Richard Feynman

When the excellent book by Matthew Skelton and Manuel Pais first came out in 2019, I lacked the patience to enjoy it. We were in middle of a big Customer Centricity transformation, designing and implementing a Reverse Conway Manoeuvre to strengthen a multi-thousand-person organization and a billion-revenue business. The responsibility and the complexity of the task were immense; no small diagrams or 3 by 4 matrices of the DevOps team topologies and the interaction types seemed to do it justice.

Four years and two business transformations later, I’ve re-read the book with considerable pleasure. The lived experience and the opportunity to reflect on the long-term impact of past decisions filled these diagrams and matrices with the stories of real people, conversations, struggles, and successes. They sprang to life in full color and depth and knowing both the right and the wrong answers shed new light on the questions themselves.

It also made me think back to a journey from long ago. I call it:

The team cognitive load and value flow: “Your org and the role you are offering sound too complicated for me!”

This was the rationale from one of my talented colleagues who declined what I believed to be an exciting leadership role in my team more than 10 years ago. It had all the components for fun and impact – a broad scope, a variety of levers to pull, multiple customer segments, high business value, and ambitious growth plans. At least, that’s how I viewed the role: a microcosm of my own complex executive position that touched all the parts of the matrix organization and drove the overall business, both directly and indirectly. Why would anyone say no to that?

What my colleague perceived more clearly from the outside, was that the complexity of the handoffs, dependencies, and considerations the team needed to handle was too great for the group to operate at its best – slowing down the value delivery of customer engagement and revenue.

We got many things right to create value for our customers. This was a multidisciplinary team, with Product Managers, Marketing, Analytics, Business Development, and Operations. Most roles were directly aligned with the two core customer segments in the marketplace: consumers and businesses. We invested in understanding our customers, measured their engagement and revenues, and conducted experiments to test our hypotheses before rolling them out broadly.

At the same time, we struggled with the complexity of the overall organization and marshaling the right resources from shared teams to execute on our Product priorities. We lacked a dedicated Technology team for our business stream and instead held regular prioritization sessions for the shared Technology roadmap with the entire Leadership Team, planning and time-boxing Value-driving Projects (Outputs) rather than Value Streams (Outcomes).

The biggest gap lays between the Executives’ tolerance for high uncertainty and complexity (comes with the job) and the negative impact that the same levers had on the ability of the operational teams to execute and move things forward.

The concept of limited cognitive load on the team level is powerful, and fully appreciating it requires a shift away from individual-level thinking. It might be described as moving from Kahneman’s “Thinking, fast and slow” “type 1” (rapid, intuitive, automatic, and unconscious) reasoning to “type 2” reasoning: slower, more logical, analytical, conscious, and effortful. A lot more can be accomplished by a team than by one individual; but it requires more intentional design and nurturing to keep progressing.

As executives, we often fail to appreciate how the limits of a group’s cognitive load, related to tangible progress and the complexity of action, differ from an individual’s cognitive limits when they are analyzing a complex situation and make strategic plans, the complexity of thought.

Designing and evolving organizations to optimize the flow of value delivery and the cognitive load for the team is relevant beyond the context of software development. Matching the team’s topology and interaction modes are critical for its success. This is where things went wrong more than a decade ago: a Stream-aligned team, driving business value for a well-defined customer group, would have operated best if empowered to build and deliver customer value as quickly, safely, and independently as possible, without requiring hand-offs to other teams for parts of the work. Instead, the organizational setup required constant collaboration, resource negotiations, hand-offs, and dependencies. No wonder my colleague was excited about the role as it was defined back then.

What might have I done differently back then? Reading more books would not have been enough. My advice for my past self – actively seek more outside-in perspectives, keep digging to understand the lived experience behind high-level conclusions shared by others, especially when you don’t agree at first, and… paraphrasing my favorite Richard Feynman quote: “If you can't explain something in simple terms to others, you yourself don't understand it.”

Today I dig into the key revenue drivers for four marketplaces businesses: Uber, Lyft, Booking, and Airbnb. What are the insights from their 2022 annual reports?

Let me start with the great news for all the FP&A professionals out there:

• you can move jobs between the Marketplaces businesses,

• reuse your forecasting models,

• and reapply your knowledge immediately, with a very short learning curve.

You can see in the pictures below that the four businesses only vary in the naming conventions and the degree of detail in their disclosures when describing their revenue drivers in the annual reports.

What are the insights for the IR community? Those come from game theory:

• when you omit the information that your competitor is reporting, the signal you might be sending is the “hidden bad news.”

• For example, Uber, who have had an exceptionally good year, is providing significantly more metrics transparency than Lyft who struggles by comparison.

What are the key business insights?

• All four businesses show strong double-digit growth in their transaction volumes, partially due to the post-pandemic recovery.

• Uber increased its effective take rate by 43ppt, resulting in 83% revenue growth – can this be repeated?

• Lyft does not split the frequency/price/take rate effect – making it hard to judge its fundamentals and the growth potential.

• Booking and Airbnb take rates are converging (13.4% and 13.3%, respectively), with the Booking take rate decreasing while the Airbnb one increasing.

• None of the companies include the sell-side offering into their business model drivers (the number of drivers, hotels, hosts). It is purely buy-side driven, a big difference from the early marketplaces days when acquiring sell-side offering is key.

What’s next?

• I will be comparing the reported revenue drivers for online transactional marketplaces: #Zalando, #eBay, #Allegro and some more. Will the rose still be a rose? Read about it next week.

• Please subscribe to the #PathtoProfitability Newsletter to stay tuned for the insights on the growth, take rates, and revenue forecasting.

• Please add your suggestions in the comment section on the interesting companies to analyze, and tips on getting deeper insights on the non-public companies – for example, #fashion #marketplaces which are super interesting to review.

Below are the in-depth insights and revenue model per company.

For #Uber, all user metrics have been on green in 2022:

• Active Consumers (riders) have grown 11% YoY,

• Trips increased by 20% (driven by 8ppt higher frequency),

• Gross Bookings grew 28% (explained by 6ppt average trip price increase)

The pièce de résistance is the take rate, which jumped 43ppt, resulting in the impressive 83% YoY revenue growth.

Great results? Absolutely. Can this be repeated next year? Let’s see.

#Lyft is in essence a very similar business to Uber. They are also a public company, filing the annual report with the SEC.

The difference is that Lyft takes a shortcut, reporting Revenue per Active Rider and combining the other three business health metrics into one. We can see that both the rider numbers and the revenue per rider have grown, however, it is not transparent whether this growth came from higher frequency of usage, higher price, or a hike in the take rate. The answer does matter for understanding the longer-term growth outlook.

Continuing to the marketplaces that focus on travel, #Booking and #AirBnB both focus on the same metrics and their results can be almost directly compared.

Most of the usage and revenues come from the room stays for both companies, so the noise coming from the car rentals, airline tickets, experiences, and advertising revenues is not likely to change the big picture.

What is the big picture? For #Booking, it shows strong volume growth of 52% YoY, a modest increase in the average price per nightly stay, and a slight decrease in the take rate. This is very interesting from the perspective of business maturity and competitive pressure – since the take rate increase has consistently been one of the key growth drivers for the marketplaces businesses.

Another observation is that neither Booking nor AirBnB report the number of unique customers who purchased room stays – it would be very interesting to see the split between different customer segments and understand how much growth is coming from expanding the user base vs. increasing the frequency of usage.

#Airbnb growth is lower than that of Booking but is nicely consistent across different levers: the number of nights booked grew 31%, and both the average price and the take rate show a modest increase of 3-4ppt, definitely less confronting for the customers than the Uber jump of 43ppt.

Next, I will be looking in detail at the transactional marketplaces like Zalando, eBay, Allegro, and the like: their reported revenue models, implied take rates, and growth drivers.

Stay tuned, drop your questions or comments below, and subscribe to the #PathtoProfitability Newsletter.

I have always been fascinated by the precision sport of the revenue forecasting. Out of all the companies where I worked, eBay will forever have a special place in my heart when it comes to exercising this sport. eBay is where I have learned the trade, where my performance review target was “to hit the revenue forecast within the month to 1ppt and within the quarter to 3ppt,” and where many late nights were spent in the parking garage bonding with the rest of the finance team over the month close and figuring things out.

What’s my “so what” on the revenue forecasting?

1. If you do it, do it well. When a revenue guidance is issued by a public company, the confidence interval tends to be quite narrow (2ppt wide for a mature business such as eBay, 4ppt wide for a growing one such as Uber).

2. It’s ok to temporarily issue no numeric guidance or increase your confidence interval when the volatility is high – Airbnb, PayPal, Uber all did that when they needed to avoid issuing hugely incorrect forecasts.

3. Sometimes the volatility comes from the market (like COVID or the economic slowdown), but sometimes it comes from the company's own growth strategy (promotional actions of Uber). A less volatile proxy for the revenues (Gross Bookings for Uber, or GMV for other companies) can be a good solution in the latter case.

How do large, complex, multi-product line businesses forecast their revenues? How do public companies, whose stock price depends on predictability, deliver on their promises, quarter after quarter?

I asked my friend ChatGPT and its pdf plugins to analyze several hundred quarterly financial statements and create a dataset of revenue guidance confidence intervals versus realized revenues of major public companies in the Technology and Marketplaces space.

What are the amazing insights from this AI-driven research? Who am I kidding; I ran out of my 50 questions per 3 hours limit in an hour, called ChatGPT an idiot, and did a much more limited analysis by hand myself – but at least you can trust the results I share below.

I looked at eBay, PayPal, Airbnb, and Uber in detail. In the past four years, these companies:

• have been selective with issuing revenue guidance at all,

• kept the guidance at the highest level of aggregation,

• withheld the guidance when the uncertainty increased,

• “sandbagged” the forecast to land at the top of the guidance range, and

• overcorrected when forecast went wrong.

Let's look at them in more detail below.

eBay tends to issue a revenue guidance for the next quarter with the average variance of about 2ppt. The only notable exception has been Q2 2020, where the interval was 4ppt. Does eBay always hit its stated goal of forecasting precision?

Well, the answer is a careful “actually, kind of yes.” If I remove two outlier quarters, the average error is indeed 1ppt! Very impressive; and requires a high quality of the database systems, reconciliations, and analytics that goes into building this forecast.

Airbnb is a newcomer to the revenue guidance business after their IPO in December 2020. Note that the comparison graph starts only a year after the IPO – the first time that Airbnb has issued a revenue guidance was in Q4 2021, when – not coincidentally – their business has returned to a predictable YoY growth pattern for the second quarter in a row.

Another observation of note is the direction of the forecast error: the actual revenues have exceeded the mid-point of the forecast every single time, on average exceeding the top range by 1ppt as well. Every public company CFO always tells their team: “there is no such thing as a good surprise.” The markets nevertheless do punish overly optimistic forecasts and companies do "sandbag".

While PayPal is not a marketplace, I include it here for several reasons. Number one – I admire the exemplary performance of PayPal over the years, with the strong consistent growth before, during, and after the pandemic.

The second reason is how PayPal translates forecasting uncertainty into a revenue guidance. Some companies, like Airbnb or Uber, simply did not issue guidance in the quarters with high volatility. Others, like eBay, churned out a consistent forecasting approach.

