THE ULTIMATE GUIDE

The Metrics that Drive Growth for Online Marketplaces

The phenomenal Metrics Tree model explained

MELINDA ELMBORG • Oct 22, 2019

Some of the world’s biggest startups include marketplaces such as Airbnb, Didi Chuxing, and Grab. It’s a sure thing that they would never have reached their gigantic size unless they knew how to get each metric to grow!

You might be running a C2C marketplace for selling off your old CDs or a B2B marketplace to exchange industrial spare parts. No matter the case, analyzing metrics is crucial to achieving growth, and I’m going to tell you how to make that happen.

Below is my guide on how to break down your business piece by piece to identify the metrics that are important to you. This kind of breakdown is called a Metrics Tree. Surprising, I’m sure!

To achieve your goal of fast growth, you need to realize that a business is full of levers to pull and push. It is crucial to identify these connections that can help you move the needle in the right direction. With this view, you can recognize correlation and causation relationships between different metrics.

This example dashboard will help your startup team to easily understand what is happening to your business. And when you understand your users and business, you will be better at making the right decisions!

Thanks to this monthly view, you can connect your actions to the performance of your startup. When you look over your numbers, think about what has happened during the past month. Did you launch a new feature? Try out a new marketing channel? Start using different soap? (Okay, maybe not that one…) You should be able to see the difference in these metrics!

Below is a screenshot of an example Marketplace Metrics Tree. You can download the template to use for your own business here. Let’s say that it is a B2C marketplace such as Uber to keep things simple.

The Metrics Tree for Marketplace Startups. Download the Google Sheet template here

Revenue

This is the income of your startup. Note that it is not called MRR as the revenue of a marketplace is not recurring. The revenue of this startup was 12 000€ last month. To the right of that number, you can see the change from the month before, which was 20 %.

This online marketplace did a great job during the past month of increasing revenue, but how did they manage that? In line with the logic of the metrics tree, you will discover that each number is based on the metrics beneath. So then obviously your revenue equals to your GMV x Take Rate. Hooray, maths!

Take Rate

This is the average commission that you take from each transaction. Depending on your financial model, you might want to split this metric into fixed fees and commissions. It is especially important to track this metric if your Take Rate varies since it strongly affects your revenue. Increasing a take rate from 1 to 2 percent might not sound like much, but it would double your revenue.

GMV — Gross Merchandise Value

This is your total marketplace’s turnover, where you, in turn, have a Take Rate. This is the metric that most levers are connected to, to increase your revenue. Many investors find this metric more important than the actual revenue of the company because it gives a truer picture of how much attraction the marketplace has, without taking the Take Rate into consideration

AOV — Average Order Value

The Average Order Value tells you the average size of each transaction in the marketplace. Easy peasy!

Orders Delivered

This metric can also be expressed as Confirmed Orders. It is the number of transactions realized in the marketplace, excluding the cancelled orders.

Cancellation Rate

Depending on your market, this number can be very significant, while for other marketplaces it only makes a minor difference. It’s nobody’s favorite metric, but you should, in any case, keep it under control and ideally find out the reasons behind your cancellations to avoid them.

Orders Placed

This can also be expressed as Booked Orders. This is the number of planned transactions but includes orders that were cancelled later. In case your cancellation rate is very low (below 2 %), you might consider skipping this level and just analyzing Orders Delivered.

That metric is then split up into buyers and suppliers to identify how we arrived at this number of orders. The suppliers in your online marketplace are the ones receiving money from transactions. The buyers are the ones paying money for a transaction. For the sake of simplicity, I will provide one explanation for both since the buyer and supplier side are similar.

Active Buyers/Suppliers

These are the number of users who have been active during the last month, split based on buyers and suppliers. It is important to know how much of your user base actually contributed to your marketplace’s GMV. Our complete base of users will be further split up farther down in the tree.

Frequency Rate

This is a number that differs a lot depending on your market and the kind of products that are traded on your marketplace. For example, if you are Airbnb, your buyers probably do on average one transaction per year. If you are Uber, though, your suppliers (drivers) have numerous transactions every day.

In any case, it is important to increase this metric, as a high frequency in your marketplace proves that your users see a high value in your service. Your benchmark for this metric should always be compared to how your users consume your type of services. For example, if you are Uber and your average user needs a taxi once a week, that should also be your desired frequency.

Registered Buyers/Suppliers

This metric is something that many founders put a lot of weight on, but it is a typical vanity metric. Without seeing the value, the user will not generate any revenue for your company. Instead, the value can be found when combining this metric with the activation rate or splitting up the users into different groups. Read more about how to turn this vanity metric into sanity metrics.

Activation Rate

This is the ratio of registered users who were active this month. This is a very relevant metric as it can prove that you provide high value to a large part of the population. Show people, you’ve got what they want!
The majority of my marketplace clients struggle with this exact metric. It is strongly linked to the retention of your cohorts of users. If your users who register keep coming back every month — in other words you have perfect retention — your activation rate would be 100 %.

Warm Buyers/Suppliers

This metric, you probably have never heard of. That’s because I’ve invented it! I saw the need to segment users into more than just active and non-active. Some users might be happy with your platform, but still, only come back every three months or less often.

