OfferUp: Tackling Craigslist, Head On

  The Challenger

OfferUp has created a “mobile, local marketplace[1]” that allows users to buy and sell goods from other users. It is, at this stage, a C2C marketplace for goods, although there is no reason per se that this could not change going forward. The value creation, then, is very simple: it connects users to facilitate the purchase and sale of primarily used goods, with a modern app to ease the process. It is a platform with direct network effects, as value to users goes up with more users on the platform. At this time, there are no indirect network effects because there are no complimenters (such as advertisers) on the platform.

OfferUp Screen Shot. Source: Author

Value capture, however, is more problematic. Currently, OfferUp makes no revenue. It takes no share of transactions, benefits from no advertising revenue, and does not charge for any listings.[2] And while advertising might be a source of future revenue, providing that the advertising experience does not alienate users, transaction cuts could prove difficult given that users have the option of executing cash transactions, even if the app were to integrate a payment platform. Charging for listings is a possibility, but likely would require different types of goods (apartments, job listings, etc.) than currently offered, and also likely requires monetizing a B2C aspect of the platform that does not yet exist.

Another issue exists as well: not only is the value capture model challenging, but there are two huge competitors already in the space: eBay and Craigslist.

The Competition

eBay and Craigslist are both very well established online marketplaces with strong network effects Thus, OfferUp needed to craft a careful strategy to enter the market successfully. I believe the first element of that strategy was to avoid eBay. eBay is a global platform, which is generally agnostic of buyer/seller locations. OfferUp instead pursued a very local model,[3] focusing on transactions which would be facilitated on the platform but would be fulfilled face-to-face. This allowed it to focus on building local network effects and insulated it from some of eBay’s incumbent advantage. OfferUp could focus on building users within specific cities and then expand; anecdotally, in the author’s experience there is even a noticeable difference in the platform strength in New York versus Boston, with New York featuring a much more robust user base.

However, this strategy pits OfferUp squarely against Craigslist, which is much larger. OfferUp has focused on a few discrete strategies to attempt to gain share against Craigslist. First, they have focused on improving the user experience on their platform versus Craigslist’s antiquated listing index. OfferUp has made it very easy to list items using a phone camera, as well as created a much more visual, streamlined app experience.[4] The effect of this strategy has been to make it easier to multi-home, since the effort of listing an item for sale is much lower due to the integrated smartphone/app process, as well as reduce frictions on OfferUp’s platform to make buying and selling easier.

 

Craigslist v. OfferUp UX. Source: Author

The second thing OfferUp has focused on is the community on the platform.[5] Craigslist is notorious for having a “wild-west” feel, with scams somewhat common and no way to verify user histories. OfferUp is utilizing buyer and seller ratings, and user verification to build a more transparent user base, and employing machine learning to tackle scams.[6] The intent of these initiatives is to create more trust on the platform and make it the primary destination for their target transactions over Craigslist, in concert with the improved user experience.

Sample OfferUp User Profile. Source: Business Insider

The Outlook

So far, their strategy seems to be working. OfferUp is reportedly was on track to do about $14 billion in sales volume in 2016, suggesting a robust platform.[7] However, Craigslist, while privately held, reports that it has about 60 million active users a month, compared to OfferUp’s ~18 million total downloads.[8]^,[9] Additionally, OfferUp still faces a huge monetization challenge. Craigslist has publicly stated that it is not in business to maximize profit in the past (although 2016 revenues may have been close to $700 million);[10]^,[11] OfferUp, with $221 million in total funding from investors, likely does not have that luxury.[12] Additionally, it will be very difficult for OfferUp to monetize a part of the platform that others give away for free. Craigslist currently only monetizes job listings and apartment listings in New York.[13] Thus, while OfferUp has clearly done a good job entering a platform market with strong network effects, the jury is still out on whether it will be able to capture enough value to build a viable business.

 

References:

[1] https://offerup.com/about/

[2] http://fortune.com/2016/03/08/craigslist-killer-offerup-is-growing-fast-but-still-no-revenue/

[3] http://www.geekwire.com/2016/craigslist-challenger-offerup-pace-14b-transactions-year/

[4] https://offerup.com/howitworks/

[5] https://offerup.com/trust/

[6] http://fortune.com/2016/03/08/craigslist-killer-offerup-is-growing-fast-but-still-no-revenue/

[7] Ibid.

[8] Ibid.

[9] https://www.craigslist.org/about/factsheet

[10] http://www.mediapost.com/publications/article/52242/just-an-online-minute-stunning-wall-street-shu.html

[11] https://www.aimgroup.com/2016/11/29/craigslist-revenue-soars-again/

[12] https://www.crunchbase.com/organization/offerup#/entity

[13] http://smallbusiness.chron.com/craigslist-money-27287.html