Marketplaces go mainstream
With in-person shopping restricted and customers staying indoors for most of last year, digital marketplaces quickly turned from a convenience to a necessity. The shift to e-commerce has been a boon for established leaders (such as Amazon and Alibaba) but has also given rise to new innovative marketplaces. These businesses have been able to compete with larger players by targeting local and niche markets and offering differentiated products, services, and customer experiences.
Given that the number of marketplaces is projected to continue growing, our investment team has closely looked at some attributes we believe set the best businesses apart from their competitors. Below, we share some of our observations, including characteristics of leading platforms, lessons we’ve learned, and essential questions that we pose to management teams when considering new investment opportunities.
Features of successful marketplaces
Although different marketplace models have been successful, we believe the best demonstrate four key actions that allow them to fully deliver on their purpose:
In our opinion, online marketplaces must constantly improve their service to stay relevant, and any price increases should bring a commensurate value-add to the customer. Therefore, we believe that a disciplined pricing strategy is critical for marketplaces seeking long-term growth and profitability. Marketplaces should also align their brand, mission, and purpose across the entire business. Where there is a mismatch, we have seen instances of this limiting a company’s full potential.
For example, Etsy, an online marketplace for handmade and vintage items, focuses its community-centric model around its vision of empowering individuals to turn their creative talents into opportunities. It brings together a largely fragmented group of artists and artisans who believe in keeping the “human connection” at the heart of the business. This emphasis reveals the uniqueness of the products offered on Etsy’s platform. As the pandemic evolved, Etsy has grown in popularity, becoming the go-to place for custom items such as handmade facial masks.
Lessons from the accelerated shift to digital
The acceleration of digitization has wide-ranging implications for marketplace businesses. We have discussed why we believe companies that fail to embrace a “digital-first” approach to improving their value proposition are at risk of being left behind and losing competitiveness. The pandemic emphasized a vital lesson: all businesses must be digital. This is particularly true for marketplaces, where innovators often rely on technology to tap into new consumer markets. Digitalization is raising the stakes, so companies have a growing incentive to find new ways to differentiate their customer experience.
The pandemic emphasized a vital lesson: all businesses must be digital.
Online commerce has also disrupted the “winner-takes-all” business model, historically a mainstay of investing. Years ago, technology was only accessible and affordable to the largest industry players. However, in our opinion, the digital transformation has eroded traditional barriers to entry, democratized the business landscape, and leveled the playing field for smaller businesses. Consequently, we believe it has become increasingly difficult for a “winner-takes-all” model to succeed, given that competition is often “just one click away.”
Investing in online marketplaces
The following are some key questions that we find are important to ask management teams when assessing marketplaces. These considerations have allowed us to identify some of what we regard as the best marketplaces in the U.S. and around the world. Together, these insights help fuel our investment process and pursuit of positive outcomes for clients.
- What specific actions are you taking to drive value for both sellers and buyers? Does this distribute more power to the edges?
- Is the leverage within the marketplace symmetrical?
- How do you mitigate multi-homing from both customers and suppliers?
- What friction points can still be removed or improved within your marketplace?
- Can this same value proposition be generated more directly today?
- Are both sides of your marketplace aligned in the core value proposition they are seeking?
At Polen Capital, we seek to invest in marketplaces that, among other things, focus on customer-centricity for both parties. We believe that the best management teams establish feedback loops to understand the needs of their stakeholders on a deep level and make decisions through the lens of the customer. In our view, companies that exhibit these characteristics are best positioned to reap the long-term benefits of the secular shift to online shopping.
Important DisclosuresThis information is provided for illustrative purposes only. Opinions and views expressed constitute the judgment of Polen Capital as of September 2021 may involve a number of assumptions and estimates which are not guaranteed and are subject to change without notice or update. Although the information and any opinions or views given have been obtained from or based on sources believed to be reliable, no warranty or representation is made as to their correctness, completeness, or accuracy. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice, including any forward-looking estimates or statements which are based on certain expectations and assumptions. The views and strategies described may not be suitable for all clients. This document does not identify all the risks (direct or indirect) or other considerations which might be material to you when entering any financial transaction.
This information should not be construed as a recommendation to purchase, hold or sell any particular security. Holdings are subject to change without notice. There is no assurance that any securities discussed herein will be in the portfolio at the time you review this post or that any securities sold have not been repurchased. The securities discussed do not necessarily represent the entire portfolio. It should not be assumed that any of the securities, transactions or holdings discussed were or will prove to be profitable or that any investment recommendations we make in the future will equal the investment performance of the securities discussed herein. For a complete list of Polen Capital’s past specific recommendations for the last year, please contact [email protected]. Past performance does not guarantee future results and profitable results cannot be guaranteed.