Speaker 1: 0:02

Hi, welcome to the Big Commerce Podcast. Hello, welcome to a brand new episode of the Big Commerce Podcast. My name is Luigi and in today's episode, I'm joined by Shirish Nadkani. Shirish is a successful serial entrepreneur who's worked for the likes of Microsoft during the Hotmail acquisition and the launch of MSN. He's worked for Research Emotion and also co-founded the world's largest language learning site, livemoker, which was then sold to Rosetta Stone. In today's episode, we understand how marketplaces like Amazon, ebay and Airbnb have evolved over the years, how trust plays a huge role in online shopping and marketplaces, and how marketplaces build trust with their customers, how marketplaces have transformed traditional business models and what the future holds for marketplaces. Today's episode is extremely interesting and I certainly learned a lot. I hope you enjoy it too, shirish. Welcome to the podcast.

Speaker 2: 1:01

Thank you very much, great to be with you.

Speaker 1: 1:03

I've been looking forward to this podcast for many reasons, but just the knowledge that you have around marketplaces and how it's kind of just reading your book I've learned so many things. It's incredible how you've managed to condense it into a book. I'm a bit looking forward to interviewing you, but more so after the book. I've got plenty of questions for you that I think our listeners will enjoy as well. For those that haven't don't know you haven't heard of you, why don't you tell us a bit about yourself and your experience?

Speaker 2: 1:39

You bet? Yeah, I'm a native of Seattle. I've been in the tech industry for the last 35 years. I started my career at Microsoft in 1987. This was one year after the Microsoft IPO. I worked for Microsoft for about 12 years. In that I did the acquisition of Hotmail, which was one of the biggest acquisitions that Microsoft did at that time, and then launched MSNcom, which became a top web portal. Then, after that, I started my entrepreneurial journey. I've done multiple startups, had multiple exits. I now spend time writing books I've written two books so far and also advising and investing in startups.

Speaker 1: 2:30

I think you're being quite humble there, sherish, because I've done my research. Yes, you worked 12 years at Microsoft and in the acquisition and then RIM Blackberry. You also co-founded a company called Live Mocha, which became the world's largest language learning site, which was then sold to a little company called Rosetta Stone. Sorry, I think you slightly undersold yourself there Then. Obviously, you're working now as a TIE. This is one of the reasons why you have this authority, because when you talk about market places, because of your time at Live Mocha, where you built a marketplace and then you had millions of members, 15 million members.

Speaker 2: 3:12

We had about 15 million members in 200 different countries and that we had about 300,000 language tutors around the world. We built this marketplace of language learners and tutors, where you got instruction from Live Mocha, but also you could sign up with one of the language tutors to actually practice the target language that you were planning to learn.

Speaker 1: 3:38

I think that's a really important point because within my industry of e-commerce and retail, when we think marketplaces we predominantly think of physical goods. So your Amazon, your Ebay, your Etsy, and obviously the new wave of marketplaces that are being spun out by retailers such as Walmart and so on You're touching it within the book marketplaces everywhere, from Airbnb through to Alibaba and obviously Live Mocha as well. Your latest book because it's not the first one that you've written dives deep into marketplaces, not just dissecting the kind of marketplaces and the success they've had, but actually how they've been able to build those marketplaces and really build a position of, I guess, partly monopoly, but, as the title says, the winner takes it all how marketplaces are creating monopolies. So why don't you talk to us a bit about the inspiration? Why did you write this book and why now?

Speaker 2: 4:46

Yes. So, as I mentioned just now, I had the opportunity to create and run a marketplace, a large marketplace at Live Mocha, with 15 million members and 300,000 language tutors, so I understood the dynamics of launching and scaling a marketplace and the power it has, the network effects that are generated that allow you to become a monopoly in that space. So I've been fascinated by marketplaces for a long time, primarily because of the fact that as you establish a critical mass of suppliers and consumers, then network effects kick in and it becomes a virtuous cycle where, as you have more consumers, more suppliers join the network. As you have more suppliers, more consumers want to buy from you because you have a wide range of suppliers, and it becomes a virtuous cycle that leads to a winner takes all. A winner takes most kind of situation.

Speaker 1: 5:52

We're going to touch on some of these things later on, but the things around the network effects and so on, how have marketplaces predominantly maybe the more known ones are the ones within our sector, like Amazon, like eBay and so on evolved over the years?

