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Building a standard SaaS company is like working in construction: you design the blueprints, lay the foundation, and build linearly toward a finished product. Building a marketplace, however, is more like gardening. You are tending to a complex, living ecosystem where you cannot force growth—you can only nurture the conditions that allow it to happen. If you prune a branch over here, it might have an unexpected effect on the roots over there two months later.
Few people understand this delicate balance better than Dan Hockenmaier. As the head of strategy and analytics at Faire and a veteran of Thumbtack, Dan has worked on more marketplace startups than perhaps anyone else in the industry. His approach combines rigorous data analysis with a deep intuitive understanding of network effects.
This guide explores the frameworks Dan uses to deconstruct growth, from building robust financial models to solving the "chicken or egg" dilemma of supply and demand.
Key Takeaways
- Growth models are for decision-making, not forecasting: The primary value of a growth model is creating a "common currency" to compare trade-offs between different product teams, not just predicting next month's revenue.
- Adopt the "Gardener" mindset: Unlike linear SaaS products, marketplaces require a light touch. Aggressive changes to incentives can cause unforeseen second-order effects across the ecosystem.
- Liquidity is the ultimate health metric: Gross Merchandise Value (GMV) is a vanity metric if your liquidity—the reliability of a transaction happening—isn't stable.
- Prioritize Demand over Supply: While you need supply to start, demand is the true currency of the business. You should only acquire supply to the extent that it serves customer demand.
- Expansion relies on adjacency, not TAM: When expanding a marketplace, success depends on how closely the new vertical relates to your existing operations, not the total size of the new market.
The Strategic Value of a Growth Model
Many founders view a growth model simply as a spreadsheet to show investors. However, the real utility of a growth model lies in its ability to simulate the business mechanics. It is an analytical representation of how the company grows, linking inputs (traffic, conversion, retention) to outputs (revenue, contribution margin).
Building the Formula
To construct a growth model, you must break the business down into its fundamental equations. For a standard SaaS business, this is relatively linear:
- Acquisition: Traffic sources, paid spend, and viral coefficients.
- Retention: Activation rates and monthly survival rates.
- Monetization: Subscription fees and upsell rates.
For marketplaces, the formula becomes significantly more complex. You must model two distinct sides of the business—supply and demand—and, crucially, their interaction. You have to account for unit economics that include cost of goods sold (COGS) and transaction costs, which are often negligible in pure software businesses but vital in transactional models.
The "Common Currency" of Product Teams
The most profound benefit of a growth model is that it solves the resource allocation problem. In a growing company, you might have one team wanting to improve SEO and another wanting to build a new feature for power users. How do you decide which initiative gets resources?
Without a model, these decisions are political. With a model, you can run scenarios to see which lever drives the highest long-term value. It translates disparate efforts into a common currency of growth.
Fifty percent of the value you get from a growth model is simply building it. It forces you to understand how the business works. The other fifty percent is using it to weigh opportunities.
The Retention Reality Check
When you input your data into a growth model, one truth almost always becomes immediately apparent: the business is incredibly sensitive to retention. Founders often overestimate the value of top-of-funnel acquisition and underestimate the compounding impact of keeping customers.
However, realizing retention is important doesn't make it easy to fix. Retention is a lagging indicator of the entire product experience. You rarely improve it by "working on retention" directly (e.g., sending more emails). You improve it by fixing the core product experience—usually the very first interaction a user has with the platform.
Measuring Marketplace Health
In the early days of a marketplace, standard metrics like GMV or revenue can be misleading. You can buy GMV with unsustainable subsidies. To truly understand the health of a marketplace, you need to look at liquidity and share of wallet.
Liquidity: The Magic Number
Liquidity measures the reliability of the marketplace. If a customer wants to buy, can they? If a supplier wants to sell, do they get an order?
This metric should be defined by a dimension the customer deeply cares about. For Uber, it is wait time. There is a "magic moment" around the 4-minute mark where the service transforms from "just another option" to "better than owning a car." For a retail marketplace, it might be search-to-fill rate. Until you have achieved liquidity in a specific geography or vertical, scaling elsewhere is usually a mistake.
Share of Wallet: Depth vs. Breadth
The second critical metric is share of wallet. Of all the money a buyer spends in your category, what percentage flows through your platform? This measures the depth of your relationship.
In marketplaces, depth is defensibility. A customer who spends 10% of their budget with you is likely multi-tenanting (using competitors). A customer who spends 90% of their budget with you is locked in. It is almost always better to have fewer customers with high share of wallet than many customers with low share of wallet.
The Supply and Demand Dynamic
The classic marketplace question is "chicken or egg"—should you focus on supply or demand? While you cannot ignore either, the emphasis often drifts too far toward supply.
Demand is the Currency
Supply is essential because it is the "product" you are selling. However, if you aggregate demand, supply will almost always follow. If you go to a plumber, a driver, or a retailer and promise them a customer at a profitable rate, they will say yes. Therefore, demand is the ultimate constraint.
You should view supply acquisition through the lens of an ROI equation. You acquire supply only to the point where it improves the customer experience (liquidity). Beyond a certain threshold—like having so many Uber drivers that wait times drop from 3 minutes to 2.5 minutes—the marginal cost of acquiring that supply outweighs the customer benefit.
One lesson I learned the hard way is that if you think about running a marketplace, you're basically a gardener. You have to have a very light touch. If you're building a SaaS business, you're a construction worker... strictly building. For a marketplace, you're messing with an ecosystem you don't fully understand.
Expansion and Unbundling Strategies
Once a marketplace gains traction, the temptation is to expand everywhere. However, history suggests that disciplined expansion is the only way to survive.
The Fallacy of Total Addressable Market (TAM)
When choosing a new vertical, don't just look at the size of the market. Look for adjacency. How similar are the operations of the new vertical to your current one? For Instacart, expanding from grocery to convenience stores made sense because the logistics were identical. Expanding into general retail would have been a heavier lift, even if the market was larger.
Furthermore, look for expansion areas that accentuate your network effects. UberEats worked because the supply side (drivers) could be shared with the core ride-sharing business, and the demand side (riders) had a high overlap of interest.
Why Unbundling is Overhyped
There is a popular narrative that every broad vertical (like LinkedIn or Craigslist) will eventually be "unbundled" into niche marketplaces. This thesis often fails because it ignores the economic benefits of aggregation.
Niche marketplaces only succeed if the vertical has:
- High Average Order Value (AOV): To support customer acquisition costs.
- High Frequency: To keep users returning without re-acquisition.
- A Self-Contained Network: Where the users don't need access to the broader network.
LinkedIn is hard to unbundle because professionals (like investment bankers) don't just want to talk to other investment bankers; they want to keep their options open for future careers in other industries. The cross-pollination is the value.
The Future of Marketplaces
The marketplace model is evolving. We are moving from "Marketplace 1.0"—simple lead generation (craigslist)—to managed marketplaces that verify trust (Airbnb), and finally to fully managed ecosystems that handle logistics and underwriting (Faire).
As marketplaces take on more of the value chain, they can charge higher take rates. However, there is an event horizon. If a platform begins to own the supply entirely (like Opendoor buying houses), it ceases to be a marketplace and becomes a reseller. The most enduring marketplaces will likely be those where creativity and unique supply are required—areas where standardized, corporate inventory can never compete.
Conclusion
Building a marketplace is one of the most intellectually challenging feats in business. It requires balancing the aggressive tactics of growth with the patience of an ecosystem manager. By focusing on liquidity rather than vanity metrics, prioritizing depth over width, and understanding the complex interplay between supply and demand, founders can build platforms that don't just transact, but endure.