What PayPal did was different: it changed its stated precision of the revenue forecast depending on the structural uncertainty in that quarter. PayPal is the only company in my sample that issues one-point forecasts (“we expect the revenues to be $6.80B”) at all – and when it does, it hits them within 1ppt accuracy. But it’s also the only company in the sample that explicitly widened its confidence interval at times to reflect increased volatility.

In Q4 2020, PayPal has widened their confidence interval to 4ppt, while eBay overshot its forecast mid-point by 7ppt, and neither Airbnb nor Uber issued any guidance at all. PayPal hit the revenues within 1ppt precision in that quarter.

Finally, let’s look at Uber “playing it safe” with the forecasting precision. Uber does not issue a revenue guidance – only the Gross Bookings one, before marketing promotions introduce high volatility to their take rate. It’s interesting and kind of cool that Uber simply sums up their Gross Bookings across the three businesses – mobility, food delivery, and freight – and it seems to work quite well. What you can also see is that their quality of forecasting is getting better over time. The confidence interval has been 4ppt-wide in the first quarters that the guidance has been issued and is slowly narrowing towards 3ppt. The actuals are hitting the mid-point of the forecast quite well, with less than 1ppt deviation in 2023.

Would you want to see analyses like that for more companies? What are the insights you find the most practical? Please hit the comment section with your feedback.

How do Online Payment Platforms integrate Sustainability into their company strategy and operations?  

In 2021, retail e-commerce sales reached 5.2 trillion US dollars worldwide, in comparison to 3.4 trillion U.S. dollars in 2019. According to the European Commission, approximately 20.3% of the world′s emissions are from the transportation sector. This implies a significant indirect environmental footprint for the Payment Platforms. At the same time, online payments bring positive ESG impact by democratizing access to doing business online and growing welfare, especially for the small business owners and consumers in the emerging economies.

Let’s look at the Annual Reports, Sustainability Reports, and ESG agendas of several Payment Platform providers and see where their priorities are. To make the comparison more insightful, I intentionally selected three companies with different regulatory headquarters locations and market focus:

• Adyen, with €767.5 billion in processed volume in 2022, active in 42 countries and the HQ in the Netherlands. Key market focus has been the EU and the US, the footprint is expanding further into UAE, Brazil, Australia and so on.

• Paypal, with $1.36 Trillion processed volume in 2022, available in 200 countries, and headquartered in the US.

• TPAY Mobile, serving 24 markets across the Middle East, Türkiye, and Africa with integrated mobile payments solutions, headquartered in Dubai and having processed cumulative $50 billion by 2020.

What are the key differences in ECG priorities across these companies?

Let’s start with TPAY Mobile, who operate in the region where 63% of the adult population (1 billion people) are unbanked. At the same time, the smartphone penetration is growing apace. According to the 2022 Afrobarometer data, the rate of cell phone ownership in Africa has reached 84%, with 45% internet access rate. In the MENA region, the number of mobile internet users exceeded 300 million in 2021 and is forecasted to grow to 350 million in 2025.

What does this mean for the ESG priorities? The Social Impact and Financial Inclusion clearly make the most difference for the TPAY customers. The company social impact blog describes how their services enable 14 million active monthly users to purchase goods and services inaccessible without traditional bank accounts, and access educational content and healthcare services that might not be otherwise available. Social impact is at the core of the company strategy. There are several volunteering and charitable projects described on the website, but otherwise the company does not offer a separate Impact Report with quantified measurements.

This is not a publicly listed business, so there are no regulatory requirements to deliver Impact reports. An open question is how the lack of such external reporting might affect the businesses’ ability to fundraise, especially from the US or EU based investors where regulatory requirements related to Sustainable Finance are increasingly stringent.

Adyen Social Responsibility portal presents a different approach. First, the European Corporate Sustainability Reporting Directive applies. The portal reports the Scope 1, 2, and 3 emissions of Adyen and highlights the priority of building an ethical business, enabling charitable giving and investment into Vietstar Waste Treatment project. For those who enjoyed the “tons of CO2 per euro revenue” benchmarks from the previous posts, Adyen’s footprint of 57,993 tCO2e and revenues of €1.3 billion in 2022 translate into a negligible direct environmental impact per euro earned.

When it comes to tangible sustainability actions, Adyen announced a decision in 2022 to annually dedicate 1% of their net revenue to initiatives that support the United Nations Sustainable Development Goals (UN SDGs). In practice, this translated into introducing Governance focus within the company. The 2022 Annual Report describes the creation of Adyen’s ESG Working Group, reporting to the company CFO. The objectives of the ESG Working Group are two-fold: to increase understanding and raise awareness of the three dimensions of ESG across the organization, and to establish a unified approach to reporting on Adyen’s ESG strategy.

Unlike the companies like Vinted or Vestiaire Collective whose on-the-ground operational priorities like shipping and packaging reflected measurable sustainability priorities, Adyen’s role as a payments facilitator translates into more generic priorities like committed impact investing.

Finally, PayPal, who is subject to the US SEC ESG disclosure requirements, shows the most detailed and mature approach towards the ESG reporting and translating it into specific actions. PayPal has been publishing its Annual Global Impact Reports since 2017, and the five years of progress are clearly visible in the scope and continuity of measurements. The 2022 PayPal Annual Global Impact Report has a telling subline: Transforming digital payments to create economic opportunity. At the same time, what makes PayPal different from the other two companies reviewed here is its explicit emphasis on Governance both from the internal (corporate governance) and the external (data privacy, cybersecurity) perspective.

Cybersecurity, Data Privacy, and Corporate Governance are the most represented category in the top-right quadrant of PayPal’s ESG Significance Map. Financial inclusion, empowering entrepreneurs, and employee engagement also have made it to the top, reflecting the general themes around Payment Platforms’ missions and Tech industry priorities. However, actionable Governance topics are significantly more present in the PayPal report than in those of other companies I have reviewed.

The excellent 52-page PayPal Impact Report goes into depth on all four categories of impact, switching between highly quantifiable metrics like $20+ billion in funds donated through PayPal or a 79 Employee Engagement Score and the statements of intent, such as Committing to Responsible AI Practices or Setting Strong Business Resiliency Practices.

Is this a reflection of general US ESG priorities, maturity of PayPal ESG approach, or idiosyncratic company priorities? Stay tuned and subscribe to the #PathtoProfitability newsletter. In the next writeups, I will compare US companies across different industries to find out!

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Online Marketplaces Sustainability Reports: the Methodology, the Insights, and the Actions 

First, some great news: if you were wondering about the claims that the companies like #OLX, #Marktplaats, #Kleinanzeigen, #Vinted, #Vestiaire Collective, #leboincoinare net-net good for the environment, the data appear to show that their net carbon footprints are indeed negative.

Second, the biggest A-Ha: how incredibly cross-disciplinary, both online and offline, are the efforts required to convert these carbon footprint reports into actionable operational impact.

Finally, the So-What: Today, it's mainly the largest companies with granular internal data and access to proprietary databases who can translate carbon footprint insights into action. Progress on open-access environmental lifecycle databases and digitalization of operations for the companies of all sizes and industries is needed to achieve the full potential of decarbonization.

Let’s start with the example of Vestiaire Collective to illustrate how an online marketplace for designed second-hand fashion went well beyond their core software platform into the offline world to reduce their carbon footprint.

Similarly to the other Online Marketplaces, Vestiaire Collective Scope 1 and 2 emissions represent only 1% of the total company carbon footprint. This means that optimizing energy footprint of the internal company operations, while a no-brainer, was not going to have a significant effect on the total footprint.

A significant share of the Scope 3 carbon emissions is related to the transportation of traded products. Reducing this footprint required work on multiple fronts and went far beyond the “online platform product development” discipline.

-      Digital Authentication: Vestiaire Collective increased the ratio of users who ship items directly to each other, without passing through the warehouses, to 65%. This required investments into digital authentication, which in turn reduces the volume of in-person authentication checks.

-      Warehouses and Regional Local-to-Local Transport Partners: The share of air transport was reduced from 80% to 26% by investing into 5 warehouses across the globe that enable regional local-to-local transport.

-      Packaging design and materials: The packaging volume was reduced by 80% by redesigning the boxes, the paper tags, the pouches, and the seals, and moving towards recycled, organic or bio-sourced materials.

This example illustrates how reducing the carbon footprint of online marketplaces necessarily takes them into the offline world, requiring additional expertise ranging from industrial production to transportation to packaging.

Expect to see increasingly cross-disciplinary impact, such as using digital ID and AI-driven authentication tools by Vestiaire Collective to simplify the product delivery journey, or Vinted setting up Vinted Go – a shipping vertical business that goes beyond enabling the original marketplace.

It is even more critical to reduce the burden of data collection and benchmarking, so that the corporate GHG emissions reports can focus on generating actionable operating priorities rather than on the descriptive methodology.  There are a lot of opportunities to add value: for the companies with proprietary Life Cycle Inventory databases and tooling, and for the non-profit organizations like #Ecoinvent, which is dedicated to the availability of high-quality data for sustainability assessments worldwide.

The companies with large user bases and societal impact, like the online marketplaces in this article who often boast 30 to 40 million customer bases per country, will greatly benefit from investing into cross-disciplinary and offline expertise to further improve the net-negative carbon effect of their operations.

What are the key takeaways from the Four Sustainability Reports of Adevinta, OLX, Vestiaire Collective, and Vinted?

All these companies have a modest direct carbon footprint, mainly related to the electricity and heating of their offices and data centers. For example, Adevinta reported 40kT of CO2 emissions in 2022. For comparison, Unilever reported 92mT GHG emissions in 2022, approximately 125 times higher per employee (617 T vs 5 T).

 End-to-end, the business of enabling second-hand trade is producing a negative carbon footprint, as extensively covered in the company sustainability reports.

The main drivers of this negative carbon footprint are the Avoided Emissions:

 -      Life extension of the items traded on the platforms, which reduces their annual carbon footprint. The Vestiaire Collective report estimates that buying a used garment extends its life by 2.2 years on average, reducing its carbon, waste, and water footprint by 73%.

-      Displacement effect, when buying used prevents a new item from being made at all. The Vinted report estimated such avoided purchase rate based on 108,829 survey responses, reporting that the average of 39% of used products bought on Vinted replaced a new product purchase. For Vestiaire Collective, who focuses on luxury fashion, 82% of sold items replaced a first-hand purchase.

The displacement rates for multi-Vertical marketplaces such as Adevinta or OLX vary much more per category and country, ranging from nearly zero for the users considering a second-hand car purchase (OLX estimate), to a much higher percentage in the case of home décor or phones.

As for the decarbonization levers, the reports show that the key sources of carbon footprint for these marketplaces are largely outside of their direct control:

-      Emissions related to Producing and Using the items that are being re-sold are the largest drivers of the total carbon footprint. As the OLX report illustrates, buying a used smartphone results in 36 kg CO2 -ed emissions savings, a used Television saves 172 kg, and a used car 776 kg CO2 -ed emissions. With 26 millions of such items sold second-hand on the OLX platforms in 2022, even a modest displacement rate generates a significant total impact, estimated at 5 million tonnes of CO2 -e.

-      Transportation emissions related to second-hand trade require a lot of assumptions to assess when the transactions take place primarily off-platform.  Adevinta Second-Hand Effect report used surveys to estimate the average distance between a buyer and a seller and the resulting footprint of a direct point-to-point transportation.