Speaker 2: 6:14

Yeah. So Amazon, as you know, was a primarily an e-commerce site initially, and then they decided that, made a very important strategic decision to open up their platform to other suppliers and then to offer services like fulfillment by Amazon, and they were the first platform to do that and they were very successful in attracting suppliers to that platform. Now they have about 2.3 million suppliers and they are the dominant marketplace with millions of suppliers. Walmart, in contrast, also tried to copy Amazon. They were very late to the market, as you know, and they only have 50,000 suppliers, lastly, lower than Amazon, and that's the reason that Amazon has become a monopoly and Walmart is a distant second. So that's an example of Amazon. Of course, ebay also has had great success, though today, auctions really makes up only 10% of their sales. Most of it is fixed price and that's where they have lost to Amazon and most suppliers on Amazon. Most consumers prefer to go to Amazon first as opposed to eBay.

Speaker 1: 7:50

Yeah, we're seeing that and obviously they made that shift, I think, to kind of partly shake off also an image that they had around, kind of you know, the type of customer that would shop on eBay. But that certainly changed. You touch in your book about the importance of trust from a marketplace and the example you used was an Airbnb renter who had their or host, who basically had their house, their apartment, ransacked by individual and that was a pivotal point, I think, within Airbnb and how they approached things, because there was this assumed trust and then in an instance that trust now became questionable. And you touch on the eight ways that marketplaces can really ensure that there is that certainly perception, but there is that trust between itself and the customers. What do you touch on? A few of the most important ones?

Speaker 2: 8:50

Yeah, establishing trust is super important for any marketplace and that brings greater liquidity and greater transactions in the marketplace. So there are a variety of ways in which you can establish trust. The first and most common way is through reviews and ratings. You know, amazon does a very good job, as you know, with that. A lot of people go to Amazon to research products and they look at the ratings and reviews. Now, certainly they have been. Ratings and reviews have been abused by suppliers with false ratings, false reviews and so forth, so you have to invest in algorithms to detect fake reviews and remove them from the system to create more trust. So that's one mechanism. Another mechanism is through insurance. So you refer to the Airbnb example where the host home was ransacked and so Amazon offers a $1 million insurance policy to make sure that, if you are home it's damaged in any way, that you get insurance to cover the expenses associated with addressing that damage.

Speaker 2: 10:18

Yeah, you can't Airbnb sorry, Amazon Airbnb yes, yes, yes. And then you have ESCO services. This was something that was pioneered by Alibaba in China. There was a lot of distrust whether you paid for an item, whether you would get the item from the merchant, and so they establish an ESCO service where the funds will be released to the merchant only when the consumer confirmed that they had received the item and they were satisfied with that item. So those are some of the ways that you can establish trust in a marketplace.

Speaker 1: 11:03

And I think that's the reason why I kind of brought that up is, I think for a lot of merchants predominantly, or even ones that don't sell on marketplaces, or even businesses in general, I think trust is a really important piece of business.

Speaker 1: 11:18

Very few companies can kind of push trust to the side because maybe they have such a dominant market position, but for anyone that's doing anyone's in business, they need to make sure that there is that trust between themselves and their customer. And yeah, different marketplaces have different ways and one of the things you touched on, referring Alibaba, was obviously different markets have different I guess I won't call them standards, but certain markets were happy to, you know, would accept counterfeit goods that you might historically have found on Alibaba, whereas obviously others weren't. And I guess that's where maybe certain markets weren't really suitable for Alibaba because it didn't have the same success it did in its home country. You also touched on things like communication and just making sure that the customer feels like they're in control, to things like refunds they're critical to make sure that the customer continues to come back, because you spoke about different metrics such as lifetime value and so on, and they will only happen when the customer is confident enough to be able to go back a second time and a third time and a fourth time.

Speaker 2: 12:36

Right, yeah, I mean. There's also an example I give about OfferUp, which is in the used goods market, and with Craigslist. For example, in the US there's a lot of distrust in using Craigslist because there have been many examples of people getting mugged and so forth. When they meet, the consumers and suppliers meet to exchange the item, and so with OfferUp they have an identity verification system which allows you to make sure that you're really dealing with the right person and if something goes wrong you can report that person to the police and so forth.

