A marketplace is a platform where buyers and sellers can sells and buys products of each other. It usually improves efficiency in communication and payment. Though the definition is so simple, building a marketplace startup is much more difficult because you have to combine the interests of two parties.
Though marketplaces are tough to build, but they’re even harder to kill. They can be incredibly durable and profitable once they reach liquidity which is also hard part. Despite the difficulties, there’s a tried and true way to startup a successful marketplace, one that hopefully ends in success. Let’s start with the basics checklist.
Characteristics of Building a Successful Marketplace Businesses Startup
Not all marketplace businesses are born equal. Different marketplaces have a better chance of success because of their underlying characteristics. Below are some of the considerations you should consider before building a marketplace startup.
1. Liquidity: Liquidity is a market’s feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset’s price. It is the reasonable expectation of selling something you list or finding what you’re looking for.
It can be measured either based on trade volume relative to shares outstanding or based on the bid-ask spread or transactions costs of trading.
2. Price: Price is another important characteristics for most successful marketplace startups. Good marketplace should be cheaper compared to other to stay in the competition. For example, eBay, Uber, AirBnB, Expedia offer products and services that are cheaper than the other providers. They have cut down the margin of middle-men to get their profit at a reasonable scale.
3. Speed: Are you able to deliver your products or services on time? This is another crucial characteristics of building a successful marketplace startup. If your marketplace will face this sort of problem it will be very difficult to take off.
4. Fragmented: The best marketplace should be fragmented and should have lots of buyers and sellers. If your marketplace have only few large sellers, then the marketplace would less value to them. As a result, they could be very aggressive on the margins that they are willing to pay. If the marketplace are not so fragmented, then they may have to offer value-add services to stay the large sellers on the marketplace.
5. Enhanced experience: Your marketplace should be using advanced technology to offer an enhanced experience. For example, Uber lets you call a cab with a click of button and avoid hassle to pay with cash.
6. Trust: As in the marketplace different types of buyers and sellers with different mentality are gathering, it will be a great challenge to win the trust of each other. For providing trust most of the marketplace business use review as a core mechanism.
7. Network effects: Naturally, a successful marketplace will have a big network effects. The bigger the marketplace will be, the more value there will be for everyone. It will be difficult for a new company to enter into that market.
Checklist for Building a Successful Marketplace Startup
There are some checklist for building a successful marketplace startup that you should follow to bring effective value to buyers and sellers within your business:
1. Choose an industry based on your expertise
During the beginning stage to create a successful marketplace business, it’s best to go into a field in which you have expertise in. By creating a network business for a familiar business industry, you’ll automatically have a better understanding of users’ needs and desires. This deep expertise will differentiate you as a founder and help tell a compelling story to investors.
If there are many suppliers and buyers, it is easier for you to use your expertise for providing value and be relevant as opposed to when there are fewer suppliers or buyers.
For example, Transfix is a freight brokerage that connects shippers with carriers. The company was founded by Drew McElroy. He was able to identify first-hand a problem in the industry and create a platform to solve this. The motto of the company is “real-world expertise and strong partnerships with road-tested technology.”
2. Nailing the core transaction
One of the major keys for building a successful marketplace is nailing the core transaction. The core transaction is the set of actions consumers and producers must complete in order to exchange their value. There must be company plans of what transaction will occur on their platform in order to properly scale their marketplace and target the right type of users for their platform. Say for instance, for Uber’s core transaction, drivers make themselves available for rides and ride-seekers submit requests for rides. On eBay, producers list their products on the site for sale and customers purchase those items. AirBnB’s homeowners make their homes available for rent and visitors book stays at different locations.
Core transaction can be broken down into the 4 C’s: create, connect, consume and compensate. A producer creates the value and makes it available in the marketplace to be consumed. In every transaction, one party always makes the initial connection that initiate the transaction and begins the process of exchange. When consumers find what they’re looking for, they consume the value that are created by the other party. Finally, consumers create value after consumption through some form of compensation, usually monetary and concluding the core transaction.
