La Paz — a city in Bolivia, South America.
It has a vibrant tourism industry.
It also has a somewhat dark side.
Like many touristy cities, it has bazaars filled with odd items.
Over time, shops started actively catering to the tourists – selling items like souvenirs, key chains, fridge magnets, photo frames, etc.
However, tourists are warned against going to certain streets of the city.
The shopkeepers on these streets sell items that are alien and unseen in most markets. Roots, pebbles, potions, statues, bracelets, and other such ritualistic items.
Venture deeper into the lanes and the shops also have cat skin and dried animals like frogs, snakes, and llamas.
The sellers wear black hats. They are not just sellers. They are also shamans – witch doctors – that provide ‘services’.
Predicting the future, curing diseases, blessing children – the sky is the limit.
This is the famous Bolivian Witch Market.
It is held twice a week.
People from far come to the shamans to get themselves treated, buy sacred stones, potions, etc.
If they are building a new house, they might buy dried animals as offerings to be used before the construction starts.
When it comes to peculiar markets, the Bolivian Witch Market is just one of many.
Bulgaria has a bride market. There is a thief’s market in Mumbai (Chor Bazaar). Hong Kong has a dried seafood market. There’s a massive pet market in Thailand that is rumoured to have illegal wild birds.
The list of quirky markets in the world is quite long and intriguing.
We Need a Market
Markets serve as a common meeting point – of buyers and sellers.
A dedicated marketplace takes one major hurdle away – finding the other party to make a deal with.
The idea is immensely simple.
A market happens at a fixed time and place. Certain items are traded.
Anyone wanting to buy those items can go to the market and find a seller.
Anyone wanting to sell those items can go to the market and find a buyer.
Business Model
A bazaar like the Bolivian Witch Market might have started organically.
One shop was set up. More shops followed that shop. More customers started coming to the shops, and so on.
But many companies also do this – provide a marketplace.
That is their business model.
Connect two parties. Earn from the deal.
One easy name that comes to mind is Ola. Uber follows the same business model. It is an online location; an online marketplace, where cab drivers and passengers go to find each other.
Swiggy and Zomato are also in the same business – marketplace for customers and eateries.
When you start thinking about it, a surprisingly large number of companies follow the marketplace business model.
Airbnb, Makemytrip, Oyo, Yatra – they are all marketplaces for travellers, hotels, airlines, cabs, etc.
Amazon, Flipkart, and Meesho are marketplaces for all kinds of buyers and sellers.
Urban Company is a marketplace for home maintenance-related services.
Chicken and Egg Problem
One of the biggest problems faced by any marketplace is usually the first major problem they face.
How do you get all the parties to join the marketplace?
Buyers will come to the marketplace only if there are sellers there.
Sellers will only come to the marketplace if there are buyers.
It’s a chicken and egg problem.
Getting this start in new companies’ case is extremely hard.
But if they manage to get this start, this itself can become one of the biggest moats.
Since it is hard to start a marketplace, new competitors find it difficult to enter the business – less number of challengers.
In many product categories, buyers and sellers do not like switching platforms. Once they find a platform they like, they might stick with it for a long time.
That’s the thing about the marketplace business model. Establishing a marketplace is incredibly challenging. But once established, it is often hard for others to compete with it.
Other Factors
With marketplaces, revenue is mostly in the form of a brokerage or commission.
Cabs, hotels, flight tickets, restaurants, movie tickets, etc – all marketplaces in these sectors earn a commission from the transaction.
Marketplaces based business try to go a step ahead by adding a layer of trust – to ensure all parties keep using the marketplace.
This is why the service providers are often ID-verified, are given star ratings, have reviews written, etc.
It’s all an attempt to prevent the parties from leaving the marketplace.
Doing so is also aimed at convincing parties to not deal without them in between. Example: Airbnb is very sensitive about phone numbers being shared on their chats.
They do not want to be cut out of the deal.
Marketplaces also face heat from regulators. Cab hailing apps frequently tussle with local municipalities. Same with most other marketplaces – be it food delivery or hotels.
Those are risks all kinds of marketplaces face.
Marketplaces that are able to navigate these challenges earn the trust of all parties.
But even then, different marketplaces have different levels of loyalty.
