Building a marketplace is hard. It’s difficult because you’ve got two different customers: buyers and sellers who are typically two different people (exceptions include classified ads and dating apps). Two different customers implies:
- Two different value propositions
- Two different routes to market
- Two different products
- Two different support structures
- Two different EVERYTHING!
Marketplaces are two businesses running simultaneously and both have to succeed for the overall operation to prosper. This results in marketplace failure rates that are much worse than a normal startup, however they have the benefit of being able to scale wildly if they are successful.
I’ve dealt with a lot of marketplaces over the last year. Everything from a private tutoring market in the Middle East, rental accommodation in Ireland to dog boarding in Europe. After ten years in WhatClinic, people think I’m some sort of expert. I don’t have any secret sauce, however I do know a lot of the pitfalls.
The first pitfall is trying to build both sides of the marketplace before you have sufficient resources / team. Even in a successful marketplace with teams supporting both sides of the business, it’s hard for the CEO to wear two hats; it’s nearly impossible when resources are very limited. Focus your resources on one side of the market first.
Recognise who your primary customer is. In general, this is the side that has fewer problems finding the other party . This is the side of the market that you have to crack. It’s where the real risk is in the business – if you can crack this side of the market, the other side is simple in comparison.
So for WhatClinic the primary customer was the consumer not the clinic, for Google Ad Network it’s the advertiser not the partner website, for Amazon it’s the consumer not the seller. Uber, HostelWord, Hotels.com & Opentable all built supply first, parking the consumer side until they were ready [Note some edits made here from original posting thanks to comments from Ronan Percival)
- If Amazon has has loads of consumers it is safe to assume they’ll be able to sign up vendors
- If Google Ad network has loads of advertisers then partner websites will flock to them.
- Uber reckoned that if they sort out supply that demand would exist
But it’s a chicken/egg (horse/cart) problem. It’s difficult to build one side without the other because no value is being delivered. What’s the answer? Try and park away the second side of the marketplace by directly addressing the primary side’s value proposition without building a market on the other side.
Can you park away one side of the market?
- Offer the service directly yourself. So if you are an online babysitting marketplace you can directly hire a few babysitters in your first city. Once you have proven the value proposition for the parent and have more demand than supply, you can switch your attention to building the other side of the market, targeting the sitters. Amazon was an online store before it became a marketplace.
- Seed the market. Get one prestigious name on the secondary market that will drive large volumes from the primary market. For example if you are a jobs board then a job for Ferrari or Dolce & Gabbana can drive tens of thousands of CVs.
- Build the supply without the relationships. For example if you are a real estate marketplace you can simply list properties without developing the paying relationships with the real estate agents. Once you have the primary audience you can start to build the relationships
- Build the primary audience for a directly related informational need. If you are an investment real estate marketplace you could build your primary customer audience by publishing research information before building the market.
My final thought is try and recognise when the marketplace exists because of a customer need for a market or because of internal business requirements. Uber’s riders & drivers don’t want a market (the rider just want a ride and the driver a fare) but Uber does. They don’t want the hassle and legal liability with directly employing drivers. However the consumer clearly wants a marketplace for homes to buy as they want to compare lots of options. Having clarity on exactly who the marketplace serves should give you insight on how to get it started.