Defining KPIs for a Two-sided Marketplace
In my last article, I touched on how we ensure the products we sell on AppSumo will become a hit before they’re even released to our audience. However, it surprised me how often I’ve been asked by colleagues within just the last few days how to track success for a business as a whole.
Often the most challenging part of working on a two-sided marketplace is the fact that we have two major parties to divide our attention and resources: customers (demand) and partners (supply). Figuring out which side of the marketplace to devote scarce resources—and when to change directions—is crucial for our success.
You might be familiar with the classic supply and demand curve in Economics 101. Our job as middleman is to minimize friction between our supply and demand, so that we can get as close as possible towards that equilibrium of quantity and price for each product sold on our platform.
I like to think about two-sided marketplaces in the analogy of a seesaw, with supply and demand on opposite sides. The goal is to make both sides as even as possible, so that one of them isn’t outweighed by the other in terms of resourcing, attention, traction, etc. The key to identifying this is through the use of North Star metrics and KPIs.
Step 1: Who are we and why do we exist?
In my experience, marketplace key performance indicators (KPIs) are best incorporated after you have first defined the overall company’s mission and North Star metric and then work backwards. The North Star metric (NSM) would look like a global KPI that you want to track on a regular basis to keep a pulse on the business as a whole. As Sean Ellis pointed out in his recent article, North Star metrics need to be:
- Easy to remember
- Tied to customer value and what helps drive product/market fit for your business
- Something that can grow sustainably
When you pair this metric with the mission statement, it helps align the overall organization towards what growing the NSM means and what success might look like.
In essence, you need to know 1) Who you are and 2) Why you exist—all with the goal of knowing if you’re doing well or not.
Here’s how other companies approached their NSM and mission:
NSM: Nights booked
Mission: Help create a world where you can belong anywhere and where people can live in a place, instead of just traveling to it.
NSM: Number of purchases per month
Mission: To offer our customers the lowest possible prices, the best available selection, and the utmost convenience.
NSM: Time spent listening per month
Mission: Unlock the potential of human creativity—by giving a million creative artists the opportunity to live off their art and billions of fans the opportunity to enjoy and be inspired by it.
NSM: Weekly trips
Mission: Bring transportation — for everyone, everywhere.
NSM: Daily active users
Mission: Bringing the world closer together
So at AppSumo, we began with a deep-dive into who we are as a company and what we aim to do on a fundamental level. As a result, we came up with the following for our NSM and mission:
NSM: Number of solutions delivered
Mission: Empower every entrepreneur
Step 2: Defining primary and secondary KPIs
Once you have your NSM and mission, you can further break your business down into additional primary and secondary KPIs to better gauge on various parts of the business.
As a16z outlines in their recent article, marketplace companies have multiple important metrics to track. Not all marketplace companies are exactly the same, so these metrics are a great starting point to figure out which metrics are right for your business.
For a two-sided marketplace, you might want to start by breaking down your business into supply and demand and assign primary and secondary KPIs to each side. I would argue that the most important metric to track for a two-sided marketplace is liquidity, defined as the likelihood of someone selling something or the likelihood of someone purchasing something on the site. This metric is divided into buyer and seller liquidity metrics, calculated as:
Buyer liquidity: # of transactions divided by # of visits
Seller liquidity: # of listings with purchases divided by the total number of listings
How you define “transactions,” “visits,” “purchases,” and “listings” depends on the type of business you have. You’d also want to time-box these metrics (i.e., last 7 days) to see how they are evolving over time. With these primary liquidity metrics, you can then go deeper and select secondary KPIs for buyers and sellers.
Acquisition, retention, and engagement
I like to break down the customer KPIs based on the major themes: Acquisition, Retention, and Engagement. The time periods in which you want to track these depends on your product and line of business.
Here are the metrics we pay most attention to at AppSumo:
Core Action Retention: # of active customers (defined as the total number of customers who have purchased a product within the last month). We further analyze this metric by breaking it down into cohorts, so that we can see any patterns over time between our newest vs. our oldest customers.
Engagement: % conversion within each step of the ecommerce flow (e.g., comparing the number of sessions to the % sessions with product views, adds to cart, and purchases). We largely use Google Analytics to track this, especially the e-commerce shopping funnel metrics.
Acquisition: # of new customers (defined as the number of customers who made their first purchase within the last month)
On the partner (supply) side, we pay attention to how much value we are providing to our partners and how easily we can bring in new self-listed sellers to grow our marketplace.
Unsurprisingly, the primary ways partners report that they measure their success is: Getting more customers and making more money. Partners are also incentivized to market their listings and bring in new customers, because they earn more revenue share with each new customer. Therefore, we break down our secondary KPIs into the following categories:
Acquisition: Number of new sellers per month (defined as the number of new sellers who listed a product within the last month)
Retention: Total number of sellers (defined as the total number of sellers with a product available for sale on the site)
Revenue: Average revenue per partner
Engagement: # of new customers who purchased a product (defined as the number of customers who purchased a product in their first transaction).
Step 3: Bringing it all together
As the Lead Product Manager for AppSumo, my role is to oversee the strategy and product development of our two-sided marketplace. No two days are the same, though my work constantly revolves around identifying and building the most important functionality for our audiences.
Our current priority as a company is to blitzscale the business over the next few years, which requires us to aggressively acquire and retain as many customers and sellers as possible. This includes entering new markets of customer segments and also attracting new verticals of products to serve those new target markets. Hence, why we choose to focus primarily on liquidity and growth metrics.
At the end of the day, the metrics you want to focus on are largely dependent on your company goals. For example, are you looking to double market share or are you looking to enter uncharted waters and disrupt an existing industry? Each of these goals will require a very different approach and therefore you’d want to track different metrics. The KPIs you choose for your business might look similar to ours or vastly different, depending on whether your company has a similar business model and strategic direction.