Isa Maidan: Welcome to ECI’s series on valuing digital platforms and marketplaces. Today, we’ll be talking about the supply side and in particular homogenous versus heterogeneous supply. So, let’s start with some definitions. Firstly, what is homogeneous supply? Homogenous supply is where each unit that is on your platform is more or less indistinguishable from the next. Think Uber, Lyft and Bolt, where your consumer is relatively agnostic to the driver and the car that turns up.
Secondly, let’s define heterogeneous supply. That is where each unit that is on your platform is unique. Think Airbnb, where each apartment and each property looks different from the next.
So, what are the pros and cons? The pros of a homogenous supply model are very high conversion rates. The customer comes to a platform expecting a specific product or service, and you have that exact product or service.
That means there are very high conversion rates and customers typically turn from search into a value transaction. So, what are the challenges with the homogenous supply model? The most obvious one is that it’s very difficult to differentiate versus your competitors, and that means you typically end up with copycat platforms. The taxi market again, is a good example here, whereby riders and drivers will typically run multiple platforms.
The challenge you’ve got here is consumers tend to focus on one thing, and that’s price. Moving on to heterogeneous supply, the main benefit here is that you can differentiate versus your competitors, and you do that through the quality of your supply. Here, customers only need to go to one platform to look for different products or services. That means you typically get more customer loyalty, you get higher repeat rates and you get much less pressure on price.
The key challenge with a heterogeneous model is managing a wide range of diverse supply is inherently more complicated. Building up supply and maintaining standards on your platform becomes a lot harder.
Your supply model will impact a few KPIs, which are important in driving the valuation of your marketplace or platform. Unit economics, retention rates and competitive differentiation are typically better in a heterogeneous model versus your ability to scale and conversion rates, which are typically better in a homogenous model.
So how does this impact your valuation? If you have a heterogeneous supply model, an investor is likely to focus on your base to build and maintain the quality of supply, as well as increase conversion rates. If you have a homogenous model, customer and supplier loyalty is going to be key. At ECI, we’ve invested in businesses with both homogenous and heterogeneous supply models, both of which have been hugely successful.
If you have a digital platform or marketplace, we’d love to hear from you.