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We're sharing a guest blog post from our community EIR Blake Hirt covering the importance of having a high frequency and/or high Average Order Value (AOV) when building a marketplace. This was previously shared as a post in the community here.
Hey EM, I’m continuing my series of posts on what I believe to be the anatomy of a successful marketplace.
In this post, I’m going to provide an overview of the third criterion: high frequency or high average order value (AOV). I’ll define these terms, break down why they are so important, cover examples, and share tips you can leverage for your marketplace.
This post does not dive into all of the nuances of this topic, but the goal is to provide a better high-level understanding. For further reading, I recommend referencing some of the great resources at the end.
Frequency relates to the number of times a user transacts on your marketplace within a given amount of time. Marketplaces generally need to be used at least monthly in order to qualify as high frequency. If used weekly or daily, even better.
“I would say anything less frequent than monthly is low frequency, though it tends to be a little more binary in nature — either you have monthly frequency or you have annual frequency. There isn’t a whole lot in between.”
-Casey Winters, Growth Advisor
Average order value (AOV) is the amount of money spent per order on your marketplace. This is typically measured as gross merchandise value (GMV). There is not a definitive cutoff to constitute a high AOV, and it highly depends on industry and business model, but I generally consider it to be anything over $100. Some marketplaces have AOVs in the many thousands of dollars. All else equal, the higher the better.
Let’s start with the financial basics. For most marketplaces, your revenue is a simple formula of:
# of transactions x AOV x take rate = revenue
The number of transactions is a direct result of how many users you have and how frequently they use the marketplace. While take rate is important, AOV is generally more important because even a small percentage of a big number will provide meaningful revenue for you and your marketplace.
Thus, it’s easy to see why building a high frequency or a high AOV marketplace is vital — your revenue depends on it! Additionally, high frequency and a high AOV demonstrate that you’re providing real value to users. Both increase LTV, helping ensure your unit economics are healthy. With a high frequency product, you may not make much money on each transaction, but the user will transact enough times on your platform to add up to great unit economics over time. With a high AOV product, you can oftentimes have positive unit economics on the first purchase, reducing the need for high frequency. However, you generally still want users coming back, even if it’s on an infrequent basis.
There’s generally an inverse relationship between frequency and AOV, so you typically only have one or the other. If you have both, you are a rare breed that is ultra-dreamy!
Low frequency makes it hard to stay top of mind for users. This dynamic results in higher CACs, as you’re forced to consistently remarket to users. Additionally, it lowers retention, resulting in lower LTVs. If users only come once and never again, that’s a recipe for disaster. Companies like Casper, Away, and 23&Me have learned this the hard way.
“I think the main challenge with low frequency marketplaces is that you have short windows to engage and deliver value - and you won't get another shot with the same user for a long time.”
-Matt Holder, Founder of Loop Golf (prev. Zillow, Trulia, Houzz)
Fortunately, there is still a path to success as a low frequency marketplace. Some examples of infrequent marketplaces include Booking.com, Wayfair, and Zillow. These marketplaces range in frequency from fairly infrequent to very infrequent, but have still grown to huge market caps.
“You can build a great business that is low frequency. It’s not a death sentence in any way. But, when you are a low frequency marketplace, every other component of the marketplace has to be way better to make up for it. Your AOV, cost of acquisition, or take rate…probably all three of those need to be better to make up for the fact that you’re not having a high frequency of transactions.”
-Casey Winters, Growth Advisor
Zillow took a novel approach of building Zestimate to combat low frequency. Although users transact on the platform at a very low frequency, they could come back on a monthly, or even weekly, basis to check the value of their home. This kept Zillow at the front of users’ minds when they were finally ready to buy or sell a home.
Additionally, if your product is visible to your users on an ongoing basis, even if they’re not visiting your platform, that will help re-engage them. Clothing marketplaces like TheRealReal and Stitch Fix benefit from this dynamic, as users remember the company whenever they get dressed in the morning or get asked by colleagues where they bought their wardrobe.
