The Ultimate Guide to Marketplace Incentives
Marketplace liquidity basics. Types of incentives. Designing your incentive orchestration strategy. Designing an optimum supply/demand side incentive.
Marketplaces are fun and hard.
Although so much is said and written about them, there’s suspiciously little practical information about the incentives strategies.
Open any book from Andrew Chen, David S. Evans to Alvin E. Roth (Nobel laureate in Economics by the way), you’ll find basic theories and a bunch of anecdotes from Uber, Tinder, Airbnb or alike.
Yes, the common-sense principles are covered—subsidize demand or supply to compensate for the lack of value and stimulate liquidity. Go niche. Scale one category to dominance. Rinse and repeat.
But when you try to convert those tidbits into actual tactics, you’ll have more questions than answers.
At least, that was my experience when developing a growth strategy for an e-commerce business. It took weeks of research and testing before we arrived at something practical.
Below are the key non-NDA takeaways from that journey.
Today’s article
E-Commerce marketplace basics. How to measure liquidity. Minimum viable supply. Elasticities behind KVIs.
🔒 Incentives. Types of incentives (demand/supply). Key incentive parameters (target segment, discount, adoption timeframe).
🔒 Incentives coordination. Strategies for cold start, demand/supply constrained or balanced marketplaces. Measuring the effectiveness of your incentives strategy via net rate and payback.
🛒 E-commerce Marketplace Basics
Incentives play a crucial role in the context of the marketplace. Without understanding the bigger demand/supply dynamics at play and having a specific strategy - you’ll just burn your money.
So let’s start with the basics fist.
Umico is a two-sided marketplace with multiple core categories (or how theorists like to call it - heterogeneous supply).
Each category (Appliances) and even niche sub-category (Vacuum cleaners) is a standalone marketplace.
So you have to answer a series of hard questions.
What’s the current liquidity of the category? (% of sellers getting GMV and buyer-to-seller ratios).
Based on the answer, you’ll be able to pinpoint which marketplace stage you’re in—cold start, growth, or dominance.
The term liquidity is often thrown around, but what does it truly mean?
Simply put, it measures how effective you are as a matchmaker—how many sellers can successfully sell and how many buyers can find and purchase what they need.
The two simplest metrics I’ve come across are “% of sellers generating revenue” and “buyer-to-seller ratio.”
Since most sales come from 3P sellers, our own turnover (i.e., % of SKUs being sold) isn’t the primary concern. What matters more is the percentage of sellers receiving actual demand—otherwise, they’ll churn. Duh.
% of sellers generating Revenue
With cold start you’re either at nil or ~2-5% of sellers capturing 70-90% of the GMV. There’s limited pool of merchants and supply, generating a disproportionate impact.
At the growth stage your seller base will diversify, leading to 10-20% of sellers capturing 50-70% of GMV.
At the dominance stage, ~25% of sellers will yield 50-60% of GMV with top niche players.
Buyer to seller ratio
Cold start ~200:1 (reflecting a similar disproportion)
Growth ~100:1
Dominance ~20-50:1 (diversified base)
Keep in mind these are directional metrics and your numbers might differ. That’s ok.
What’s the minimum viable supply needed for a category?
There isn’t a single numerical answer. Of course, there are benchmarks - anything from 8 to 50 SKUs. But the important thing is, your niche category should cover the whole available demand spectrum.
A good illustration is a demand spectrum for cooking pans. There’s a limited amount of materials (stainless steel, cast iron, non-stick) and sizes (8-28 inch). Of course, there are nuances (e.g. brand), but for a rough start a selection of 30 SKUs (3 * 10) would suffice.
Ask your category managers to crunch the numbers here.
There’s also a “magic number” theory (shared by our colleagues from Uzum). If your cross-category marketplace has >=1m SKUs, then you pretty much capture the whole market. Adding more will have diminishing impact on your demand dynamics.
What are the KVIs (key value indicator) goods?
KVIs (or “hammer” items) are the most sought-after products.
These account for 20% of the supply but generate a disproportionate 80% of GMV. Depending on the category, they can range from as few as five items (for niche products) to as many as 100 (for everyday essentials).
You can identify them through high-frequency search queries and GMV per SKU data.
The power of KVIs lies in price discounting (within a 1P operating model), which has an outsized impact on GMV. For example, a 5% discount can drive a 10% increase in GMV for those SKUs.
Additionally, because KVIs shape price perception within a category, they can stimulate incremental sales of complementary products.
However, the downside is the significant impact on cash burn—a 5% discount on every item sold can reduce take rates by 30–40% across the entire category.
Careful ROI analysis is crucial.