For transactional marketplaces like Vinted or Vestiaire Collective, the transportation data are available on a granular level, and have shown to be the main source of operational carbon footprint, 96% in case of Vinted.

Such detailed transactional data, combined with the existing emissions databases, gave Vinted and Vestiaire Collective highly actionable insights that they translated into operational priorities and executed upon.

In case of Vinted, the analysis has shown that delivering to a Pick-Up and Drop-Off (PUDO) location instead of to a buyer’s home reduced emissions by 62%. Vinted Go Service is now directly focusing on making this the prevailing standard. 

As both Adevinta and OLX platforms increasingly introduce transactional commerce and pay-and-ship services, the transportation footprint will increase significantly. For example, OLX reported 12 million pay-and-ship transactions in H2 2023. Applying the average footprint of a home delivery from the Vinted data (1.77 kg CO2 -e), OLX pay-and-ship would generate 42kT CO2-e on an annualized basis, comparable to the entire Adevinta direct footprint.

Given the total user base and the number of items traded on these platforms, when Adevinta and OLX will enrich their environmental impact reporting and translate that into actionable carbon footprint reduction, the total impact across the 30+ markets they operate in will be even more significant.

 What are the Key Methodology So-Whats?

1.    Scope 1 and Scope 2 emissions are straightforward to calculate with the data and techniques available across different countries and industries. They are a small percentage of the total emissions, addressable with straightforward measures such as switching to sustainable energy in the office and data center operations.

2.    Scope 3 emissions require conducting a lifecycle analysis for an individual company and applying many assumptions of varying precision.

There are a lot of similarities in the high-level lifecycle schemas for the online marketplaces. However, there are so many differences in the types of products traded, their carbon footprints, life extension, displacement rates, and transportation footprints, that to deliver actionable insights one must go vertical-by-vertical and country-by country, developing specific tailored solutions on a granular level.

For example, reducing the environmental footprint of electronics trade (phones, tablets, and TVs) may require investments into reparation centers, while for fashion the biggest impact is digital authentication and reduced packaging volume. Implementations depend on the price of labor, population density, and income in the region, leading to diverging optimal outcomes per country for the same global business.

3.    There are several tools and databases that provide Life Cycle Inventory insights, most of them proprietary and vertical-specific (Kering, Vaayu, Aktio), but some are non-profit and open for all to use (Ecoinvent). The best actionable insights come from combining these databases with the internal transactional data and user surveys.

For example, Vinted sent their series of surveys to a total of 2.4 million users from 8 countries with a response rate of 10.8%. This created a unique dataset with 350,000 survey responses, allowing a granular matching of the transactions to Vaayu’s Product Life Cycle Assessment (LCA) Database of more than 600,000 data points.

Vestiaire Collective built upon Kering and PWC work on the Environmental P&Ls, that translate multiple aspects of the environmental and societal impact – from GHG and water usage to employment rates – into monetary values. Kering eP&L focuses on the Luxury Fashion vertical and can be applied across multiple companies to estimate and reduce environmental impact.

The more well-developed and more commoditized these databases become, the more opportunity for meaningful action there is for the companies of all sizes. Today, it’s mainly the large companies with the granular internal data who can afford to take facts-driven action. Hopefully, better databases and more digitized operations open these opportunities to smaller businesses.

4.    User surveys will continue playing a meaningful role in the data collection and interpretation, complementing other data points, such as LCI databases or transaction and shipment route analyses.

These surveys are especially valuable in understanding customer motivation, choices available to them, and the means to empower sustainable behavior – this is where the Customer-Driven Product Development expertise of the online platforms can translate into broader environmental impact beyond their core operations.

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Why does the grim uncertainty of 2023 bring good news for the companies considering Private Equity backing? Because investing into strong business fundamentals is now the most attractive value creation route.

Alvarez & Marsal (A&M), a global consulting firm that specialises in turnarounds and performance improvement, has recently released their 2023 report on Transformational Value Creation in Private Equity. For this survey, A&M interviewed approximately 200 C-level executives at leading mid- and large-cap PE firms, as well as portfolio companies across 10 European countries.

Facing the high interest rates and a sobering market for private valuations, PE playbooks are shifting focus.  Operational improvements, sustainable business models, and digitalisation investments are driving the PE priorities – building stronger long-term business fundamentals for the companies they own and operate.

PE- backed companies consistently outperform their public peers – both on the revenue and the EBITDA growth metrics. The shift in PE priorities in the current market is a great opportunity for all – since it’s the operational improvement skills, not the financial leverage, that creates a performance advantage.

The key insights from the A&M report are all about the increased sense of urgency, the value of operational improvements, and reduced focus on leverage and multiples expansion:

OUT:

are financial engineering and simple cost reduction

IN:

are operational enhancements through:

• better pricing

• operational and service excellence

• digital transformation

• cash and liquidity management

 INCREASED INTEREST:

• in automation of complex business processes through digitalisation

• in leveraging machine learning to improve demand forecasting, inventory management and SIOP

HIGHER URGENCY:

Investors are keen to launch the transformation programs as early as possible in the deal cycle (not waiting 12 months post-deal anymore)

Why is this a big deal? Because it’s a huge opportunity for the privately owned companies to define their own future and a sustainable business model and execute on it.

In the past decade, value creation strategies have heavily relied on leverage and multiples expansion. It has been painfully hard to compete without access to large investment facilities. The emphasis has been on growth and footprint expansion, as well as moving the companies “up the multiples benchmark” ladder.

Some companies have been shifting their industry definition to land in the higher-multiples benchmark. WeWork, trading at the Tech multiples while managing commercial Real Estate, is probably the most extreme example.

Others invested into growth (often unsustainable) to reach the size that ensured higher multiples. While reviewing hundreds of SaaS and Digital Services businesses in my M&A work, I have seen quite a few companies create custom or non-repeat business to reach the higher-multiples of a “scale-up” rather than the “start-up” category.

Today’s shift of value creation in PE towards deeper operational performance improvement implies that the companies themselves can also define and deliver on these strategies, investing smaller and more phased amounts into talent, skills, and infrastructure – rather than having to raise large amounts for large-ticket and high-risk marketing and expansion plans. 

For many companies, this is a unique opportunity to retain independence, build up internal skills and infrastructure, and align growth priorities with and sustainability of the business model.

With the right skills and relatively lightweight infrastructure, value creation steps don’t have to require a change of ownership or an investment profile.

What are the examples of such expert-supported, Do-It-With-ME (DIWM) Value Creation Levers?

1.    Cash and liquidity management

Surprisingly a lot can be achieved by improving the cash flow forecasting, paired with reviewed and optimised vendor payment terms.

 As pointed out by Deloitte, weekly direct cash flow forecasting has been more commonly associated with distressed companies, but no more. No longer a pure treasury exercise, this type of modeling can be embedded in — and integrated with — the larger financial planning and analysis function of the entire organisation, using operational stakeholder input to inform the analysis.

Depending on the size and complexity of the company, an experienced financial modeling expert and straightforward modeling tools can deliver an upside in a matter of months.

2.    Better Pricing

As a long-time Analytics Nerd, I continue being amazed at the progress in data collection, modeling, and customer insights of the past decade. Even for the companies without the FAANG scale of tech and data infrastructure, pricing improvements are no longer synonymous with simple price increases.

It is now possible to understand and quantify the value that the customers gain from using your products, identify distinct value-based customer segments, and align pricing with value creation. A combination of real-time customer surveys, qualitative research, and triangulating internal and 3rd party data sources allows to step up the customer understanding, improve and prioritise the proposition and product development, and get the pricing to be aligned with the customer interests.

While not as much of a quick-fix as the liquidity management, value-based pricing and customer insights-driven proposition development deliver significant value uplift for the long term.  

Such phased investment, paired with the data collection infrastructure that can be reused for other operational improvements, is another great way to create long-term value uplift without a step-change in company ownership or investment profile.

So, what’s in it for me, you may ask?

If your company has a clear vision, your strategy is set, and you want to gain more time to deliver results and grow value independently before deciding on the next fundraising round, there are things you can and should be doing yourself, using the PE playbook but relying on your own talented employees, supported by external experts and lightweight data infrastructure solutions.

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Selling Out Part 3: The Decision Tree 

“Selling out” Part 3: Surviving Profit Optimisers and the Decision Tree.  

As someone once told me, working for a PE-owned business is like being in the army: people tell you when to wake up, when to use the toilet, and what to eat. It gives the comfort of operational clarity, but it’s not for everyone.

In the previous posts, I introduced the three types of corporate buyers and when they are the best fit for your exit:

1.    Corporate Venture Builders: if you are staying for another 3+ years and want to accelerate and de-risk independent growth.

2.    Business Integrators: if you want a gradual (1-3 years) transition and your product closes a meaningful gap in a core proposition of a larger business.

3.    Profitability Optimisers: when are ready to give the reins to someone else and when operational excellence (not vision or strategy) is the key priority.

Who are the Profitability Optimisers and why this might be the right exit for your business?

There are different types of companies that act as a Profitability Optimising buyer:

 -      Private Equity companies are the most well-known examples, with (depending on the industry) roughly a 4-year horizon for improving profitability and business operations and exiting the business again.

 -      Another type of a Profit Optimising buyer is a large company with a “bolt-on” acquisition strategy, who buys and streamlines similar businesses across multiple markets to reap the benefits of scale, but unlike the PE buyer intends to hold their acquisitions in the long term.

A Profitability Optimiser can be a great owner for a business that has a clear and stable business model but experiences sizeable operational inefficiencies due to lack of scale or lack of experience at the top leadership level.  An experienced team and a structured approach to improving operations can maximise the value of such a business.

This is the acquisition strategy most common in the industries with significant production lines, where op-ex and benefits of scale directly translate into profitability gains. Coca-Cola, Dupont, Akzo-Nobel are all examples of the companies successfully employing bolt-on acquisition approach. There are interesting examples within the Software and Consumer Internet industries where this has been attempted.

What are the implications for my business?  

If your business is serving a small market but its business model and product proposition are (near) identical to a larger multi-country competitor, a great way forward could be a bolt-on acquisition. The larger buyer provides the benefits of scale and excellence in operations that increase the profit margins, as well as the safety of a well-capitalised owner. For the buyer, this in an accelerated way of increasing market share and securing competitive position.

 Note the difference from the Business Integrator case, where a unique product can strengthen and evolve the buyer’s proposition. In the case of Profit Optimisers, the key benefit is more “mechanical”: increasing profitability of essentially the same business proposition through operational levers.

What to expect?

-      Expect a lot of detailed instructions: like in the “army” quote at the beginning of this post, the buyer will use their operational playbook to convert your business and its operations towards their blueprint of excellence.

-      Expect very detailed supervision on the financials. No spend will be too small to be reviewed and questioned. All budgets will be zero-based. “This is last year’s baseline plus X%” is no longer a valid budget input.

-      Expect to see movements and results - fast. This is one of the magical things about such an acquisition when done well: things start really moving. Daily operations get better, decision-making simplifies, profitability increases. This will give good energy to the team from seeing the fruits of their efforts.

What NOT to expect?

-      There won’t be vision, mission, or strategy discussions happening for a while after the acquisition.  The focus will be very operational and tactical. It will be about improving what is already in place and what is already known (business model, back-office operations).