For this metric, you need to set your own definition to decide what you consider being a warm user (and it’s not who has the most blankets 😉). The idea is to find the difference between users who come back regularly (even if it’s seldom) and the users who seem to have forgotten about you. You want to explore this metric to learn more about the expected lifetime value of your new users.

If you’re starting out, you will have to decide on the most number of weeks or months that you expect between the orders of a warm user. What do you consider is a relevant frequency?

When you have more users and you have been active for some time you can do a more relevant estimation. To know when this usually happens, study the chance of a user coming back at different moments in time. For the users who made an order a year ago, what is the chance that they came back for a second order one week, one month, three months, or six months later?

You will probably get to a point when the chance is very close to zero and doesn’t seem to decrease any more, that would be your definition of a warm buyer. Let’s say that this happens after six months, it means that any user who hasn’t been active in a six-month period gets passed on as a cold buyer or supplier.

Cold Buyers/Suppliers

These are the users that are no longer defined as warm users since they haven’t been active during the predefined period. It is, of course, preferred to keep this number as low as possible, which means that your users stay active.

If you are managing an online marketplace of consumer discretionary goods, it might not make sense to work with warm or cold buyers. That is because customers don’t buy these goods or services very often. Then you should probably skip this layer in the metrics tree and rather focus directly on converting leads.

Cold Buyer/Supplier Rate

When dividing this month’s new cold users by the total number of warm users, we find the rate at which users go cold. This is the rate that corresponds to the subscription services’ churn rate.

Thanks to this calculation, we can later calculate the LTV (Lifetime Value) to know what each customer is worth to us, see more below.

New Buyers/Suppliers

This is the number of newly registered users for this month and shows the result of your marketing funnel.

Site Visits and Conversion Rate

This is the number of visitors on the two respective landing pages — buyer and supplier landing pages. Even more important are the conversion rates. They tell you a lot about the efficiency of your landing page and onboarding experience. Improving the conversion rates even a tiny bit can have a huge impact on your final revenue, without having to spend more on marketing.

Seeing an increase or decrease in your conversion rate can be connected to changes in design, communication, or features. Because it is easily connected to actions, it’s an excellent actionable metric.

Marketing/Acquisition Spend

Here, you see the amount that you’ve spent on acquiring buyers or suppliers. According to the rule, you should include all costs linked to acquisition. That means everything from ad spends to sales representatives. Many early-stage startups, mistakenly, do not include the salaries of their marketing and sales hires.

Now we’ll move over to the summary of the Metrics Tree:

Buyer-Seller Ratio

Apart from the tree, a couple of other important metrics should be highlighted, as seen in the box in the top left corner. The first is the buyer-seller ratio, an important balance to find for online marketplaces to grow efficiently. Since you need buyers to attract suppliers, and suppliers to attract buyers, you risk being stuck in a Catch-22 situation.

Your first issue, though, is deciding on what your balance should be. Again, it depends completely on what you’re selling at your marketplace. Let’s take an example such as Airbnb. You might have suppliers renting out their apartment on average four times a year and buyers renting on average once a year. your balance should probably be one supplier on four buyers. It is important to keep an eye on this metric to make sure that you keep the balance and grow both sides of the marketplace.

CAC — Customer Acquisition Cost

Here we see our marketing cost per new customer. It is calculated by taking the total marketing spend and dividing it by the number of new users.

LTV — Lifetime Value

This is the total value that you can assume from every new buyer or seller on-boarding your platform. It might not appear obvious how to calculate it for a marketplace. For a subscription service, it is much more straightforward.

For an online marketplace, you calculate LTV with AOV, Activation Rate, Frequency Rate, Warm Users, Active Users, Cold Buyer Rate, and Take Rate. When you download the template, you can see the formula of the calculation directly in the Google Sheet.

If you have any transaction cost, such as Uber Eats has for the delivery, you will need to subtract that cost out of your AOV before including it in the LTV equation. As mentioned earlier, if you’re a marketplace of consumer discretionary goods, you might have to do things differently and just use your gross margin per transaction as an LTV, since the repeat probably is very low.

LTV-CAC Ratio

This is a very important metric since it provides insight into the startup’s profitability and future potential. Dividing Lifetime Value by Customer Acquisition Cost gets us quite a good idea of a company’s profitability level.

The recommendation is to be around 3–4 while you’re growing your company. Having a satisfying LTV-CAC ratio means that we get back the money we spend on acquiring a customer. We can then organically finance acquiring more customers. This metric reveals both the efficiency of the marketing and sales funnel, as well as the value customers, find in your service. Thus, it is a great number to be able to show off to investors.

Some people believe that when a business has managed to achieve a good LTV-CAC ratio, it means that the product-market fit has been found. You have then found a sustainable business model and it is time to hit the accelerator.

If you want to apply this template to your business, download the Google Sheet here! This template will help you to improve your monthly metrics reporting so you can gain more insight into your users. At the same time, you’ll understand which actions you’ve taken that has led to success, so you can keep on growing.

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About the Author: 

Melinda Elmborg was a Venture Capital Investor at the French VC firm Daphni. To help founders build, grow and raise capital to their startups, she switched careers to become a startup coach. In 2018, she started Startup Action. 

Based on her learnings, she has developed The Startup Action Framework that guides startups from launch to exponential growth.

So far, over 400 founders have already joined one of her workshops and thousands of founders have taken advantage of her templates and guides to succeed with their startup.

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