The Importance of Dominance in Marketplace Businesses

Sarah Tavel is a General Partner at Benchmark and sits on the boards of Chainalysis, Hipcamp, Rekki, Cambly, and Medely. She is a founding member of All Raise, the nonprofit organization working to accelerate the success of women in the venture-capital and VC-backed startup ecosystem. Before Benchmark, Sarah was a partner at Greylock Partners. She joined Pinterest in 2012 as their first PM and launched their first search and recommendations features. She also led three acquisitions as she helped the company scale through a period of hypergrowth. In this episode, we discuss:

Sarah’s Hierarchy of Engagement framework for growing a consumer startup

• The three levels of the Hierarchy of Engagement: core action, retention, and self-perpetuation

• The importance of measuring cohorts and maintaining focus on the core action

• Examples of core user actions from Pinterest and YouTube

Sarah’s Hierarchy of Marketplaces framework for building a marketplace startup

• The three vectors of growth for dominating a marketplace

• Advice on “tipping the marketplace” and ultimately dominating the market

• The value of focusing on a constrained market

• How to avoid disruption

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This entire episode is brought to you by Gelt—Redefine your approach to taxes.

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Find the full transcript at: https://www.lennysnewsletter.com/p/the-hierarchy-of-engagement-sarah

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Where to find Sarah Tavel:

• X: https://twitter.com/sarahtavel

• LinkedIn: https://www.linkedin.com/in/sarahtavel/

• Substack: https://www.sarahtavel.com/

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Where to find Lenny:

• Newsletter: https://www.lennysnewsletter.com

• X: https://twitter.com/lennysan

• LinkedIn: https://www.linkedin.com/in/lennyrachitsky/

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In this episode, we cover:

(00:00) Sarah’s background

(03:33) Framework 1: The Hierarchy of Engagement

(06:03) Level 1: Core action

(10:33) Level 2: Retention

(14:00) Level 3: Self-perpetuation

(19:32) The importance of focus

(23:54) The challenge of anonymity

(26:04) Advice for founders who want to increase retention

(29:34) What founders often get wrong

(31:43) Examples of core actions

(37:37) Finding your North Star Metric

(38:12) Who should use the Hierarchy of Engagement framework

(38:54) The Hierarchy of Marketplaces framework

(46:09) Level 1: Focus on a constrained opportunity

(50:19) Sarah’s “happy GMV” and “minimum viable happiness” concepts

(54:47) Thumbtack: a counterexample to this approach

(56:36) Signs you’re ready to move to level 2

(58:06) Level 2: Tipping the marketplace

(01:04:15) Tipping loops

(01:10:53) Not all markets are susceptible to tipping

(01:15:55) The challenge of homogeneity in B2B marketplaces

(01:20:29) Signs you’re tipping successfully

(01:21:43) Level 3: Dominating the market

(01:28:29) The opportunity in underestimated markets

(01:30:11) The challenges of chasing GMV and losing focus

(01:36:36) Recognizing currents and momentum in the market

(01:39:20) You can never rest on your laurels

(01:41:03) How to apply these frameworks outside of marketplaces

(01:42:57) Three ways to find marketplace opportunity

(01:45:10 ) Lightning round

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Referenced:

• Hierarchy of Engagement, Expanded: https://sarahtavel.medium.com/the-hierarchy-of-engagement-expanded-648329d60804

• Pinterest: https://www.pinterest.com/

• Evernote: https://evernote.com/

• Notion: https://www.notion.so/

• Houseparty app: https://en.wikipedia.org/wiki/Houseparty_(app)

• Clubhouse: https://www.clubhouse.com/

• How to price your product | Naomi Ionita (Menlo Ventures): https://www.lennyspodcast.com/how-to-price-your-product-naomi-ionita-menlo-ventures/

• TikTok: https://www.tiktok.com/

• Lessons on building a viral consumer app: The story of Saturn: https://www.lennysnewsletter.com/p/lessons-on-building-a-viral-consumer

• Saturn: https://www.joinsaturn.com/

• What happened to Secret?: https://www.failory.com/cemetery/secret

• How to determine your activation metric: https://www.lennysnewsletter.com/p/how-to-determine-your-activation

• Shishir Mehrotra on LinkedIn: https://www.linkedin.com/in/shishirmehrotra/

• The rituals of great teams | Shishir Mehrotra of Coda, YouTube, Microsoft: https://www.lennyspodcast.com/the-rituals-of-great-teams-shishir-mehrotra-coda-youtube-microsoft/

• Engagement Hierarchy: Core Actions: https://sarahtavel.medium.com/engagement-hierarchy-core-actions-dd4f72042100

• Choosing Your North Star Metric: https://www.lennysnewsletter.com/p/choosing-your-north-star-metric

• Hierarchy of Marketplaces: https://sarahtavel.medium.com/the-hierarchy-of-marketplaces-introduction-and-level-1-983995aa218e

• Mike Williams on LinkedIn: https://www.linkedin.com/in/yoroomie/

• Everything Marketplaces: https://www.everythingmarketplaces.com/

• Fabrice Grinda on LinkedIn: https://www.linkedin.com/in/fabricegrinda/

• OLX: https://www.olx.com/

• DoorDash Loves the ’Burbs as Much as You Do: https://www.wsj.com/articles/doordash-loves-the-burbs-as-much-as-you-do-11605618001

• Thumbtack: https://www.thumbtack.com/

• NPS: https://en.wikipedia.org/wiki/Net_promoter_score

• Sean Ellis on LinkedIn: https://www.linkedin.com/in/seanellis/

• Rekki: https://rekki.com/

• Ronen Givon on LinkedIn: https://www.linkedin.com/in/ronen-givon-535b2514

• Hipcamp: https://www.hipcamp.com/

• Demand driving supply: The little-understood growth loop behind a surprising number of iconic billion-dollar companies: https://www.lennysnewsletter.com/p/demand-driving-supply-marketplaces

• Inside the Revolution at Etsy: https://www.nytimes.com/2017/11/25/business/etsy-josh-silverman.html

• Faire: https://www.faire.com/

• Bill Gurley on LinkedIn: https://www.linkedin.com/in/billgurley/

• Mechanical Turk: https://www.mturk.com/

• Parker Conrad on LinkedIn: https://www.linkedin.com/in/parkerconrad/

• Rippling: https://www.rippling.com/

• “White Space” for Building a Marketplace: How to Find Your Competition’s Vulnerabilities—and Capitalize: https://sarahtavel.medium.com/white-space-for-building-a-marketplace-how-to-find-your-competitions-vulnerabilities-and-79674aa4d399

• Pachinko: https://www.amazon.com/Pachinko-National-Book-Award-Finalist/dp/1455563935

• The Five Temptations of a CEO: https://www.amazon.com/Five-Temptations-CEO-Anniversary-Leadership/dp/0470267585

• The Five Dysfunctions of a Team: A Leadership Fable: https://www.amazon.com/Five-Dysfunctions-Team-Leadership-Fable/dp/0787960756

• Tesla: https://www.tesla.com/

• Reid Hoffman on LinkedIn: https://www.linkedin.com/in/reidhoffman/

• What Is A Good Activation Rate: https://www.lennysnewsletter.com/p/what-is-a-good-activation-rate

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Lenny may be an investor in the companies discussed.

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