 -      Step-by-step optimisation of the existing business and product will take precedence over investing into new business development or high-stakes experiments. If you have big hypotheses to prove, do that before the acquisition – not after.

When is a Profit Optimiser the right buyer for me?  

-      If your market is small and the business model identical to that of a larger competitor, becoming a bolt-on acquisition can maximise company value through the benefits of scale.

-      If your business model is clear, the key path towards profitability is excellence in operations, and you for whatever reason are not the right leader to deliver it, a PE exit can be a great option for value maximisation. 

When is a Business Integrator NOT the right buyer for me?  

-      If you are not ready to follow detailed instructions or leave the company – you should not sell it to a Profit Maximiser.

-      If your strategy and business model are going through a significant transformation, no operational excellence playbook will make your business great without addressing the core strategic topics first. A Profit Maximiser is not the right buyer in this case.

-      Finally, Profit Maximisers pay relatively low multiples for their acquisitions since they do not include vague “strategic synergies” into the valuation methodology. If you believe that sticking around and contributing strategically to your business post-acquisition will create additional value, a different type of a buyer is a better match.

In summary, the decision tree for selling depends on two big factors: your business outlook, and your own personal leadership horizon. 

Below, I have drawn a simplified decision-making tree when it comes to the decision to sell (or not to sell your business). 

Interested to apply this to your own decision making? Need sparring or support? Do reach out.

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 In the previous post, I introduced the three types of corporate buyers:

1. Corporate Venture Builders

2. Business Integrators

3. Profitability Optimisers

and discussed the Venture Builders, what to expect from them post-acquisition, and how they might affect your long-term success in more detail.

Today’s insights are around Business Integrators: the companies that leverage M&A to deepen or broaden their own core business proposition.

The M&A strategy is very different from the one of the Venture Builders. A Venture Builder’s M&A strategy can be described as “investing into the future seeds,” focusing on multiple companies, independent operations post-acquisition, and a longer horizon for integration. 

With the Business Integrators, the M&A strategy is a direct function of the business priorities for the core business operations. Companies are bought to be integrated – either as a new market under the same business model, or as a product that will become part of the existing proposition over time.

Think of #eBay who bought #PayPal in 2002 to improve peer-to-peer payments offering for their marketplaces business and replaced its own payment system Billpoint with it.  Or #Microsoft that bought #Skype in 2011 and gradually transitioned a lot of its functionality into #Teams, retiring Skype for Business product altogether in 2021. In the same year, six years after splitting out #Paypal, eBay has removed it as the payment processing partner.

What are the implications for my business?

• If your business has an excellent product that covers a very specific step in a broader customer journey already well-served by a large company,

• or is operating in a small geographic market where the benefits of scale are limited,

joining a business integrator could be a fantastic lifeline to extend the market opportunity, switch to a more scalable infrastructure, and step out of the head-to-head feature competition.

On the other hand,

• if your product is excellent and its market opportunity is broader than that of the potential acquirer, in the long term you might be more successful in grabbing that opportunity if you remain an independent company.

eBay has benefited greatly from the PayPal acquisition. However, since becoming an independent company again, PayPal accelerated its growth significantly.

What to expect when acquired by a Business Integrator?

• When done well, an acquisition by a Business Integrator means becoming a part of the mothership – fast. When I worked for eBay, acquisitions were put on a tight PMI schedule, and 90 intense days later all systems were integrated, teams were warmly welcomed, and their new badges opened all eBay office doors around the world – speak about belonging!

• Expect structured, intensive, and all-encompassing post-merger integration (PMI). Your financial systems, your corporate IT setup, your vacation policies will migrate to those of the acquirer. Some changes will be positive, like better tooling. Others will be constraining, reducing the flexibility of tools or behaviours.

• The first months might be confusing: you will suddenly have a “real” manager and be a part of a Corporate Way of Doing Things. At the same time, your manager will likely still be learning about you and your business, so you might feel more constrained than supported by them at first. The first 90 days are a great opportunity to establish mutual rapport and share as much knowledge in both directions as possible – shared context will give both of you trust and independence needed to be successful.

What NOT to expect from such an acquisition?

• Your own business was The Center of the Universe for its team while the company was independent. Now it is just another product / market to run and integrate within the large company. It’s a big change in perspective: before, the top priority has been clear and resources were hard to find, now resources are more ample yet the priorities are harder to define.

• Just like the Venture Builders, even the best Business Integrators will not be able to save the sinking ship. If your product requires a significant rewrite or your team culture is weak, there will not be a magic solution coming from the new owner. You can however tap into a lot of knowledge and resources to improve things – with Business Integrators, there are significantly more tools, systems, and dedicated Learning and Development experts to help you.

• Finally, as tough as it sounds, a successful acquisition by a Business Integrator means the end of your company as it was. When an integration goes well, you may see the brand disappear, the product dissipate, and the team go into different parts of the organisation. A true success is when the overall customer value proposition improves, even if it’s no longer visible to the outside that your company and your product made that possible.

When is a Business Integrator the right buyer for me?  

• If you have a great product that covers a small and specific part of a broader customer journey already well-served by a large company, joining forces with a Business Integrator can secure the future of the product.

•  If you operate in a small geography and your business proposition is close to that of a bigger international company, joining forces can give you access to more efficient operations, better product, and a more secure long-term market position.

• If you are ready to leave in 2-3 years maximum and able to oversee and support the integration efforts, such acquisition can provide a well-managed transition.

When is a Business Integrator NOT the right buyer for me?  

• If your business can be a supplier to multiple large companies and your potential acquirer is one of them, remaining independent may be the best long-term strategy to realise the full potential. Think PayPal post-split with eBay when the constraints were removed.

• If you want to continue running your business for a longer (3+ years) horizon and value independence and flexibility, this may not be the right step for you. You will get a real corporate manager, you will experience a lot of constraints, and your business priorities will become secondary to the larger company goals. A Corporate Builder or remaining independent is a much better match.

• If the expected synergies with the acquirer are not proven and are not tangible, the chances of a successful acquisition with value creation are low – don’t count on them. Continuing the eBay example, the idea that Skype (acquired in 2005, largely written off in 2007, and sold under pressure in 2009) could bring additional value to the Marketplaces business made high-level sense, but it never materialised because there was no tangible use case for it.

So, you are reading this and thinking - this is still not my cup of tea... what are the other options?

What if your business model is clear, your operational priorities are known, and someone just needs to execute and do it well to make the best out of it?

Enter the Profitability Optimisers.

Subscribe to the newsletter and read about them next week!

Have you been approached with an acquisition offer?

Are you considering joining forces with a larger company to maximize the success of your business?

Are you worried about retaining your top talents unless there is a step-change in your business scale?

For the founders reflecting on what’s best for the long-term success of the businesses they are building, the difficult fundraising market of 2023 makes the M&A path a more top-of-mind consideration.

Venture and growth investors in private companies continued to scale back their investment pace in the first quarter of 2023, Crunchbase data shows. Global funding in the first quarter reached $76 billion — marking a 53% decline year over year from $162 billion in the first quarter of 2022.

According to the Pitchbook Global M&A Report published in April 2023, founder-owned businesses made up 61.5% of all businesses sold in Q1, their highest share of the market since the great financial crisis. The share of the sub-$100 million companies among the M&A transactions is increasing.

Today, we talk about three types of the corporate buyers, what to expect from them post-acquisition, and how they might affect your long-term success.

Ranked from high to low on the long-term strategic rationale behind the acquisitions, and on the degree of independence granted to the acquisition targets, please meet the three types of the corporate M&A buyers.

1.    Corporate Venture Builders

2.    Business Integrators

3.    Profitability Optimizers

Corporate Venture Builders are companies with a long-term M&A strategy and a portfolio approach towards investments. These companies do a lot of acquisitions, have a scientific approach towards the industries and the types of the companies to acquire. The M&A often starts with a minority stake, retains founders in their operational roles and as shareholders, and includes a clear path towards control in the share purchase agreement (SPA).  Think of the companies such as Prosus, who lists 46 investments under their Ventures portfolio.

What are the implications for my business?  

The key benefit is the continuity of operations, coupled with the increased funding runway. This is also the key risk: if the quality of operations or the organizational momentum were not on the right track, an acquisition by a Corporate Venture Builder will not change things for the better.

What to expect?

• If you are proactive about it, you will get easy access to experienced Board Observers, and sparring opportunities with other founders or executives.

• Extended funding runway and the feeling of belonging to a bigger umbrella organization can help you retain your top talent. It is especially valuable for smaller national companies joining large international groups.

• You can accelerate success from your current momentum through such an acquisition; keep in mind that the acquisition itself will not create a success momentum.

What NOT to expect?

• Don’t expect a step change in your backend systems or processes because of this M&A. Those will remain your responsibility and your costs.

• Don’t expect a Corporate Brigade coming down and solving business model problems or Technology backlogs for you. This will also remain your responsibility post-acquisition.

• Don’t expect unending support at any cost; likely your business is one of many acquisitions, and the buyer is rational in expecting some of them to fail.

When is a Corporate Venture Builder the right buyer for me?  

• When your business has a clear product-market fit and a growth momentum

• When you see a market opportunity in scale that is beyond your own business’ organic potential

• When you as a founder have the energy and drive to continue running it for another 3-7 years

• When your business fits into the portfolio strategy of the buyer, clearly solving one of their key mission problems

When is a Corporate Venture Builder not the right buyer for me?  

• If your business is stagnating, or your business model needs a pivot, or the product-market fit is not there, being acquired will not change any of that, no matter how experienced or strategic the buyer is.

• If you want to step down from operations within a short time horizon (1-2 years max), a Venture Builder acquirer will not provide the right succession that fast.

• If your business is outside of the buyer’s established expertise, you will still experience all the burdens of a controlling shareholder without the benefits.

What if my business needs a different type of investor? What are the alternatives for Venture Builders?

In the next edition, we will talk about Business Integrators and the Profitability Optimizers.

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Today's edition is about the Online Advertising revenue and maximizing its long-term profitability potential.

 The total market is huge: Google Advertising generated a staggering $224 billion in revenues in 2022, Meta $113 billion. Online businesses with large audiences – like Adevinta with its 1 billion users – have benefited from the high-margin online advertising revenue stream for years. In 2022, Advertising brought in €337 million, or about 20% of the total Adevinta revenues.

The growth is slowing down. Most companies refer to the difficult macroeconomic environment as a key driver. To quote Sundar Pichai: “It’s clear that after a period of significant acceleration in digital spending during the pandemic, the macroeconomic climate has become more challenging.”

At the same time, this remains one of the highest-margins revenue streams – for the advertising giants like Alphabet or Meta, but also for the businesses with high user volumes when they serve well-targeted ads. Programmatic advertising, with its 50%+ profit margins if set up well, accounted for 84 percent of the global digital advertising spending in 2022 according to Statista research.

What are the key success factors for a profitable advertising stream?

1. Focus on building a vibrant core business and customer base. 

A strong, growing, engaged user base allows generating healthy advertising revenues. In turn, a strong advertising revenue stream delivers profits that can be reinvested into further growth. However, advertising stream by itself will not directlycontribute to your user engagement, growth, or business fundamentals.