A lot of it comes down to switching costs. How difficult is it to go to another marketplace?
In many cases, the options are limited.
Example: there are only a few cab-hailing marketplaces. Similarly, there are only two major food delivery marketplaces.
On the other hand, some marketplaces have very low switching costs: there are tons of hotel and flight ticketing marketplaces.
Network-effect is another trait to keep an eye out for.
A market attracts more sellers. More sellers attract more buyers. The market grows further with little effort.
Almost all the companies we spoke about above had this benefit to varying degrees.
All factors said and done, there is one last dominating factor: size of the market.
No matter how good a marketplace, it will only grow as big as the customer base.
If the marketplace is operating in a niche market, it can’t grow much (example: rare coins buying/selling marketplace).
On the other hand, if the marketplace is in a sector where there’s lots of demand and supply, that market has a lot of scope for growth – like online shopping.
Of course, each marketplace will have its own industry-specific factors.
In addition to those, factors that apply to any business will also apply to marketplace business – revenue, profit margins, growth, cash flow, etc.
Investing
Many of the tech platforms we see today are mostly marketplaces.
Most of the above points apply to them – in different ways.
Cab hailing apps, hotel booking apps, even jobs seeking and matrimonial apps – they’re all marketplaces.
By the way, since we are talking about marketplaces, it must be said, even stock exchanges are marketplaces!
Both Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are marketplaces that match buyers and sellers of stocks.
Interestingly, this happens digitally today. We do not need to go to BSE and NSE to buy and sell stocks.
But not too long ago – before the internet age – investors (or their brokers) had to be physically present at the exchange.
It was literally a market.
Quick Takes
+Swiggy has filed for an IPO with SEBI to raise Rs 3,750 cr by a fresh issue of shares + an Offer For Sale (OFS) of around 18.5 crore shares.
+India’s forex reserves rose to anall-time highof$692.30 billionafter adding $2.80 billion in the week that ended on 20 Sept.
+NPCI International has partnered with the government of Trinidad and Tobago to develop a payment platform similar to India’s UPI (Unified Payments Interface).
+KRN Heat IPO was subscribed 214.27 times. Retail subscription: 98.06 times.
+Indian banks issued 9.20 lakh new credit cards in August (vs 7.55 lakh in July). Total number of credit cards now stands at 10.55 crore (15.6% year-on-year growth): RBI data.
+India’s defence production rose to anall-time highofRs 1.27 lakh croreby value in 2023-24. India is now exporting defence products tomore than 90 countries: Defence Minister.
+Digital loans in India rose 27% year-on-year in value to Rs 37,676 cr in April-June (Q1 2024). Fintech Association for Consumer Empowerment (FACE).
+Manba Finance IPO was subscribed 224.10 times. Retail subscription: 144.03 times.
+EPFO recorded the highest-ever monthly net additions of 19.94 lakh members in July. The total number of first-time employees increased by 2.6% in a month to 10.50 lakh. Share of the 18-25 age group rose to 59.4%.
+India and US announced a new semiconductor plant in India to make advanced chips for security, telecom, and green energy. The plant will be under the India Semiconductor Mission and a partnership with Bharat Semi, 3rdiTech, and the U.S. Space Force.
6-Day-Course
Theme of the week: IPOs
We’ve reached the end of this week’s course that started on Monday. Here’s a test you should take. Get pen and paper!
Question 1:
During IPO, companies sell:
-All of their shares
-Some of their shares
-None of their shares
Question 2:
In which case does the money raised go directly to the IPO company?
-Fresh issue
-Offer for sale
Question 3:
A company was offering 45,000 shares in the IPO. But it received applications worth 1,80,000 shares. This IPO was oversubscribed by _____________.
-2 times
-4 times
-10 times
-Not oversubscribed
Question 4:
Which investor has more restrictions when it comes to selling shares after IPO?
-Retail investors
-QIB
Question 5:
IPO shares always go up after listing.
-True
-False
Answers:
Q1: Some of their shares
Q2: Fresh issue
Q3: 4 times
Q4: QIB
Q5: False
The information contained in this Groww Digest is purely for knowledge. This Groww Digest does not contain any recommendations or advice.
Team Groww Digest