Speaker 1: 13:14

Exactly, yeah, you also. It's a very interesting piece you wrote about how can Airbnb use Craigslist as their kind of leading source to find. I mean the Airbnb story that I'd heard of many years ago. There was an interview with one of the co-founders, so it's a very interesting story how they started up and the serial etc. But actually just shows you that finding this business is now huge.

Speaker 1: 13:43

But actually at the beginning they still had to be resourceful. And even Instacart as well, where the founder was the one doing deliveries and so on. And it just kind of goes to show that not everything starts from this kind of high level, heavily financed business, that actually sometimes those co-founders were the ones that rolled their sleeves up and actually did the heavy lifting at the beginning to get the wheels moving. And I think that's really encouraging to businesses because you kind of see the end product, if you like, or certainly the successful side of that part, but you don't see all the heavy work and all the beginning that the co-founder put in to make that business grow. You spoke briefly about kind of customers. What role do they play in making a marketplace a success or not?

Speaker 2: 14:44

Well, in terms of consumers and the impact on marketplace, one of the things that you can do is really track what kinds of items they're looking for, and that provides a lot of useful research data that you can use to populate your marketplace with the right set of suppliers. But today people no longer go to Google to search for a product. They go to Amazon, and that's certainly true for my own behavior. If I have a product that I want to buy, then I first go to Amazon and do my research and read all the reviews and so forth. So there's a lot of rich data that you can gather from consumers in how they use the platform, and you can then use that to better populate the suppliers and also improve your search algorithm so that you're highlighting the most useful and most trusted items to the consumers.

Speaker 1: 15:52

Let's stay on that because, like you said, the algorithms marketplace is having to invest in technology for so many different reasons, not just from the kind of front end, the merchandising side, but, like we've said, the security and verification and so on. Have you seen other examples of any kind of technological innovations that have really made an impact in the way that marketplaces have evolved or maybe been successful over the last few years?

Speaker 2: 16:23

Yeah, absolutely. I mean, let's take the impact of mobile on marketplaces. So Greglis, as you know, was the 800-pound gorilla in the used goods marketplace in the US and it was hard to imagine that somebody could come in and displace a monopoly in that space. But OfferUp didn't manage to do that. They took advantage of mobile to allow you to simply take a picture of your used item household item and, very few steps, published that on their marketplace and then engaged in instant messaging with consumers to negotiate the appropriate price and address any questions that the buyers would have. And that was significantly better experience than what you had with Craigslist, where you had to use a PC to upload a picture. People would respond via email and the suppliers would take several days to respond back and so forth.

Speaker 2: 17:38

So that's one example. Another example, of course, is Uber. The fact that mobile really enabled Uber to happen in the first place. But mobile you wouldn't have drivers getting alerts on riders in the neighborhood who are looking for a ride and then you know, watching on the phone, where the ride is and how far it is and when it will arrive, and so forth was only possible through location tracking and mobile.

Speaker 1: 18:12

And with location tracking as well. One of the really interesting case studies that is in your book is about convoy. So just to kind of give a recap of the marketplaces that you talk about, so we've got Instacart, Airbnb, DoorDash and OfferUp that you just mentioned, Alibaba, Convoy, Upwork and Cazaver, and obviously you spoke about Craigslist, Uber, Amazon, eBay and OpenTable as well, which, again, we don't traditionally think as a marketplace. I mean define it and it's a marketplace, but we don't necessarily kind of think of that as a marketplace. So again, Convoy, because they really entered a market with a lot of distrust.

Speaker 1: 19:00

You said that the Hauliers, the companies that had the trucks, they didn't really trust the status quo as it was at the moment, the companies that were working in that sector, because the payments were late, sometimes the jobs didn't go through, there was no tracking for their customers as well to be able to check things.

Speaker 1: 19:16

So when you speak about kind of GPS on phones, again a system like Convoy, that's what they did to be able to track that lorry use the phone's GPS and again it's pretty native technology. The truck driver didn't have to upgrade to a particular type of technology or buy an additional functionality. It was out of the smartphone, that this benefit kind of came up. And that's why, again, this book is so interesting for me, because it just dissects different types of marketplaces and how disruptors have just come in and, like you say, just knock the 800 pound or half a ton for those metric gorilla from the top spot, because maybe that company got complacent, assumed they had a really comfortable position in the market but actually didn't really invest in better serving their merchants at the end of the day their customers.