2. First-party advertising is a more sustainable revenue stream, but it requires significant internal tech investments.

It pays off to be strategic about the role that advertising will play in your business model in the long-term, when evaluating Tech investments into the first-party advertising technology. They will not pay back in the short term (1-2 years). But on the longer horizon, this is a great sustainable way of generating advertising revenues – see the Admarkt case study of Marktplaats.nl and other insights on my Substack blog.

3. Be intentional about allocating and targeting branding and performance advertising across your platform.

A diverse and vibrant online platform creates an opportunity to use branding campaigns as well as performance advertising in a targeted way, increasing the ROI on the advertising space used and reducing the customer “irritation” factor. Measuring both the revenue and the user engagement effect of the advertising campaigns can help with allocation decisions and improve the ROI and long-term outlook for both.

4. When estimating the advertising revenue potential, be aware of the ad blockers adoption rates, and the effect on the ability to generate advertising revenues from your business’ target group.

Ad blocking varies significantly per country: 39% in Germany, 37% in the US, 31% in the Netherlands according to the Hootsuite 2022 report. A difference of 25ppt between two neighboring Western European countries is huge when it comes to the advertising potential.

But also gender and devices matter for the usage rates. If your audience are predominantly 25–34-year-old males, you will see 54ppt (!) more ad blocker adoption in the US than if your target group were 55-64-year-old females. There are ways of asking the users to white-list your site specifically – from pop-ups with a kind request of support, to not allowing access without turning off an ad blocker.

In the end, the key lever towards healthy advertising revenues remains the same: a vibrant platform with healthy user fundamentals.

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Today, I will share how Marktplaats.nl – the leading Classifieds Marketplace in the Netherlands and the foundation to eBay Classifieds Group – focused on Customer Value win-wins and reduced its business customer acquisition costs (CAC) by nearly 20%. 

First, some trivia facts. Marktplaats.nl is the largest Online Classifieds platform in the Netherlands, with 8 million unique visitors and 350,000 new ads per day. In fact, there are more live ads on Marktplaats (18,7 million) than people living in the Netherlands (17 million). Marktplaats was acquired by eBay in 2004 for 225 million euros after a tough competitive battle. Marktplaats - local, nimble, and easy to use - was run by an entrepreneurial team in Emmeloord, and won against a well-funded American arrival. eBay leadership saw the great potential of the Classifieds experience, and in the spirit of “if you can’t beat them, join them,” acquired Marktplaats, creating a foundation for the eBay Classifieds Group (ECG). In turn, ECG was acquired by Adevinta in 2020 for 8 billion euros and delivers strong profitable performance to this day.

Today’s story is about how redefining a “successful customer,” learning from other industries, and breaking down organisational silos resulted in a nearly 20% decrease in customer acquisition costs (CAC). This meant a meaningful uptick in profitability, as well as higher satisfaction with the “value for money” delivered to the business customers.

Marktplaats business seller proposition was introduced in 2006 to a great success. Thousands of businesses were using Marktplaats already, and an opportunity to create a more professional presence, pay only for performance, and define your own budget and price made it an easy sell. Four years later, the business grew well beyond the existing Marktplaats sellers, and was using a professional Outbound Sales partner and leads generation to expand its customer base. The focus shifted from announcing our proposition to the world to a more targeted acquisition, finding prospects with the highest chance of converting from a sales call to a sign up.

Another four years later, the fresh leads lists were getting shorter, and the conversion rates were decreasing. The costs of customer acquisition were growing, the number of new customers declining, and their lifetime value flattening.  The team had enough data at their disposal to confirm that there was a problem; it was, however, not sufficient to figure out a solution: how to improve the quality of leads and the overall business performance?

The highlight of today's story isn’t really CAC improvements or profits. It is the three major shifts in operating that made it possible to improve the business results:

(i)     A shift in perspective when defining valuable customers. We went beyond the one-dimensional revenue metrics and applied a balanced “win-win” definition, to identify the types of business sellers who were the most valuable to Marktplaats in the long term. 

We defined them as sellers whose ads were attractive to buyers and converted well into website visits, who paid a fair price for the service they received, and who in turn were receiving good value for their money and stayed as Marktplaats customers for a long period of time. 

Focusing on acquiring and retaining businesses with a high “win-win” profile score instead of those most likely to say “yes” in a sales call decreased the customer acquisition costs while growing revenues and customer success. 

At the earlier stages of business growth, when the long-term customer performance data were not yet available, customer segmentation that worked well enough was based on simple revenue rankings. Customers with the highest monthly revenues received the most attention and proactive personal contact, those with the lowest spend received automated email encouragement. 

With time, it became clear that the relationship between monthly spend and long-term value to Marktplaats and its users was more nuanced. Shifting the perspective from a one-dimensional segmentation to a balanced “win-win” measure of value to the buyers, sellers, and the Marktplaats business overall helped identify the next wave of successful customers. 

(ii) Increased diversity of professional backgrounds on the Marktplaats team made it easier to recognise relevant transferrable practices from other industries, like Telecom, Banking, Media, Hospitality, or Automotive, and thoughtfully advance them in the new context. 

A lot of challenges in business performance are universal across different industries. Topics like lowering customer acquisition costs, increasing customer retention and lifetime value, fraud prevention, identifying real rather than stated customer needs have been around before the internet industry. A lot of resources and thought already went into figuring out how to address them well.

Blindly applying playbooks from other industries does not automatically deliver value in a new context. Instead, what matters is having team members with a diversity of experiences – those who can recognize when a borrowed practice from another industry might be relevant, thoughtfully scrutinize how it needs to change in the new context, and then take the risk of doing things differently than before.

The Internet Industry has grown strongly and impressively since the late 90s. It’s been a fantastic place to work, full of young people building up their expertise while seeing immediate and measurable impact of their efforts. You might recognize a company like this: everyone is roughly 28, has worked for a tech company or consulting straight out of the university, and sees themselves as an successful innovator.  

There is a risk of serious blind spots related to overstaffing the team with those of similar backgrounds; not having the exposure to recognize transferrable best practices from other industries is one of them. Some of the most impactful innovations at Marktplaats have been introduced by those who joined from the Telecom, Banking, Automotive, or Retail industries, and recognised the opportunities to apply decades of development in the new context. Intentionally choosing an Outbound Sales partner that has been serving many different industries also made it easier to use those best practices to improve performance.  

Expanding the team beyond the existing profiles and backgrounds, bringing different points of view and experiences, allowed us to see the opportunities that would not have been visible when everyone on the team had the same history and perspective.

(iii)  A culture shift within the organisation: moving from a hierarchical, functionally siloed, waterfall way of working to an active ongoing collaboration across teams.

Conventionally, a company would be divided into the Business Functions and the Support Functions. The “Business Teams” would create the requirements, and the “Other Teams” (Operations, Outbound Sales, Analytics…) would execute on them. For example, to acquire new business customers, the Operations team would receive a file with the leads to contact and the targets on the conversion rate for sign-ups. All they had to do is hit the phones. It was a simple and clear way to work. 

Or was it?

It was indeed straightforward to execute on the instructions. Activity-based measurements used by the Operations team and their outbound sales partner – such as the number of calls made and conversion of calls to sign-ups – were useful in quantifying the increasing CAC.  The fresh leads lists were getting shorter, the conversion rates were decreasing, the pressure on the team budget increased. But the levers at the team’s disposal were limited. A bigger change was required.

It was really exciting when people from different teams started coming together, not to compete for control or give requirements, but to brainstorm and collaborate on how we might use all the knowledge and experience in the organisation to make a big, audacious change of 20% CAC decrease.  

Our bright Analytics colleagues went deep into K-means Clustering Segmentation, uncovering patterns we have not seen before. Our Marketing colleagues verified the findings with the qualitative research and explored the effects of the CLM programs on increasing the “win-win” score. Our Operations team worked with the Outbound Sales partner and with external data enrichment companies to create ranked, targeted outreach lists prioritized on the chances of long-term success.  The lines between functional responsibilities were blurring; the common goal of increasing long-term success for all: Marktplaats buyers, sellers, and the business itself – was taking over.

In the end, the impact came from the following three steps.

• First, we created a measurable definition of what makes a “win-win” customer. These were the customers who had a high conversion rate (CTR) from their Marktplaats ad to their own website, maintained a healthy price-per-lead relative to benchmarks like Google Adwords, and remained paying customers for a long period of time. 

• Second, we enriched the company data with the help of Outbound Sales partner, companies like Dunn & Bradstreet, and our proprietary online presence analytics tools to build company profiles most likely to be successful “win-win” sellers on Marktplaats. For example, a company with a well-setup web shop, healthy financials, and good customer reviews would have different chances than a one without online presence and with a long list of customer complaints. We went further than the shallow “are you a good online company” segmentation and compared these profiles to the “win-win” customer profiles of Marktplaats to identify those for whom our platform, proposition, and buyers' intent were the most relevant. To expand on the example above, all things equal, a webshop selling as-good-as-new bookshelf sets would have a better long-term success on Marktplaats than a “design your own fancy furniture online” brand. 

• Finally, we used these insights to apply the lookalikes methodology to qualify prospective leads, improve our sales pitch with a value proposition based on real and relevant customer stories, increase conversion rate, decrease customer acquisition costs, and grow the lifetime value of our customers.

The moral of the story? It's all about the team and its culture: what your colleagues know, what they see, how they connect and share ideas, makes a gigantic difference to the business results. Oh, being good at customer segmentation analytics helps as well 😉

There are many reasons for the popularity of Marktplaats in the Netherlands: simplicity of its user experience, high success rate in trading on its platform, a recognizable brand with proud local roots and great many stories to tell. You will read in my later posts how the journey of the Classifieds businesses in other parts of the world compared to this playbook, which aspects proved to be universal, and which required a complete user experience reinvention (a hint is in the comments).

But for now, dear readers - if you recognise the story and have your own insights to share from those times - do add them in the comments, and tag your colleagues who were part of this and might enjoy the memories.

Next week, I will be writing about applying best practices from credit risk modelling in the Banking industry to fight online fraud in Marketplaces and SaaS businesses, the impact it had on the customer experience, and the fun the teams had doing it.

Exaggerating the Progress on the Path to Profitability:

The Temptation for High-Growth Marketplaces and SaaS Businesses

Both Marketplaces and SaaS businesses can show a great long-term profitability.  Once the product-market fit is in place, the platform is adding value to the customers, and the network effect keeps clients locked in, the longed-for “flywheel effect” starts to deliver. Sustainable revenue streams are established, customer churn is contained, and customer acquisition costs are reduced, leading to a healthy profitability and a positive business outlook.

How to evaluate the progress towards profitability for the growing companies? 

The simplest answer is always the same: cash flow. Having positive free cash flow allows the company to fulfil its obligations and invest back into the business without raising additional funding – and is the most reliable indicator of healthy business fundamentals. Alas, high-growth businesses, especially coming from a low base, are not likely to have positive free cash flow due to high investments required, and EBITDA-type measures become leading in understanding profitability.

Valuations of growth businesses are highly dependent on their profitability and cash flow outlook.  Moving profitability timeline forward by as little as one year can give a significant bump to the valuation (15-20%), even if the company does not outperform forecasts on other metrics.

The businesses that rely on “growth investors” (rather than “value investors”) for their fundraising can be tempted to focus on reporting the metrics – including financial ones – that exaggerate their progress on their path to profitability. Especially for smaller privately held companies that face less stringent statutory reporting requirements and GAAP reconciliation transparency, it can make it harder to evaluate true progress on the path towards profitability.

