Marketplaces Deep Dive with Ramesh Johari

Ben Gilbert (0:00)

Good afternoon, LPs. I will say it feels good to get me out of the interview seat and have another episode with a real and proper guest.

David Rosenthal (0:08)

You couldn't handle the pressure.

Ben Gilbert (0:11)

Very much so.

Ramesh Johari (0:13)

Very much so.

Ben Gilbert (0:14)

So David, who do we have with us today?

David Rosenthal (0:16)

We are super lucky to be joined by our advisor at Wave, Ramesh Johari, who in addition to being a very, very awesome and critical advisor to us, Wave is a professor at Stanford of management science and engineering. And he teaches courses on data science and platform and marketplace design, which is all of which is super core to what we do. And then additionally, outside of Stanford and Wave, previously he was head of data products at Upwork.

He took a leave from Stanford to do that. And he's now also a senior advisor to Airbnb, Uber, and Stitch Fix.

Really, really critical to the whole Silicon Valley marketplace ecosystem from Stanford to great companies to Wave. We're really lucky to have him here. So thank you for joining us.

Ramesh Johari (1:01)

Yeah, thanks a lot for having me here. It's excited to talk about marketplaces. I could talk about them all day.

David Rosenthal (1:06)

It's literally your job to talk about marketplaces.

Ramesh Johari (1:08)

Literally my job.

David Rosenthal (1:10)

It's my job too. So great.

So that's what we're going to talk about today. Everything all about marketplaces, how you start them, how you build them, how you operate them, and then how you optimize them at scale. And Ramesh has seen all of it.

Let's start with starting. So Ramesh, one of the first things you kind of told us here at Wave is, as we were getting going, was about your framework for kind of the three fundamental, I think you call them friction points a marketplace can address, but really like jobs that a marketplace platform does in a market. Can you talk a little bit about them?

Ramesh Johari (1:41)

Yeah. And this whole thing really started when a while back, I was talking to some students about what it is we're selling. When you start a business, you think you're selling something. So what is it you're selling? The initial thought was that if you look at, say, Airbnb, that's a marketplace that's selling lodging.

You look at Uber and Lyft, that's a marketplace that's selling transportation. You look at Amazon, that's a marketplace that's selling goods.

What I thought about that, something made me really uncomfortable about it, which is when you go to these marketplaces, it's true that you're buying lodging, you're buying transportation, you're buying goods, but you're not buying that from the platform. You're really buying that from sellers on the platform. And so, once you dig into that, you start unpacking it, what you realize is that what the marketplace is selling is actually the reduction of transaction costs between buyers and sellers on the platform, or to use less academic language, what they're doing is they're just making it easier to trade with each other. So, sellers-

David Rosenthal (2:42)

Easier even possible.

Ramesh Johari (2:44)

Even possible, yeah, exactly, that's right. I mean, sellers and buyers are both, in some sense, users of a platform. They're both coming to the platform to get something.

And the platform is really, if it's gonna succeed, if it's gonna make money, it's gonna make money because the friction of being able to trade, and that's where that word friction comes in that you mentioned earlier, the friction of being able to connect with the other side of the market is either reduced or completely eliminated in some cases. So, you asked kind of what are those three friction points that I brought up, and that really comes out of asking yourself, well, what are the things that have to happen for me to be able to trade with someone on the other side, to connect with someone on the other side? And it's not, let me just preface this by saying, this is not my framework, this is just kind of a common economic way of thinking about things that have to happen for a buyer and seller to be able to actually connect with each other and one of them exchanged money for goods or services. So, the first one of those is kind of in line with what you said, David, you have to know the other side exists.

So, that's what we call a search or search and information costs, is basically that one role of a platform is showing you if you're a buyer that there are sellers out there and showing if you're a seller that there are buyers out there. And then the information part of that is just telling you enough about them so you can figure out whether that's someone you wanna buy from. Again, like concretely, if you go to a site like eBay, you want a used iPad, well, number one, are there used iPads for sale somewhere in the world? And number two, what do those used iPads look like? Are they scratched up and crappy or are they new and in box? And so eBay is providing both an inventory of used iPads and enough information about them for you to know if that's the thing you actually wanted to buy.