Marketplace Thickness & Incentives
TL;DR: In order to run a marketplace business, you need thick supply to provide enough liquidity. To jump start, incentives are the most effective approach.
Market design is a well-established area. Quote from Harvard Business Review almost 10 years ago:
To function properly, markets need to do at least three things.
- They need to provide thickness—that is, to bring together a large enough proportion of potential buyers and sellers to produce satisfactory outcomes for both sides of a transaction.
- They need to make it safe for those who have been brought together to reveal or act on confidential information they may hold. When a good market outcome depends on such disclosure, as it often does, the market must offer participants incentives to reveal some of what they know.
- They need to overcome the congestion that thickness can bring, by giving market participants enough time—or the means to conduct transactions fast enough—to make satisfactory choices when faced with a variety of alternatives.”
How to get thickness fast
In Uber, most of our growth effort is around driver growth. We have dedicated Product/Eng team to optimize top of funnel (referral), signup, activation, first trip and engagement.
The whole team is organized around driver lifecycle. And if you know Uber Driver product well, we have incentives designed for every stage of the driver lifecycle.
Someone would argue is this sustainable? I couldn’t share the data but the rationale behind this is following:
In order to provide reliable service(Our mission is make transportation as relaible as running water), the platform needs thick supply pool could get decent ETA for riders.
To bootstrap this, we need to grow driver base. After thick driver pool, riders(demand) will organically grow as it provides far better experience with cheaper price point.
As demand goes up, it will have more “trip request” to the marketplace and it will boost overall driver earnings. Ideally, the boosted driver earnings should make up incentive gap and incentive would play less and less important in later lifecycle of the driver.
Above fly-wheel cycle has one assumption: No sizable competitor. If there is competitor in the landscape, the competitor could choose to play incentives war, meaning both parties are irrational and giving out incentives hurt bottom line.
The strategy works pretty well for Uber in US as lyft is so small.
But the strategy doesn’t work very well in China as Didi is the dominating player there.
TK’s strategy is simple and straightforward: We need to raise more money than all our competitor combined so that competitors would run out of business some day