In this post I will use the real-life examples from well-known SaaS companies and a fictional example of a high-growth company financials to illustrate how using non-GAAP financial profitability measures can shift the perception of progress and the company valuation without any change to the underlying fundamentals.

The Long-term Profitability Outlook for the Marktetplaces and SaaS Businesses

Many well-known Marketplaces and SaaS businesses have demonstrated strong long-term profitability margins. In the previous edition of the Path to Profitability Newsletter, we talked about the margin pressure on the Classifieds and online Marketplaces businesses in more detail. The overall profitability continues to be very healthy for these businesses.

Schibsted’s Nordic Classifieds Marketplaces, Adevinta’s French and German operations, and Allegro Poland all deliver high double-digit operating margins after 20+ years of operations.

The profitability picture for the SaaS businesses looks more intriguing. At the first look, many of the large SaaS businesses have been highly profitable in Q4 2022, generating non-GAAP operating margins in high double-digit percentages (34% for SalesForce, 42% for Oracle, 28% for ServiceNow). On the other hand, the GAAP operating income margins are considerably lower for these companies (3%, 26%, and 8% respectively), raising the question of whether SaaS business fundamentals are as profitable as those of other Technology-driven companies, such as Online Marketplaces.

Let’s look at the Salesforce example in a bit more detail. First observation is that the gap in the operating margin measures is consistent over time. It suggests a Jekyll and Hyde type dichotomy: SalesForce the GAAP company operates in the 3% margin area (similar to offline Grocery Retail industry), while SalesForce the non-GAAP SaaS star appears to deliver a nearly 30% margin. What is behind this?

Three major cost components drive the differences, in total accounting for 25ppt of the operating margin:

-       Amortization of purchased intangibles – referring to the acquisitions such as Slack and increasing in value 70% YoY. The nearly $0.5 billion per year cost is amortization only, with the total value of Slack acquisition a whopping $27.7 billion that will be hitting the Salesforce P&L in the years to come. 

-       Stock-based compensation expenses: increasing 24% YoY, at the rate higher than the revenue growth of 18% YoY. Almost $0.8 billion in stock-based compensation has vested in a year, reflecting the market cap growth over the past 5 years after those grants were distributed. 

-       Restructuring costs: Salesforce has announced a workforce reduction of 10% and estimated the one-off costs at nearly $1 billion in 2023 alone (up to $2 billion in total). A non-GAAP view suggests that restructuring is a rare one-off event; companies with a longer operating history may argue otherwise.

A Temptation for High-Growth Technology-Driven Businesses: Exaggerating the Progress on the Path to Profitability

Let's walk through an example to demonstrate how designing financial non-GAAP metrics can impact the perception of the progress towards profitability. Let's use a fictional company – let’s call it “Upwards Inc” – which could be a Marketplace or a SaaS business. The common denominators are the high need for cash to jump-start growth, and a long-term profitability once the “flywheel” starts to deliver:

-       High level of investment into Technology Platforms and Software Development 

-       High growth rate of the customer base and committed future revenues

-       High customer acquisition costs during the growth stage

Schematically sketching Upwards Inc financials, it will reach positive cash flow and profitability in Year 3 and will be delivering a roughly 50% margin in Year 6.

However, the same business with the same fundamentals can paint a different financial picture – reaching adjusted EBITDA profitability in Year 2 rather than Year 3, and showing a 4ppt higher margin in Year 6.

How do businesses do that?

1.     Capitalize software development costs. Depending on the market where they operate (there are differences both within Europe and with the US), rules for capitalizing software development costs vary. For the companies who make expensive and increasing investments into software platform development, reporting software development costs as Capex may translate into significant optical improvement to the P&L. 

In the example of Upwards Inc, its software platform development costs grow 50% in Year 2 and another 33% in Year 3. Capitalizing these costs reduces P&L impact in the first three years by nearly 40%.

2.     Report revenues at the time of a sales booking rather than of value delivery or a payment. The rules around revenue recognition are increasingly stringent, so the Enron times of booking a 10-year $10 million contract as revenue in Year 1 are over. However, especially for the post-payment model serving business customers, there might be a significant delay in receiving cash, increasing the gap between the actual cash flow and the EBITDA profitability metric.

In the example of Upwards Inc, the revenues are growing rapidly (3x in Year 2 and another 2x in Year 3). Having the 90-day payment terms creates an almost 15% gap in the revenues reported and cash received over the first three years of operations.

3.     Use a high level of stock-based compensation. Unlike salaries, stock-based compensation schemes are not seen as upfront cash payments and can take 4 to 5 years to vest. This is a great way for the growing companies to preserve cash while giving strong incentives to their employees. 

At the same time, as SalesForce or other SaaS companies in the example above show, once these grants start to vest, the delayed effect on the P&L can be very high (9ppt of the margin for the SalesForce example). If grants are dependent on reaching profitability, this can be an interesting way of accelerating profitability optics with a heavy margin impact later on.

4.     Report one-offs as EBITDA adjustments. A very common topic throughout the 2022 are the restructuring costs. Many companies have been hiring at a high rate in the past 2-3 years, and are now executing significant layoffs, connected with high restructuring costs (severance pay, stock-based compensation vesting, changes to the facilities etc.). SalesForce in our example expects to spend up to $2 billion on this.

It is an open question whether restructuring should instead be seen as a “regular cost of doing business.”  With the ongoing expected uncertainty over the economic outlook, will we keep seeing regular “overcorrections” by the businesses – overhiring during the boom times and restructuring during the downturns? And should this be interpreted as a one-off, or as part of the fundamentals?

Profitable business models take time to be executed, especially for platform and customer-acquisition intensive businesses such as Marketplaces or SaaS. While it is tempting to shape the view on the company financials in the way that accelerates its progress towards profitability, the fundamentals of a healthy business remain the same:

-       Growing customer base

-       Growing ARPU

-       Cost base that is growing slower than the revenues

-       Positive Cash Flow.

Let me start with a controversial punchline: Every Transformation is Destined to Fail – if it's significant enough to be considered a genuine change. Paradoxically, the very elements that contribute to its success, such as ambitious goals, open communication, thoughtful planning, and strong leadership, are also the factors that can ultimately lead to its downfall.

To make the discussion tangible, I will use a case study of the “Orange Bridge” platform of the ING Bank – one of the more expensive Digital Transformation projects that did not turn out as planned.

So, what are the Four Transformation Paradoxes driving every successful – and failed – transformation?

1.     the Big Dream Paradox:

setting grand goals will end in a failure, yet incremental goals won’t deliver change. A Big Dream, inspiring and well-described at the start of a transformation, might turn out to be an outdated Nightmare when the transformation finally gets there.

2.     the Communication Paradox:

being open about the tough journey ahead builds the trust, yet such openness also decreases support for the transformation.

3.     the Expertise Paradox:

change management expertise is critical for driving a transformation, yet no successful transformation followed a change management playbook.

4.     the Leadership Reward Paradox:

leaders who successfully drive big transformations end up with a changed business they are not well-suited to lead. A leader’s reward for a successful transformation is not leading a better business – it’s being replaced.

Agree? Disagree? Have examples in support, or counterexamples to prove me wrong? Please share them in the comments!

Let’s get to the Orange Bridge story.

The goal of the “Orange Bridge” project was integrating IT systems between the Dutch and the Belgian branches of the ING bank. 

The Orange Bridge journey started in 2016 with a grand vision of a Unified Cross-Border Banking Platform for managing mortgages, business services, and online banking. ING was to become the largest bank in the Benelux, integrating its businesses in the Netherlands and in Belgium onto one omnichannel platform, but also using the language of “one bank” to show the operational integration. The analysis below uses ING Investor Day presentations, as well as an investigation published by Het Financieele Dagblad (in Dutch, 13/06/2020). 

ING allocated a budget of €450 million for this transformation. From 2021 onwards, Orange Bridge was to deliver annual savings of €550 million. 2016 Investor Day Presentation shared the details on the vision, implementation, and financial milestones.

How did it do on a scale of Grand Transformations?

Grand Goal? Check.

Well-defined impact and deliverables on a 5 year+ horizon? Check.

Focus on process improvement and improved customer experience? Check.

Board buy-in? Check.

Well, things did not quite go as planned.

First, the National Bank of Belgium (NBB) blocked the plan of reducing the autonomy of the Belgian management and moving key functions to Amsterdam. As a result, the planned cost synergies were no longer realistic. 

The culture clash between the Belgian and the Dutch management furthered the tensions. From Amsterdam, the management culture of ING Belgium was seen as conservative, hierarchical, and resistant to digitalization, insisting on the old-fashioned physical offices and relationship banking. From Brussels, the Dutch leadership was seen as arrogant, launching a huge digital transformation from their “ivory tower” without understanding Belgian regulation, market, or technical complexities involved.

The veto of the NBB left the project without a clear ownership mandate, since both Brussels and Amsterdam were to be involved and no one country were to be end-responsible. ING Digital Transformation executives were getting demotivated, and by 2018 and 2019 three senior executives from both sides of the border have left the bank. 

Furthermore, missing the significant 2019 savings target was generating concerns for the Belgian employee unions, who suspected that employee redundancies will replace the IT systems as the source of the future P&L improvements. 

How does this journey reflect on the Four Transformation Paradoxes?

1.     The Big Dream of a Unified Cross-Country Banking Platform delivering half-a-billion-euro annual savings was grand, clear, and well-defined. 

However, the implementation required a significant revision when the details of the local regulation, market dynamics, technology solutions, and the governance were considered. It took two years to clarify that while the Big Dream had the right to exist, some of its core assumptions had to change for it to be successful.

2.     The Communication of the journey ahead has been a case study in mutual mistrust, forced change and a resulting increased resistance, demotivating both the bank employees potentially affected by the upcoming change but uncertain about its effect on their jobs, and the bank leaders who were not able to make strides on one of the most significant programs for the bank.

3.     The Expertise for the project implementation focused on Technology transformation, while the bottleneck started in a different place: regulation and governance requirements, resulting in a National Bank intervention citing national interests rather than IT topics. With all the right expertise and planning in place for a Technology project, this turned out not to be a Technology Transformation, and could not move forward as such.

4.     The Leadership Reward is a painful illustration of the reputation damage for the outgoing ING CEO from the failed Grand Transformation. As the Financieele Dagblad (the main business publication in the Netherlands) points out, this was supposed to be his Crown Jewel of successful digitalization. Instead, the headline of their 2020 article was “Digitale toekomstdroom ING-topman ontaardt in deceptie” (ING Boss’ Digital Dream of the Future Deteriorates into a Deception).

Where is ING today on this digital transformation journey?

Well, things are looking up – and the 2022 Investor Day Presentation shows tangible progress on technology platform implementation, customer metrics, and financials. Importantly, there is a subtle change in the wording and the visuals related to this transformation and the overall presentation, reflecting a big change of tone compared to the 2016 plans.

Already in the 2019 Investor Day Presentations, the project name was changed from the “Orange Bridge” (united bank in Benelux) to “Unite be+nl,” describing the two markets as separate peer operations. The wording of the project goal showed a clear shift – explicitly describing the changes in customer experience, using the word “harmonization” rather than “integration”, and being open in naming the source of the expected savings –the number of employees (5,500 in total) who would lose their jobs, rather than an abstract €500 million a year saving promise of the 2016 deck.

