Adam Smith's Revenge

Why markets are everywhere and how you can control the ones you accidentally create

Who is Adam Smith, and why does he matter to my startup? He’s an 18th century economist and is the bewigged fellow on the UK £20 note:

So what does this long-dead father of economics have to do with your high-tech startup? Depending on what your company does, potentially everything. Smith was one of first people to write extensively on economics, and in particular markets.

If you’re a founder, you might be reaching to forward this article to your accountant or business team. But wait, this article is going to be most useful to your product team. And you, if you have a role in designing your product. You might be building markets in your product without even knowing it. Some companies have entire teams of economists on staff for that very reason.

I’m going to show you how to identify hidden markets in your product and how to control them when you find them. Being able to do this will allow you to make good design decisions about your product and fix some potentially maddening user experience problems before you release your product out into the world.

What is a market?

The first thing we need to do is define what a market actually is. When you hear the word market, you’re probably thinking of a place where goods are sold, like a Middle Eastern bazaar or a busy London street market. That’s not the sort of market I’m talking about.

A market isn’t really just a place where things are sold. More abstractly, a market is a system of supply and demand. All supply and demand means is that the price of something depends on how much of it there is (supply) and how badly people want it (demand). Supply and demand and markets are best summarised by something my Dad always told me growing up:

Something is only worth what somebody is willing to pay for it.

We’re used to thinking of the price in terms of money. An apple costs 10p, a car costs £3000 (well, some do). But price doesn’t have to be money; a price can be time waiting for something to happen. It can even be a certain amount of frustration we’re willing to endure trying to accomplish something. Price is any sacrifice we’re willing to make in order to get the things that we want.

Identifying hidden markets involves figuring out if there are any sacrifices that users have to make to get what they want out of our products and if your design decisions are causing users to have to make those sacrifices. If the sacrifice they need to make to get value out of your product is more than they’re willing to make, users will abandon your product.

Example: A Gig Economy App

So let’s see these ideas in practice with the example of a common pattern for a lot of apps, a gig economy app called Winr. Winr is an app that matches people with sommeliers (a fancy term for wine expert) who can give them an instant recommendation for what wine to pair with a meal they’re having. The app doesn’t employ the sommeliers directly, but connects them to users wanting a recommendation via the app. Sommeliers choose when they are available to recommend and are rated by users on the quality. Users pick from a list of available sommeliers and can filter the list by meal type or rating. Sommeliers can only make a recommendation for one user at a time. I’ll leave it up to your imagination to imagine how it’s monetised, but it’s not important for this discussion.

That’s a fairly common pattern for an app nowadays and is similar to Deliveroo or Uber. The service is different, but the matching pattern is the same. It might sound pretty similar to your product.

Where’s the market in that?

Apps using this matching pattern have a pretty clear issue of supply and demand. There are many fewer sommeliers in the world than there are people looking for a wine pairing and the sommeliers can only make recommendations so fast. For the sake of argument, let’s assume that there are enough sommeliers on the app at at any given time to make a recommendation for a user right away.

This is complicated by the fact that some sommeliers are going to have a higher rating than others, or specialise in a particular meal type. Users are going to naturally want to seek out the best sommelier they can find, because they’re most likely to make the best suggestion for their meal. You can imagine a situation where there are some sommeliers available in the app, but users are waiting for the most highly rated ones to become available. If the sommelier that a user wants is currently occupied then users will have to wait until a suitable one becomes available on the list. You can imagine that the more users outnumber desirable sommeliers, the longer users will have to wait for one to become available.

Why is that a problem?

At any one moment, there is a finite supply of desirable sommeliers which needs to satisfy the users’ demand for recommendations. Depending on the time of day or the time of year (you can imagine this app getting busy during the Christmas party season), the amount of demand and supply is going to fluctuate. If user demand for recommendations is greater than the supply, users have to pay a price (or make the sacrifice) of waiting for an available sommelier. If the wait for the sommelier they want becomes too great, users will have to resort to a lower rated sommelier (and be unhappy that they had to make do with a lower quality recommendation) or abandon the app entirely.

This doesn’t even touch on the problem of determining which user gets to see a desirable sommelier next. Do you put users in a queue, or do you let the users with the fastest fingers pick them off the list first?

How do we fix that?

Now that we see how this internal market can cause a problem for our product, how do we make some sensible design decisions to even out the demand for individual sommeliers, while still encouraging the sommeliers to make quality recommendations that give them a high rating? We can attack this a few different ways.

Increase Supply

A lot of gig economy apps spend a lot of money and time making sure there is an ample supply (or even an over-supply) of workers for any amount of user demand. An example would be Uber spending money on advertising to make sure its driver pool is large enough. Some companies even create an over supply of workers at the start to make wait times and selection (and thus the price in time that users pay) as low as possible.

Provide incentive for workers to be available at peak times

If a gig economy app has uneven demand, they sometimes modify the rewards given to workers to provide an incentive for them to be available at times of high demand. The best example of this is Uber’s famous surge pricing.

Even if you don’t increase the reward for sommeliers, you can simply notify them when demand is high. That may prompt a few to become available and help even out peak times.

Even out the demand

Changing how users find a suitable sommelier can spread some of the demand from users. Instead of presenting all the available sommeliers as a list, we can instead ask users what their preferences for a sommelier are and have the app make the best match out of the available sommeliers. This forces users to reveal what’s important to them. In the list system, a user might have chosen a higher rated sommelier, even though a high rating isn’t particularly important to them. This allows the app to match users to a sommelier who is suitable for them, but might not have been chosen if users just picked the highest rated sommelier from the top of a list.

Force users to make more careful selections

We could also adopt a Tinder style approach and give users a procession of sommeliers that they can either accept or reject one at a time. The order of sommeliers is determined by availability, rating and whether the sommelier is a good match for the user’s profile (if we collect that sort of information). Doing this forces a user to make a decision about whether to accept the sommelier in front of them, or take a chance on the next one in the sequence, which they can’t see ahead of time. It makes the user think about whether the current sommelier is actually suitable for their needs, rather than automatically going for the “best” available.

Where can I learn more?

We’ve seen how we can identify hidden markets in our apps and a few techniques we can use to control them. When you start thinking about your apps in terms of sacrifices that users need to make to to get value out of your product, you can head off problems before you push the app to production.

If you’re interested in learning more about markets and how to control them, A.E. Roth’s Who Gets What and Why is a great work on the subject.