Speaker 1: 20:22

You spoke about network effects. Why don't we just do a deeper dive around that? Let's talk about network effects of marketplaces.

Speaker 2: 20:37

Yeah, generally platforms enable network effects once you get to a critical mass. Of course getting off the ground is very difficult because suppliers don't want to come until they're consumers. Consumers don't want to come because there are no suppliers. So I talk about how to jumpstart a marketplace in my book. But once you have critical mass, then more and more suppliers join the platform because there are lots of consumers. And then more consumers join the platform to search for products because there is a wide array of suppliers and it becomes a virtuous cycle of network effects at that point to allow more and more consumer suppliers to join the marketplace. Then ultimately it becomes monopoly in that or winner takes all or winner takes most kind of situation in that marketplace.

Speaker 1: 21:42

How do the different network effects? You've got multi-tenanting local network effects. Network effects.

Speaker 2: 21:57

Is there a?

Speaker 1: 21:57

transition that the marketplace goes through with these network effects, or do they all come at the same time? How would a marketplace navigate those things or be able to achieve those various network effects?

Speaker 2: 22:09

Yeah, so you talked about multi-tenanting. That's a very important concept and that will determine if a marketplace can become a monopoly or not. Yeah, so basically, multi-tenanting means being on multiple marketplaces at the same time. I'll give you two examples One is Amazon, the other one is Doordash.

Speaker 2: 22:37

In the case of Amazon, it is very difficult for a supplier to be multi-tenant between two marketplaces because there's a lot of work that if somebody is on Amazon, there's a lot of work that they have to do to ensure they have proper inventory, that they are providing proper customer support, they are fulfilling the requests in a timely fashion.

Speaker 2: 23:03

All of that has to be managed and you generally have mom and pop supplier millions of them on Amazon and it's very difficult for them to be on a second marketplace, which is why Walmart, even though they are a major e-commerce player, has not been able to really attract more than 50,000 suppliers. So that's why Amazon is the 8,000 pound gorilla versus Walmart in that space. However, in the Doordash example, you don't have millions of suppliers. You only have thousands of restaurants in a particular region, and so it becomes easier for a competitor to come in and replicate that and it's easy for a restaurant to multi-tenant and be on multiple platforms, and that's why in the US, you have three different marketplaces there's UberEats, there's Doordash and then there's GrabHub to some extent, and so it's a winner take most situation as opposed to winner takes all type of situation.

Speaker 1: 24:04

And you see that here in the UK as well, where we have JustEat, we have Deliveroo and we have UberEats as well. So when you talk about that kind of multi-tenanting it's certainly kind of on a global level Tracking network effects is you kind of dissect it quite down, because there's only really three major metrics that you talk about. Before we do that, you talk about power users. So define a power user to begin with.

Speaker 2: 24:41

Well, I mean, a power user is somebody who frequently logs into the marketplace and is somebody who purchases a lot of products. So typically with Amazon, for example, anyone who's a prime member tends to be a power user. I certainly found that out with my own behavior. Before I signed up for Prime, I would not buy many items, but once I became a Prime member and shipping essentially became free, I was just going crazy buying lots of items on Amazon. Yeah, so having power users is very beneficial for your business.

Speaker 1: 25:24

And would you say the number of power users is going up? Because if you correlate it to things like Prime membership, fine, it can dip and so on, but actually with Prime membership it opened out. So you had power users before Prime membership and now Prime membership kind of opened up that gate to so many more consumers becoming power users.

Speaker 2: 25:49

Yeah, I mean I think Amazon has like 200 million Prime members and it's a way you know. What they found is that, even though they're getting code and code free shipping, that at the end of the day they make more revenue profitability with those Prime members than people who are not Prime members. So it's to their benefit to get as many people signed up for Prime as possible.

Speaker 1: 26:15

Yeah, I mean I'm no longer a Prime member, but every time I buy anything from Amazon you get that pop up try Prime Free. Everything's pushing towards you, not necessarily, like you say, signing up to Prime. It's getting that second and third and fourth order, which obviously relates to lifetime value, ltv, one of the other metrics that you talk about under the umbrella of unit economics. How important of a metric is that for a marketplace?