In 2022, the transformation is another 3 years further, a different CEO is running the bank, and different people than the names on the 2016 and 2019 Investor Day decks are driving the Digital and Technology Transformation efforts.

There are no longer separate decks dedicated to “Uniting Belgium and the Netherlands” or a “Transformation Update.” The structure of the ING Investor Day presentations follows the Functional responsibilities of its Management Team. A Technology update is a shared presentation with Operations, united by the focus on Customer Experience and sending a clear signal that Technology transformation is not singling out any specific countries but is a shared foundation across all markets, with a granular approach reflecting differing market maturity.

Belgium got their own page in the Investor Day deck, with the same content as the page for the Netherlands, no longer describing Belgian business as a unification or a merger target, but instead acknowledging both the autonomy of the market and the shared priorities of ING as one bank serving customers in many countries.

In short, the 2022 Investor Day shows significant learnings when it comes to the Four Transformation Paradoxes, and a positive trajectory on all four aspects.

The Big Dream is still big, but it is more flexible, less procedural, and centers on the customer experience rather than on the internal organizational structure.

The Communication tone and priority have evolved significantly. In 2016, the message was a big promise of a technological grandeur and financial savings, and an ambition of being “the biggest.” In 2022, the message is centered around the customer experience, sustainability, and harmonization. It also does not shy away from acknowledging that cost reductions come from thousands of employees losing their jobs, putting a human perspective on the plans.

The Expertise setup has evolved towards a functional structure, the storytelling sends a message of a collaborative and holistic approach, and transformation metrics are more balanced both in terms of the impact (customer usage and satisfaction metrics alongside with the financials) and the levers used (savings that come from optimization of cloud computing costs vs savings from reducing the employee headcount).

Finally, the Leadership has seen a lot of change since 2016, and reflects the 2022 culture, priorities, and expertise needed to take ING forward.

In the upcoming weeks, I will be sharing the insights from my conversations with senior leaders who have been initiating and driving big transformations – and will reveal what they think about these four paradoxes and what makes them successful. 

Do stay tuned, and please like, subscribe, and share this Newsletter if you enjoyed reading it! 

The conversation about the benefit of Central P&T is the longest running “will they – won’t they” plot in the history of the online marketplaces. DSA adds an extra twist.

How the “45 million users” counting rule for the VLOPs might impact Technology Platforms development and drive Fragmentation and Market Divergence of the Online Marketplaces in Europe?

Yesterday, the European Commission has published the list of the Very Large Online Platforms (VLOPs): those reaching more than 10% of 450 million consumers in Europe and seen as posing particular risks in the dissemination of illegal content and societal harms.

Not surprisingly, all the major global platforms from Google to TikTok have made the list. Interestingly for the Online Marketplaces, only several of the well-known brands operating in Europe are on the list of VLOPs and are expected to comply with complex regulatory requirements within the coming four (!) months.

We see Alibaba Express, Amazon Store, Booking, and Zalando on the list of the Very Large Online Platforms that reach at least 45 million monthly active users in the EU area. What do these platforms have in common?

One brand, one technology platform, one website (country-specific versions notwithstanding), shared content visible across EU users. 

Who are the Online Marketplace platforms that DID NOT make it to this list?

Leboncoin.fr (29 million monthly active users), eBay Kleinanzeigen (36 million), OLX Poland (18 million) – the list can continue; one thing is clear – these are the platforms that use separate Technology platforms (and often brands) per country, even though they are all part of larger companies providing service at the total scale of 45 million+ monthly customers in Europe.

Zalando operates a shared marketplace across Europe and has reached 50 million active customers. According to Similarweb, 24% of its traffic comes to Germany, 14% from Poland, and each of the other European countries accounts for less than 10% of the audience. In other words, had Zalando been running separate platforms in those countries, it would have been seen as a set of 12 million / 7 million / and less companies and would not been hit with the most stringent regulatory requirements.

How will the business case for a shared Technology platform differ going forward, when the costs of DSA regulatory requirements are taken into consideration?

Let’s make a simple decision-making model by comparing scenarios for an online marketplace that operates in 10 markets, of which 3 are large (10 million users each), and 7 are small (3 million users each). Its operating margin is 37% when all country operations are independent.

If this marketplace were to operate as one platform / one brand across EU, it would serve 51 million users and would meet the costly compliance criteria of a VLOP.  

However, moving 6 out of the 10 markets to one platform would keep the number of users just under the threshold.

I use a simple hypothetical scenario: 

-       higher compliance from hitting 45 million users costs 2ppt of the margin;

-       shared platform and brand infrastructure increases the margin by 4ppt. 

How strongly might the compliance requirements influence Technology Platform decisions in this context?

The simple answer is - not strongly. A fragmented platform with low compliance costs runs at 37% margin, while a shared platform with high compliance costs at 39% margin, still worth the investment.

Things get more interesting when we consider the strategy of “a shared platform just under the 45 million user threshold.” With the same starting point, a high growth (25% CAGR) company has much less incentive to merge their platform than a slowly growing one (5% CAGR), gaining a full 1ppt difference (39% vs 40% margin).

So, the answer to this question – will DSA influence Technology Platform decisions – is a definite yes for high-growth companies, who will think twice before switching to the benefits of shared platform due to increased compliance costs.

A more nuanced picture will appear for the more established, low-growth businesses. If they are expecting low long-term growth and will not enter the VLOP territory, it might be worth taking the risk of platform merge to simplify operations and control the EBITDA.

What does this mean for the future outlook of Marketplaces fragmentation across Europe? Will the same large players continue having a strong presence, but stop investing into advanced shared Technology platforms? Or will this bring a true diversity of offering?

Thoughts? Please share in the comments!

Having worked for the Marketplaces businesses for the past 15+ years, I was always keen to understand the dynamics of two-sided marketplace over time and how modelling insights can help steering it towards a healthy and sustainable ecosystem.

Successful marketplaces have tens of millions of active users, and modelling aggregate user behaviour by looking at the averages tends to be more descriptive (i.e. “an average buyer comes back 4 days a month and is successful 25% of the time”) than actionable (i.e. “adding 100 more sellers will increase average buyer’s success by 10ppt”).

It is especially challenging to forecast the dynamics of such large system beyond extending the known long-term trends. This is where agent-based modelling approach can bring forward-looking insights for marketplace interventions, where past averages are not enough to understand the future scenarios.

For example, it’s possible to run simulations of how a marketplace evolves if a large group of business sellers are added to a C2C category. Or investigate how introducing pay-and-ship transactions affects the dynamics of buyer success and overall marketplace health.

I illustrate this below with a few examples, using Netlogo ABM Modelling suite from the Center for Connected Learning and Computer-Based Modelling at Northwestern University and building upon its evolutionary biology models.

What is a Healthy and Sustainable Marketplace?

 The drivers of a healthy two-sided marketplace are known: a richer offering and better matching lead to more happy buyers, who in turn come back to the platform, attracting even more sellers and further enriching supply, and leading to even more successful transactions – the classical flywheel.

A healthy two-sided marketplace has:

-      many diverse sellers and items on offer

-      many potential buyers with a purchase intent

-      high probability of matching demand and supply

-      smooth transacting experience.

A sustainable two-sided marketplace has:

-      growing number of sellers, buyers, and successful transactions

-      overall profitability and a sustainable margin outlook.

 Ideally, the growth levers (sellers, buyers, and transactions) come with a positive unit economics, making the marketplace self-sustainable. In real life, this is hard to quantify upfront.

First, there is a time gap between the investment (into marketing, customer acquisition, new product feature) and the return (lifetime value of the customer or the ROI on the product). Second, the complexity of the overall ecosystem makes it hard to single out cause / effect of a specific lever or its long-term consequences.

This is where agent-based modeling can be especially insightful, since it allows generating multiple scenarios for complex system dynamics and observing how parameter change affects both the over-time dynamic and the long-term equilibrium.

Example - Local Pickup vs. Delivery Marketplace Dynamics

Let’s illustrate this with a simple example that builds upon the evolutionary biology models.

Imagine a marketplace with two types of sellers: Local Pickupsellers make their goods available within a certain (small) radius, while Delivery-Enabled sellers can reach a wider audience with their goods. Buyers are equally likely to consider either seller but might get different benefits from using a pick-up vs. a delivery solution (more on this below). What are different dynamics when different parameters are considered?

I modified a Bug Hunt Predator Invasive Species model from the Netlogo Library to reflect the following assumptions:

Marketplace Model

• Local-pickup and Delivery-enabled sellers earn money from the market demand and spend money on the marketplace presence.

• Sellers with more money increase their presence. 

• Total market demand is constrained and can sustain a finite number of sellers.

• Buyers roam the marketplace and get matched with sellers randomly.

• Buyers get value from transactions, and they invite new buyers to the marketplace when the value is high.

Bug Hunt Predator Invasive Species Model

• Two types of insects live in the field and gain energy from eating grass and spend energy on roaming the field.

• Insects with enough energy reproduce.

• Total amount of grass and its regrowth rate are constrained and can sustain a finite number of insects.

• Birds fly over the field and eat insects randomly.

• Birds gain energy from eating insects and reproduce when the energy is high.

Then I ran 200 simulations of 1,000 iterations each to observe marketplace evolution under different seller and buyer characteristics. The key question remains – what constitutes a healthy and sustainable marketplace? What ensures a lively market with many diverse sellers, many buyers and transactions, and with a stable overall population dynamic? And what leads a marketplace go into decline?

Below are a couple of examples that show the potential of this approach.

When the ability to reach buyers and the value generated from it is similar among two types of sellers, a relatively stable marketplace emerges with both types of sellers present and buyers using both.

When delivery services are offered by businesses who have a longer lifetime than individual local sellers, the share of businesses grows over time, local sellers decline, and the overall marketplace health is also not growing.

Finally, when being a local seller brings better value than offering delivery, a stable marketplace emerges that is dominated by the local sellers – with the delivery offering dying out over time. 

The main insight from these simulations is that with the same starting point, long term dynamics can diverge significantly – but it is possible to predict how that will happen even though the system potentially has millions of active participants with individual decision-making.

It’s especially interesting to understand at which point in the lifetime of a marketplace different interventions (such as adding many consumer sellers, or introducing pay-and-ship, or changing rules for business sellers) have the desired effect of increasing health and sustainability of the marketplace, versus triggering its decline.

 What are your Friday Afternoon Thoughts on this? 

We spoke for more than an hour, and the video highlights of this conversation are available at the Path to Profitability Youtube channel:

First, let’s talk about GamerPay. What do you guys do, what is the community you serve, and how do people use your services? How did you come to the idea? 

GamerPay is a marketplace for gamers who trade gaming skins. Today, we serve a community of Counter-Strike: Global Offensive players who have deep interest in in-game cosmetics. The trade is like collecting and trading sneakers or watches, but the goods are digital.  Beyond that, things are surprisingly similar: the marketplace shows images of the items and provides an escrow. Delivery is digital and is a lot easier, as it’s instant and verifiable vs physical shipping. 

The idea originated with my co-founder Martin. He was an admin in an 85,000 person group of skin traders and got flooded with users who had been scammed. Martin tried to help and looked around for other services to use, but without luck. 

