Faire, currently valued north of 12 billion, is a wholesale marketplace that connects brands and retailers. For many brands, Faire has become the home for managing their wholesale business. For many retailers, Faire has become the preferred place to shop for inventory that will increase sales.
Here are some lessons on marketplaces from my time as a Product Manager at Faire.
Find a way to fuel a viral growth loop
A viral growth loop utilizes an existing base of customers, to get significantly more customers. Behind Faire’s viral loop was the fundamental principle that more supply (brands) meant more demand (retailers) and more demand (retailers) meant more supply (brands). By figuring out the right referral incentive structures (the fuel) amongst pre-existing brands and retailers, Faire was able to create a viral flywheel effect that rapidly increased the number of marketplace participants. This viral loop was an incredibly cost effective and scalable growth engine.
So, how were Faire’s viral incentives structured? Faire started with a combinatorics problem. The marketplace was composed of brands and retailers and if we wanted to utilize the pre-existing population of brands / retailers to gain net new brands / retailers – there were only four options. Faire could create a program to get brands to refer brands, retailers to refer retailers, brands to refer retailers, or retailers to refer brands. There are merits to each of these referral combinations (and some form of each combination exists within Faire today) – but the most successful program was the one that incentivized brands to refer retailers. This program became known as Faire Direct.
With Faire Direct, brands could manage any pre-existing and off-platform (not managed on Faire) retailer relationships on Faire, with 0% commission. All a brand needed to do was invite their pre-exiting wholesale customers to buy on Faire, using a first time retailer discount code funded by Faire. In other words, Faire Direct made it a no brainer for brands to import their entire customer list of qualified retailers onto the platform.
Why did this program work for all parties involved? For brands, Faire Direct was a path to conveniently managing their entire wholesale business all in one place, without any additional cost. For retailers, ordering method typically was not something they had a ton of say in, and they were gifted a discount code for any transitional troubles. For Faire, giving up commission on referred brand / retailer relationships was worth it because those retailers then discovered and purchased from other brands on Faire. And, Faire received full commission on those other transactions.
Ultimately, the viral loop of Faire Direct was that it caused retailer growth to increase very quickly, which resulted in more incentive for brands to sell on Faire, which in turn caused more retailers to organically shop on Faire. This flywheel effect was key to Faire’s success, and can be replicated across other marketplaces.
Prevent disintermediation by building value beyond discovery and trust
A transaction happens on your marketplace between a buyer and a seller because you’ve helped connect the two parties. For the next transaction, what’s to stop this buyer and seller from moving off of your marketplace and cutting you and your commission from the deal? The typical answer is trust – you as the marketplace provide trust to a buyer and seller that do not know each other. If there is a problem, the buyer / seller can always complain to and resolve with the marketplace. But, with enough history of successful and smooth transactions on your marketplace, the value proposition of trust becomes shakier. To prevent future transactions from moving off of your marketplace (this is also known as disintermediation), you need to build additional value to the transaction that goes beyond discovery and trust.
At Faire, disintermediation was a big problem. Retailers and brands tend to have many repeating transactions that are prime for shortcutting the marketplace that initially connected them. Beyond simply being the trustworthy neutral third party, Faire built out additional functionality – namely net terms, free returns, and business tooling – to increase value and prevent disintermediation.
Net Terms
Net Terms refers to payment terms where a buyer doesn’t have to pay a vendor or supplier for X number of days. In wholesale, it is fairly standard for suppliers to offer net terms to their buyers For a buyer, net terms provide buffer between having to pay for inventory and being able to sell through the inventory. But for a supplier, net terms can challenging because cash flow is not immediate and payment down the line is not guaranteed (they may need to chase payment).
Knowing the value of net terms for retailers and the financial challenges it presented to brands, Faire was able to come in and finance net terms on behalf of brands on the marketplace. Brands got paid immediately for transactions (immediate cashflow) and retailers still got their net terms. The cherry on top was that some retailers that may not have received net terms from brands because they were smaller buyers, were later able to, only on Faire.
Free returns
Typically, you cannot return products that have been bought wholesale. Faire changed the returns game in wholesale by offering free returns on the first order a retailer placed with a given brand. With these free returns, retailers were able to try out new brands risk free – keeping their stores continuously fresh and new.
Business Tooling
For brands, managing a wholesale business requires a lot of manual work. Faire saw value in building tools within the marketplace for brands to manage their wholesale business – so that brands could effectively use Faire as their all in one wholesale storefront. Faire built products like marketing campaign management and order management to help brands automate the busy work, increase order volume, and more.
All of these value propositions made Faire that much more appealing as a place to transact, and while not perfect, significantly decreased chances of disintermediation.
Fintech is inevitable
As a marketplace, you have an unfair advantage in accessing data on how your marketplace participants are doing. This data can be used to build out strong financial offerings.
When I was at Faire, we were in the process of exploring fintech ideas that utilized this unfair data advantage, like giving out loans to brands. As a hypothetical, these loans would have been quite attractive for brands because Faire could use knowledge of brand income to underwrite the loan with a potentially lower than market interest rate.
For many marketplaces with rich financial data on their customers, building these sorts of fintech products is a big revenue opportunity and can help increase access to capital.
Taxonomy is hard
Marketplaces sell things and these things need to be organized in an understandable way within a website. How things are organized is known as taxonomy. There is a lot of complexity to getting taxonomy right. For example, let’s say you sell apparel products. At the highest level should you have categories like Tops, Bottoms? Should you actually be more specific and have Outerwear, Shirts, Denim, Sweatpants? There are many ways to cut categories and many ways to organize the hierarchy of categories. At Faire, we went through many different revs of the taxonomy and it was always a continuous project that got more complex as we expanded into more and more verticals. Ultimately, the goal is to have a taxonomy that is intuitive to buyers so that buyers can find what they want and transact – but that is much easier said than done.
Personalization, especially at scale, is key
As marketplaces grow, supply continues to increase and it eventually becomes very difficult for a buyer to manage. Buyers tend to not have a ton of time or patience for endless browsing and it’s important to get them to what they want to buy as fast as possible, otherwise they will drop off your purchase funnel.
One of the best ways to get a buyer to where they want to go is to personalize your marketplace.There is always the cold start problem when a buyer first joins. But, over time you’ll have more and more data to feed into smart recommendations that hit the nail on the head for what buyers want.
At Faire, there were hundreds of thousands of products on the platform and the company made significant investments in data science to recommend products to retailers. Everything from the specific recommendation models to the recommendation page UX was tested with rigorous experimentation to produce powerful and effective recommendation engines that ultimately were quite successful in converting marketplace traffic to orders.