Speaker 2: 26:47

Well, that's very important. I mean the two main metrics that a market needs to track is lifetime value, which is the profitability of that customer over that customer's lifetime, and then the customer acquisition cost. And typically you want to have a ratio at least of three to one between lifetime value and customer acquisition cost, if not five to one ratio. And, as I'm sure Amazon has found with Prime members, the churn is pretty low, so lifetime value can be pretty significant over time.

Speaker 1: 27:24

Obviously, within that I mean I was driving the other day and on the same road there were two Amazon bands, one at Gold Beach End. Obviously they've had to invest in infrastructure, but, like you say, 200 million members and it's not a massive amount as a monthly fee but can found that globally and it's a huge revenue stream then for, like you say, the profitability of those customers. You also talk about organic and paid users, so obviously, customer kind of acquisition, let's talk about that metric. Why is that one important for marketplaces to monitor?

Speaker 2: 28:00

Yeah, ultimately you want to have as many organic users as possible versus paid users. Initially I understand that you will have to invest in advertising on Google or Facebook or whatever to attract users to your platform, but that's not really the best way to build your user base. Basically, you want the network effects to kick in and basically consumers to be drawn to your platform organically. So you're not really paying, there's no customer acquisition costs really, and it's all pure profitability from that point on, once you have attracted that user to your platform.

Speaker 1: 28:48

You also talk about curves, but I think they'll have to buy the book to read about that. But it's really kind of interesting that actually the metrics that go into making sure that your marketplace is on the right trajectory and going towards the success is super important.

Speaker 1: 29:10

How do you think marketplaces are going to evolve over the next few years? I mean, obviously, since COVID, e-commerce within our sector has evolved considerably. I think marketplaces have done their bit as well. Airbnb obviously got hit quite badly during the pandemic, pretty much overnight, whereas other marketplaces like Amazon saw the opposite and huge growth. But where do you see any trends in terms of marketplaces over the coming years?

Speaker 2: 29:36

I mean there are a number of different ways that marketplaces can evolve. One is to manage the transaction end to end. You've seen that with sites like marketplaces like Angie's List, for example. So if you have some job that has to be performed, in the old days they would list a number of handymen or places that would come in and do the job and you'd have to search through them and decide who you want to pick. So instead of that, they allow you to provide more information about the job so you can upload pictures of the work that has to be done, and they have different categories that you can pick from and so forth, and ultimately they will then take that information, go to all the different suppliers on the network and come back with responses, with somebody saying okay, I'll take me $75 to do the job or $150 to do the job, and then you can decide who you want to pick.

Speaker 2: 30:47

So there's more management of that transaction happening with these second generation, third generation marketplaces. The second trend that I can see is using chat, tpd, for example, to really improve the experience. So in the case of Airbnb, for example, instead of searching for a home rental, you could describe hey, I want to go to Sedona for my trip and can you plan my trip for me with all kinds of not only just a home rental, but different kinds of experiences and I've done that myself, actually with chat GPT. I asked it to plan one of my trips and it did a phenomenal job of doing that, so I can see how you can use large language models to really create a whole new transaction where all the information is managed for you.

Speaker 1: 31:50

I did an episode of SellerCast a few weeks ago around kind of artificial intelligence and how systems like chat, gbt can help. But again you're so right because not only are you making the experience easier for the customer, for the consumer, for the end user, but actually then it's also making it more comprehensive. You're not just saying, like you said, here's the apartment or the house or whatever it is. You're actually then kind of planning out the rest of that and that's a value add to the again one of the network effects, with the value adds to the consumer experience. For anyone wanting to break into the marketplace space, what advice, apart from buy the book and read it and learn as much as you can, what advice would you have for anyone wanting to break into the space?

Speaker 2: 32:47

Well, the one of the key things that I talk about in my book is how to jumpstart a marketplace, and it's very important to think long and hard about how to do that. And most of the time, you know, instead of launching on a nationwide basis, it's very important to do that on a localized basis. So again, I'll give you the example of offer up. When they launched, their initial focus was on the city of Seattle and they basically established a critical mass in the area of Seattle where people could exchange used goods through that platform. In contrast, one of the competitors launched on a nationwide basis and was not successful. Because, you know, if I have somebody signing up from Seattle and another person signing up from New York, it doesn't benefit either party because they can't exchange local goods. So you have to start with a narrow niche first and then establish critical mass and then, once you have, once you know how that playbook works in a specific market, then replicate that playbook in other markets, and you've seen others like Instacart and Doordash following that same playbook.

