Disintermediation in Marketplaces and How to Fight It

Every marketplace deals with disintermediation:  oDesk, eBay, Airbnb, CustomMade, and Etsy.  No matter what, if you take a fee, some people will try to cut you out of the loop. This is known as disintermediation. 

From Wikipedia:

In economics, disintermediation is the removal of intermediaries in a supply chain: “cutting out the middleman”. 

Disintermediation initiated by consumers is often the result of high market transparency, in that buyers are aware of supply prices direct from the manufacturer.

What causes disintermediation? 

This is simple.  If the fee to a user exceeds the perceived value of the service, he will try to disintermediate.  When that happens, he must suggest disintermediation to the other party; so both parties must agree to cut you out of the loop. 

Therefore, as an intermediary, you only have two options.  Increase the value to the users such that the value exceeds the fees, or lower the fees.  

Let’s look at how users perceive the value of a marketplace and its impact on disintermediation.  There is a high value placed on the matching component (the ability to find a useful resource, product, etc) but the value of that is all upfront and has no long-term value.  There is a smaller, but long term value of everything else the marketplace might provide, e.g.| payment tools, collaboration tools, security. 

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Next, let’s look at when disintermediation happens. It’s simple — it happens when the fee of the marketplace exceeds the perceived value. 

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The only truly sustainable ways to combat disintermediation is to either lower the fees or raise the perceived value.  There are other tactics like contractual obligations or masking contact info - but those aren’t nearly as sustainable. 

What are the considerations in figuring out disintermediation risk? 

The main themes are Security, Payment, Trust, and Collaboration.  The following comparisons are some guidelines that could help you understand and mitigate the risks.  

Transactional vs Recurring - Transactional marketplaces like Airbnb, eBay, etc have different challenges than service marketplaces like oDesk.  In the transactional example, almost all of the value is perceived to be part of the match.  Once the transaction is agreed upon, there is little other than facilitating the payment that the marketplace does for the user.  Note: Airbnb is increasingly trying to add additional services after the match, I just got an email about a “Concierge” service that they have for me during my stay.  They know that they must try to add value after the match to keep people coming back.  In recurring models, the challenge is more about how do you stay relevant to both sides after they’ve established a direct relationship and have built up trust between each other.  

In Person vs Remote - In situations where the buyer and supplier never meet in person, you have a much easier time with disintermediation.  If your marketplace facilitates transactions that are going to take place in person, the users can fairly easily establish a trusted payment relationship.  

Small vs Large Ticket Price - In small ticket price items, the payment hassle for the individual user is significant.  Imagine Mechanical Turk - would you want to deal with paying 1,000 different people 5 cents each.  Disintermediation isn’t a problem there.  On the other hand, let’s imagine a single transaction for a 10k watch.  Are you going to want to pay 20% or $2k to some website where you found the watch?  Suddenly, it’s reasonable for a user to spend a couple hours figuring out if the party is trusted and how to pay them and exchange the item.    

Legal & Security Risk - Is there a high degree of legal complexity or security risk in dealing direct with the party?  If there is, then your marketplace is safer from disintermediation, but of course, there’s the downside of dealing w the risks.  The good news is that the marketplace is usually in a much better position than any individual to mitigate those risks. A good example would be 99Designs protection of a buyer in terms of copyrighted materials.  

Standard vs Custom Offerings - standardized offerings are much easier to carry out through a marketplace because they require less communication between buyer and seller.  The more communication that’s necessary between parties, the less relevant the marketplace and the more trust that’s established between them. 

Ways to Reduce Disintermediation


The following are the tactics that I’ve seen that reduce disintermediation. Keep in mind that you’ll have to tolerate some of it since it’s impossible to eliminate completely.  Also, by definition, when people want to cut you out of the loop, they usually don’t tell you – so it is difficult to measure. Rest assured though; some people are trying to cut you out of the loop. 

1) Restrict direct contact - I have some issues with this one since it can frustrate users, but it does work.  It can reduce conversion though; if you require users to communicate through your system they will be more likely to miss messages.  You can eliminate email and phone numbers from any free text messages so that people are more or less required to communicate and transact through the marketplace. 

2) Exceptional payment service - Be on time, don’t get greedy with float, and pay every single week (or more frequently).  This is one of the biggest values of the marketplace from the supply side, so make sure you don’t blow it on this one. 

3) Exceptional customer service - Every marketplace will have some level of disputes where the users can’t sort it out between themselves.  In these cases, be overly generous with your payout.  Just make it a goal to get the dispute ratio very low, like <0.2%.  Think Zappo’s - don’t like the shoes, return ‘em, no questions asked. 

4) Awesome collaboration – One other way to keep people in your system is to provide tools that make their jobs easier.  Whether it’s just organizing their transactions or checking in code, make sure that your platform makes their lives easier. Think about how many tools EBay has provided to power sellers if you have any doubt about this one. 

5) Feedback and reputation - This is the classic answer, and I believe it’s true, but only to a point.  For example, if I invest a ton of effort in building up great feedback on my oDesk profile, at some point the incremental feedback doesn’t do me much good.  Frankly, keeping things on the system once I have exceptional feedback is more risky, because a single verified negative review would cause significant harm.  Make sure you include some recency factor in your feedback systems. 

6) Legal obligation - if you’re dependent on this, you’re f#%ed. 

One helpful test to ask yourself (courtesy of Ashish Gupta) is: “Would a buyer and seller with an existing relationship prefer to move their relationship to your marketplace?” If yes, let me know, and I’ll invest. 

 

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