Lastly, you may want to consider changing your target market in order to increase frequency. There may be a certain segment of users who need your product way more often than others. Focusing on a specific niche can lead to easier acquisition and much higher retention and engagement. Twitch initially had many segments of streamers, but once they focused on gamers, growth started to take off.
“Frequency took us a while to really figure out when starting Studiotime and it actually led us to slightly changing our ICP on the demand side once we started to learn more around the nature of bookings and frequency. Instead of focusing on artists that might want to book a studio for the first time and/or having a one-time need (note that wasn’t obvious from the start), we started to also focus (and more importantly our targeted efforts) on artists, producers, songwriters, and managers that had more frequent and ongoing needs for booking studios.”
-Mike Williams, prev. Founder of Studiotime
Even marketplaces that have a decent starting frequency can find it a very difficult metric to move. During my tenure working on Uber Eats, frequency barely budged regardless of how many restaurants we added. Frequency is highly dependent on how often users need your product or service, so don’t try to force unnatural adoption simply to juice frequency. Listen to your users’ needs and serve them accordingly.
To dive deeper into this topic, I highly recommend watching the Low frequency marketplaces workshop (led by Vivek Kumar) He does an excellent job breaking down the types of infrequent marketplaces and how to improve user engagement.
AOV is generally easier to increase than frequency. It’s certainly not a snap of the fingers, but there is typically lower hanging fruit here.
The most obvious lever to pull is simply raising prices. Pricing is an art and a science, but startups often underprice to try to juice growth. By experimenting with price increases, you may be able to quickly increase AOV. Of course, getting too aggressive with pricing can decrease conversion rates and retention, but a minor decrease in these metrics may be tolerable if the increase in AOV is offsetting.
You may also be able to sell more expensive offerings. This could include higher quality products or simply increasing the duration of a service. Providing a great UX to make these updates as seamless as possible can make a big impact.
“The biggest factors that increased AOV were 1.) adding half-day and day rates, 2.) the ability for bookings to be extended, 3.) services or booking add-ons, and 4.) adding more professionalized segments of supply (higher rates, typically used in longer durations, etc).”
-Mike Williams, prev. Founder of Studiotime
Lastly, you may want to offer bundles or, at the very least, make it as easy as possible for users to add additional products or services. Instacart does an excellent job increasing their AOV by providing targeted recommendations to add more groceries with a single tap during the checkout process.
Airbnb is the classic example of a low frequency business that has broken out to be a huge business. One reason is the large AOV that they command. But there are other dynamics at play that make Airbnb such an exception.
While their users only transact once or twice a year on average, the actual usage of the product is much higher. For a two-week stay, Airbnb is "used" 14 times, not just once. This equates to the same frequency as a product that’s used monthly. Airbnb also has power users who live out of their units for months at a time, or even year-round. As a former nomad myself, my usage of Airbnb has been anything but low frequency.
Additionally, Airbnb benefits from being a place where fond memories are built. People love to reminisce on their vacations, looking through pictures and chatting through funny or thrilling happenings. This behavior keeps Airbnb top of mind when users book their next getaway.
Building a marketplace that has either high frequency or a high AOV is paramount to having success. Fortunately, you don’t need to have both, but if you can make that happen, more power to you.
However, regardless of how high your frequency or AOV is, it’s important to remember that ultimately your unit economics need to make sense. If you have super high frequency and a super high AOV, but your CAC outstrips your LTV, you still don’t have a sustainable business. These are only two factors that fit into a broader picture to determine the health and success likelihood of your marketplace.
Special thanks to Mike for his input to uplevel this post. For further reading, definitely check out the resources below.
If you have any thoughts or questions, feel free to reply below or reach out directly.
You can connect with Blake to discuss this post in the Everything Marketplaces community here. A big thanks to Blake for also being an active EIR in the community, where he is often sharing his marketplace experience, insights, and helping early stage founders.