Speaker 1: 34:12

There's two things that I'm really glad you said. The first one is playbook, because I think that's such an important thing to do, which is put together, that playbook, so that you can replicate and iterate as you expand. And the first point you put around kind of maybe starting off really locally. Somebody once told me kind of the example that they picked up from the book as well, which is you're trying to boil the saucepan or you're trying to boil the ocean, because if you try to boil the saucepan you're going to get that water boiling and probably much faster rate than trying to boil an ocean, which is going to be near and impossible. So, as you said, with offer up, you start to start locally, give that critical mass, that success, and then once you've got your, your concept proven and you know all lined out, then you really go, go all out in scale.

Speaker 1: 35:06

Where can listeners learn more about the book and obviously all of their copy?

Speaker 2: 35:12

Yeah, so obviously you can order my book from Amazon. I have actually self published the book it was. It's quite amazing really what services Amazon can provide. You know, all I had to do was to create the book in Microsoft Word and create a book cover, up more into Amazon and they print on demand. So I don't even have to hold inventory or pay for inventory. It's all done for me. So so definitely you can order the book on Amazon. You can also go to my website, which is shirishnatkarnicom, and you can learn about other books I've written, as well as blog articles. I've written on various topics.

Speaker 1: 36:00

We'll link to all of those in the show notes as well, and if this is one to connect with you, where's the best way that they can do that?

Speaker 2: 36:07

They can certainly connect with me on LinkedIn and Twitter and I welcome all you know connections. I'm happy to meet with aspiring entrepreneurs and help them in their journey.

Speaker 1: 36:23

I said, I really found your book interesting and also your, your career. You've you've had a lot of success, a lot of experience, and one of the things that we ask, I guess, at the end of the podcast is if there's a book or podcast that they've recently read that they'd like to share with listeners. But what I'd like to ask you, nirish, is if you're to go back and do it again, what's the one thing that you would do which you feel has led to your success?

Speaker 2: 36:53

Yeah, the. The one attribute that I feel has been very helpful to me is really having a learning mindset. I've been very fortunate to have been able to experience, you know, initially with Microsoft, the PC Devolution, then the Internet, then mobile, now AI and so forth. So along the way, what I have tried to do is to learn about the different trends in the market and see, you know, look for opportunities and seize those opportunities, and my learning mindset has really been very helpful in that regard.

Speaker 1: 37:40

I would share with you. I mean, I enjoy learning. There was a time when I, very early on in my career, I didn't really feel the need to learn. You know, you kind of there's a Dunder Kruger effect but you kind of feel that you know it all. But actually it's true that because you don't know what you don't know and every day learning something new, and you kind of sometimes you see some information, sometimes how grateful you are for having learned that thing, because actually that's something that completely changes your approach or your mindset or just opens up whole new opportunities.

Speaker 1: 38:14

So a learning mindset for sure, you know, and I guess it's encouraging that I share that. So, you know, hopefully I get to share some, some success in future as well. Well, it's been a pleasure talking to you. Your book we're Takes All Case Studies in how Online Marketplaces Are Creative Monopolies Available on Amazon and on your website as well. I would urge anyone who is interested in not necessarily setting up a marketplace but even just understanding how they work and how they, their business can, can kind of capitalize on on marketplaces, to get a copy. You know it's very interesting, going to into incredible depth. I've for sure learned a lot from it and very glad that I got the opportunity to speak with you.

Speaker 2: 39:03

Thanks so much. It's been a great interview and really enjoyed talking to you.

Speaker 1: 39:07

Excellent. Well, I've enjoyed it as well, and thank you very much for your time. Okay, Thank you very much. Thank you. Thank you for listening to the BigCommerce Podcast. If you've enjoyed today's episode, please leave a review on your favorite podcast platform and if you haven't already, please subscribe to learn more about our podcast, listen to previous episodes or get in contact. Please visit our website at the bigcommercepodcastcom and make sure you're following us on our social media, on Instagram and Twitter. Until next week. Thank you very much.