem interactions. Unlike linear SaaS businesses, marketplaces require a 'light touch' like a gardener, as changes can have unpredictable, long-term effects.
Prioritize expansion based on adjacency to the core business (how easily the existing model can be applied) and whether it accentuates existing network effects (using the same supply or catering to multi-demand customers). Product experience, not just go-to-market spend, is key.
It's generally easier for a marketplace to add a SaaS offering because marketplaces already possess the capability to generate demand and have relationships with both sides. SaaS businesses lack demand-side relationships and a higher-value activity inherent in marketplaces.
Unbundling opportunities are rarer than often thought. They typically succeed only if the niche segment has very high frequency or high dollar value transactions, and if it benefits from a self-contained network effect that doesn't rely on the broader horizontal network.
There are fewer B2B marketplaces partly because fewer founders understand complex B2B problems. More significantly, B2B markets often have lower fragmentation, meaning fewer, larger players. This gives suppliers more leverage, reduces their need for a marketplace, and increases disintermediation risk.
21 Actionable Insights
1. Marketplace: Light Touch Gardening
When managing a marketplace, adopt a ‘gardener’ mindset with a light touch, especially when altering core incentives or mechanisms, as changes can have delayed, complex, and hard-to-trace consequences.
2. Build Growth Model for Understanding
Build an analytical growth model, typically in a spreadsheet, to force a deep understanding of how your business truly grows and to identify key levers, as the process of building it provides significant value.
3. Prioritize Customer Retention
Prioritize efforts on customer retention, as even small improvements can have a disproportionately high impact on overall business growth and LTV compared to larger gains in other areas like acquisition.
4. Optimize Early User Experience
To significantly improve retention, focus on optimizing the early user experience and onboarding, as this initial phase is crucial for demonstrating product value and influencing long-term customer behavior.
5. Address Early Experience Variability
Identify and address variability in the early user experience (first week/month) to ensure a consistently positive initial interaction, thereby improving retention by preventing early disillusionment.
6. Track Marketplace Liquidity
Define and relentlessly track marketplace liquidity (reliability of transactions for both sides) as your primary metric, as achieving liquidity is fundamental before other growth strategies become effective.
7. Demand is Marketplace Currency
While supply is crucial early on, ultimately prioritize aggregating demand, as demand is the ‘currency’ that attracts and retains suppliers, making the customer perspective paramount in optimization.
8. Product Leads Marketplace Expansion
When expanding a marketplace, ensure product development and an excellent end-to-end customer experience lead or stay in lockstep with go-to-market efforts, as product quality is what truly drives retention and organic growth.
9. B2B Marketplaces Need Fragmentation
For B2B marketplaces, ensure there is sufficient market fragmentation (many small players rather than a few large ones) on both the supply and demand sides, as low fragmentation leads to less leverage for the marketplace and higher risk of disintermediation.
10. Beware B2B Disintermediation Risk
Be wary of B2B markets with low fragmentation, as dominant players have less need for a marketplace, are less willing to pay high commissions, and are more prone to disintermediation (transacting directly outside the platform).
11. Use Growth Model for Planning
Utilize your growth model in quarterly or annual planning to create a ‘common currency’ for evaluating and comparing the impact of different product or growth initiatives, enabling better resource allocation decisions.
12. Develop Dual-Sided ROI Equations
Develop dual-sided ROI equations for both supply and demand acquisition that account for the interdependencies of the marketplace, allowing you to optimize acquisition based on your desired payback period.
13. SaaS Growth Model Building Blocks
For a SaaS business, start building your growth model by focusing on three core components: acquisition channels (traffic, spend, conversion), customer retention (activation, survival rates), and monetization (monthly/annual fees).
14. Marketplace Growth Model Complexity
For transactional or marketplace businesses, expand your growth model to include transaction frequency, average order value, unit economics (COGS), and critically, supply acquisition, retention, and the interaction between supply and demand.
15. Track Share of Wallet
Measure ‘share of wallet’ for both buyers and sellers to understand the depth of engagement, as higher share of wallet indicates stronger relationships, increased LTV, and reduced multi-tenanting.
16. Prioritize Adjacent Marketplace Expansion
When expanding a marketplace, prioritize new markets or verticals that are highly adjacent to your core business and that accentuate existing network effects, rather than solely focusing on total addressable market (TAM).
17. Marketplace to SaaS is Easier
Recognize that it’s generally easier for a marketplace to add SaaS features than for a SaaS business to become a marketplace, primarily because marketplaces already have established relationships with both supply and demand.
18. Marketplace SaaS: Solve Customer Pain
When a marketplace considers adding SaaS products, focus on solving significant customer pain points and improving their overall experience, rather than solely aiming for additional monetization, as this approach increases stickiness and retention.
19. Vertical Unbundling Criteria
Consider unbundling a vertical marketplace from a horizontal one only if the niche offers high order value, high frequency, and a largely self-contained network that doesn’t heavily rely on the broader horizontal network for its value.
20. Avoid Early Resurrection Efforts
Prioritize efforts on new user acquisition and early onboarding over resurrecting churned users, as it’s generally more effective to engage fresh users than to re-convince those who’ve already decided against the product.
21. Avoid Correlational Analytical Failures
Avoid the common analytical pitfall of assuming that if your best users exhibit certain behaviors, you can simply make other users do the same to improve metrics; correlational exercises rarely translate into actionable changes.
5 Key Quotes
If you think about running a marketplace, you're basically like a gardener. You have to have a very light touch. Like if you're building a SaaS business, you're a construction worker, you're like building the product and the features and selling it. And it's this very linear thing. For a marketplace, you're like messing with this ecosystem that you don't actually really understand how it works.
Dan Hockenmaier
I think 50% of the value you get from it is simply building the model, right? Like it forces you to understand it. And then you get this artifact which you can use to understand how to weigh different opportunities or understand the benefit of working on different things.
Dan Hockenmaier
I think one of the most common analytical failure modes is this pattern, which is our best users do X. So why can't we make other users do that same thing and then drive future retention? And it almost never works that way because there's something unique about that customer their experience, which is driving it.
Dan Hockenmaier
Marketplace is actually the inverse, like the supply of liquidity is improving, the experience is improving. So often actually, as you see later cohorts in marketplaces, CAC goes down, LTV goes up, you see this crazy inversion where the business gets better and better over time.
Dan Hockenmaier
I think ultimately demand is the only thing that matters. If you are successful at aggregating the demand in your industry, you will have the winning marketplace.
Dan Hockenmaier
1 Protocols
Building a Growth Model for a SaaS Business
Dan Hockenmaier- Understand your acquisition channels, including assumptions around traffic, spend, and conversion rates for paid marketing, sales, or viral referrals.
- Model customer retention, including activation rates, basic monthly retention curves, and customer survival rates over time.
- Define monetization, typically a monthly or annual fee, to translate retained customers into revenue.