What Martin had discovered was that you had this growing population of young gamers that play different games and really want to express themselves in the games as they do in the real world. In some of the games, like Counter-Strike, you are allowed to resell and buy these items as if they were physical assets. That means that there is this huge, grayish kind of market, where people trade like they did on Facebook groups before Facebook Marketplace. They trade in all kinds of ways; there is a lot of scamming that is bound to get even worse with AI. There is a need for a trusted middleman to make this trade safe. 

You can use a person you both know to hold the money in escrow until the skin is released, but that’s not a scalable solution given how many hundreds of thousands of people trade within the games. There are no precise estimates, but out of roughly 25 million people a month that play Counter-Strike, two-thirds are in the European Union, and a third engage in some kind of trading activity, making the market in the EU alone as big as 5-6 million people. 

Based on our experience of building a leading peer-to-peer transactional marketplace for fashion, we “connected the dots” and decided to do something similar here.

Mathias, please tell the readers about yourself. How did you go from working for large corporates to becoming a serial entrepreneur? How do you decide which business problem to work on?

Let’s start at eBay Denmark, where we worked together more than 10 years ago. eBay Classifieds was a super fun place to be, with a lot of autonomy and entrepreneurial spirit, and a freedom to operate that came from having local organizations and local tech. Working for a smaller business and having a big impact, when I moved to Italy, was a lot of fun. I also have experienced the internal workings of a large corporate firsthand. Turning a large ship is rewarding, but it’s a lot of work. Managing many internal stakeholders was often about throwing myself in front of different organizations to allow my team to execute on their goals. I enjoy thinking about business problems, but I spent a lot of my time on internal topics instead.

So, when I ran into Mads Aaroe Mathiesen, the co-founder of Trendsales, and he talked to me about their business, I was very attracted to the opportunity. Tradono, as it was called at the time, was a mobile offering for trading second-hand goods, similar to Vinted or LetGo. The app product was significantly better than the alternatives and was gaining traction. I jumped the corporate ship to join Mads and do more entrepreneurial stuff. It was a fantastic experience, learning from the front seat on a wild journey. 

One day you are growing according to plan, but suddenly Facebook Marketplace launches in the middle of it. You are thinking – those guys are on every phone in the world, we are ******! But over the course of a few weeks, you execute on a set of strategic changes – in our case, moving from a general classifieds concept into a fashion vertical. Relief? Maybe – until you then realize, now you are competing against a strong local competitor and need to do payments really well to succeed. Fast forwarding to today, we have built a strong position in Denmark, but many of the other markets were being won by Vinted or the United Wardrobe one by one, and making a dent in their position required investments we didn’t have. So, Trendsales focused on running a great business in Denmark.

I left Trendsales and continued my entrepreneurial journey – as a co-founder of a recruitment startup, and later as a Product and business lead for a corporate venture. I enjoyed the steep learning curve and creating new solutions for truly difficult problems, like applying my general marketplaces knowledge to the specific supply and demand dynamics for the temp workers and small businesses. 

If I think back on how I have been choosing where to work, the biggest driver has been not the What, but Who to work with. I joined companies because I knew the founders and was excited to work with them.  For example, this happened when I had the opportunity to work with Rasmus Busk. My thought was – “I don’t really care what the project is, I want to work with him.” I greatly enjoyed my time at Verisure, building the Lookout. 

Joining GamerPay has been about meeting a brilliant person to work with and addressing a real business problem with a huge unsolved opportunity. Martin Lykke Suhr is a really brilliant guy, a Swiss-army knife type of person. He can code, he can do marketing, he can do many things himself – but he also needs partners, to not be doing everything all the time. I was very lucky to join Martin and the other co-founders,  join the team co-founder of GamerPay, help raising a pre-seed round in 2020, and now further focus on building up the business after a $2 million seed round by FundersClub, PreSeed Ventures, Skyfall and angel investors in 2021. 

How is today’s version of Gamerpay different from the original idea and what are the most interesting insights from the journey?

Originally, we wanted to build a Paypal or Venmo-like service that was solely focused on being a dedicated escrow solution. However, after launching we quickly realized that sellers dictated the payment means and didn’t feel a strong enough need to actually use our solution.  That’s when we started to build seller shops and marketplace functionality.

We started out being this digital middleman, and obviously we did all the product work by the book: you talk to people, you survey people, you do prototyping, all the right things. Then you launch the product and you are like ****!  no one is **** using this product and it doesn't make any sense! You spend a couple of weeks wondering – what is this? But then we backed up and talked to a ton of customers, and it was pretty evident that we had misread the dynamic between the buyer and the seller. Our product was fantastic for buyers because they're the ones typically getting scammed, but it's really the sellers that have the power to say: “hey, I'm only accepting PayPal”, or “I'm only accepting Venmo.” 

We couldn't convince them to use our solution until we started to build marketplace functionality. We basically built out a storefront for the sellers, which meant that instead of having 200 messenger chats and 200 WhatsApp chats, the sellers could just say: “Hey, just look at my store, just buy it, and you pay within the game, and I'll send it to you once I know you paid, through a notification via GamerPay.” 

That was a huge AHA moment for us: finding the way we are actually helping these guys: we help them save time, they don't need to spend as much time on managing the sale, and the transaction is streamlined. Once we got enough sellers on the platform, it became necessary to build a buyer feed to sort through all the offerings, and we continued developing the product in this customer-driven way.

What is the main problem that you are solving? What are the alternatives to GamerPay?

We solve the discovery of items and safety. The core issue, as we see it, is solving global escrow payments to ensure we have a strong alternative to unsafe solutions. On top, we see a lack of a  “Coinbase” like solution where you instantly feel safe and that it’s legit. 

The alternatives are fully “unsafe” trust-based transactions, typically with some mutual vouching. Or a trusted middleman, a known figure in the community. Neither scale very well to a large number of users and items.

There are also other trading marketplaces, but the market is very fragmented. Competition is hard, and we do have some features that make GamerPay stand out. For example, we have complete 3D visualization of the items because they already exist within the game. We can make price recommendations based on the market price index. Our original vision remains largely the same: becoming the default destination for young gamers to safely trade in-game skins.

What is the business model for GamerPay? How do you become profitable (I have to ask :O)?

The business model is success-based: we charge between 3-6,5% transaction fee, depending on the payment method. Our aim is to keep the gross margin after the payment costs at 60-65%. Growing the volume scales the business pretty nicely, so profitability outlook is bright. Our ambition is to reach 1 billion USD in GMV, you can do the math on profitability of such a business.

What is the most interesting problem that you are working on? 

New day and new problem:) Joke aside, our market is still very fragmented, with large regional differences in pricing and supply. One of the projects we are currently working on is connecting to a massive supply database solving the supply issue to an extent not seen before. This enables our users to access items otherwise not accessible, and thus we are breaking down major friction points. 

What is the question you wish people would ask you, but nobody does?

How much scam and money laundering fraud do you have? People tend to assume it must be a lot, but we have less than 1% credit card scam and so far no issues with money laundering... 

Thank you, Mathias! I have learned a lot today, and two big things especially stand out:

Digital goods marketplaces are a more complex version of the physical goods marketplaces. Some complexity comes from the nature of the products, but some of it is also regulation and how global and fast the trade is. There are a lot of direct learnings from the Classifieds marketplaces, but there are also a lot of things that are newer and faster and could not have come from an old playbook.

Another important takeaway is that what drives you, Mathias, is finding people that you really enjoy solving difficult problems with, driving the next ideas, and making impactful business decisions. There are many great problems to be solving, and who you are solving them with makes all the difference.

What is the implication of a Transactional Model for the Marketplaces Profitability? 

Looking through the 2022 financial reports, the following picture emerges.

In Norway, Schibsted has reported that the transactional model has been driving revenue growth while diluting the margin, specifically pointing out Product Development investments needed for further growth.

In France, Adevinta similarly reported that the transactional model has been loss-making for leboncoin, but that it did reach a break-even on the unit economics of by the end of 2022. As of January 2023, leboncoin introduced a 4% buyer fee for purchases in Fashion categories and restricted shipment eligibility requirements, further supporting the path to profitability of the transactional model.

Elsewhere across Europe, Prosus has reported a significant volume of adoption of the Pay and Ship solution by OLX customers, paired with a negative unit economics that is due to turn positive towards FY2026.

While improving YoY, OLX Pay and Ship take rate of 3.2% is significantly behind the market standard. For comparison, Allegro Poland – who shares a key market with OLX and operates the largest B2C transactional marketplace with a C2C offering – reported their take rate to be 11% in Q4 2022.

Some of the gap can be explained by the differences in the logistical infrastructure (which Allegro operates and OLX does not). Another possible explanation is the complexity of operating in multiple markets with fragmented delivery services – which may explain why OLX lags behind the one-country business like leboncoin in France, who has already reached a break-even on the transactional model in 2022.

What are the lessons from the B2C Transactional Marketplaces?

C2C Marketplaces have reported significant growth in their transactional models: 65% YoY at OLX, 154% at eBay Kleinanzeigen, 33% at leboncoin. It is important to remember that this growth comes from introducing a new model and a relatively low base. For the established B2C marketplaces with the transactional model, growth looks more challenging. Monetization and profitability improvement is the key priority. 

Allegro delivered 14% growth in GMV in Poland, driven mainly by the increased Take Rate (co-financing and success fee changes lifted it by 1.06ppt), higher Average Order Value (+11.3% YoY, guided by incentives and promotions), and growth of the Advertising Revenue (+29.7% YoY) – taking a page out of the Classifieds playbook, where listing promotions already generate a significant share of revenues. With a difficult economic outlook and a negative consumer sentiment, Polish Retail growth slowed down in 2022 to 15%, and Allegro GMV grew largely in line with the market.

In the Netherlands, Bol.com struggled in the difficult market and reported a GMV decline of 1.9%. It continued operating profitably (although its EBITDA was almost 30% down YoY). Growing revenue streams for bol.com were internal advertising (70% YoY revenue growth from sponsored products) and logistics services (20% YoY growth) for its third-party marketplace.

Allegro Q4 results presentation has reiterated its focus on improving profitability. While the take rate has increased to 11%, and Product and Technology investments are flattening out, net delivery costs as share of Allegro revenues continue to increase and are the biggest threat to profitability.

Allegro Poland EBITDA margin has decreased from 51% in 2019 to 33% in 2022. A large proportion of this margin dilution has come from the increased share of net delivery costs, rising from 10% of revenues in 2019 to 26% of the revenues in 2022. Getting the logistics and the customer experience right has been costly. In addition, Allegro SMART! subscription, inspired by Amazon Prime, has increased engagement but diluted margins since free delivery offering for 4.99 PLN a month is loss-making. While additional revenue streams like financing or sponsored listings can partially compensate for this, ultimately the standalone unit economics of delivery services will define whether transactional model can become and stay profitable.

Is Transactional Model a Profitability Killer for the Classifieds Marketplaces?

In short, the answer is a bit of a yes. The Classifieds Marketplaces of the 2010s, with their near 60% EBITDA margins, do not represent the future marketplace businesses that rely on the transactional model. The higher margins of the vertical businesses – Automotive, Real Estate, Jobs – will continue compensating for the profitability dilution in the General Goods category. Increased expansion of the locker-to-locker delivery services and consumer acceptance of service/success fees in the C2C trade will support profitable and sustainable operations, but at a significantly lower margin.

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