3. Solve the chicken-and-egg problem
The chicken-and-egg problem is the sink-or-swim moment for most of the successful marketplaces strategies. Initially, a marketplace platform does not generate enough value to attract new users. The problem is: which party do you try to get first, producers or consumers? As we mentioned earlier, Uber relies on its drivers to bring riders, and vice versa. Without one party using the same platform, there is no incentive for the other party to join or stay.
Our seven strategies for solving the chicken-and-egg problem can be broken down into monetary subsidies, product features, and user sequencing.
4. Assess your Market Size
If you come from a very specific vertical, you probably have a good idea of both the sector’s statistics and distribution channels. If not, you should talk to the industry specific associations that have access to such information. You can also use Google or other trusted sources such as statista.com.
Besides establishing the current market size, it’s useful to know the current immediate marketplace potential.
Google’s search engine marketing business (Adwords) is all about letting a vendor access potential buyers.
5. Design your own distribution model
As we mentioned above, Google Adwords allows not just for market sizing but also to tap the market by asking people to click your link when they are looking for your products. This is just like a pharmacist telling you to buy xyz product when you complain about your symptoms.
The same thing goes for YouTube videos, particularly on ‘how to do’ type videos. If a smartphone specialist shows you that a product is really good you will be more likely to make the decision to purchase. If one or several persons are covering your products vertical, it is always a good idea to have them test your product.
For example, when display ad first came out it had a 95% click rate. Now the average display ad has a 0.05% click rate.
6. Choosing the Right Business Model
Choosing the right business model is another important check point for building a marketplace startup.
You’re gathering the consumer-producer in a platform, but what are you getting out of it? Just like any startup, you need some funds. Now, you can move forward and invest some money initially on your own, but the future functioning of the platform and its sustainability depends on the funds generated from the very same consumer-producer interaction that you’re cultivating.
To monetize it, you require a business model, which will ultimately serve your purposes and lend you stability. There are a few models from which you can choose from:
- Freemium Fee:
In C2C Marketplaces, where users share low-value products for free with each other, you can go through a freemium business model. But How?
You can earn by including delivery charges, which the customer has to pay in order to get the chosen product delivered to their door.
In addition to that, you can ask for an insurance fee which ensures that the purchased product will be replaced if it gets damaged, stolen or lost. Though the transaction cost is minimal, but the true value lies in the features added on top.
- Website Subscribing Fee:
Make your platform more valuable by integrating exclusivity in the form of a subscription fee. How will it work? The visitors will have to sign up and pay the fees before they’re able to make any successful transaction.
They can check out the products and services, and they might even select one to buy, but they can’t purchase anything before depositing the subscription fee. This helps your platform retain a good amount of value and brings new customers to the provider’s front.
To solve the possible issue of visitors being discouraged by the subscription fee, you can offer discounts and promotions to keep their attention on you.
- List Posting Fee:
There are certain websites, like Craigslist, that run on the basis of listings that are posted by the providers. What are “listings?” Catalogs of products and services on a provider’s page from which the user can choose to purchase.
And each time a particular provider posts new listings on your marketplace, they will have to pay a certain fee to you.
- Straight Up Commission:
Because you bring the buyer and the seller together by facilitating them through a platform, you have to charge a certain percentage from every successful transaction between them. This flat fee is known as a commission, and it helps to reinforce your future standing.
- Lead Generating Fee:
Some websites give visitors the opportunity to post their queries on the platform, and then those queries are presented to multiple providers. Each provider has to pay a sum in order to bid for such visitors.
This fee is known as lead fee, which gets its name from the fact that providers have to submit it only when they get leads, or they go into business with the consumers.
7. Build Trust on both sides
There are a few rules of thumb to build trust on both sides, depending on the marketplace’s industry.
You should show lots of photos and videos of products and services that you may be selling.
Try to provide as much details as you can on products to increase the conversion rate. Thorough documentation helps the customer get inside the experience they are going to have.
Allow space and promote the presence of the makers, the factory worker, the construction worker, the designer, the tour guide, the raw materials and the process to be showcased on your marketplace.
8. Selecting Pricing
For building a marketplace startup you have a set a reasonable price. There are certain factors which affect the price selecting decision, like the probable profit margin of the providers, the competition in the market, the relevancy of the products or services, etc.
Consider these before setting the trade mark. Going from high to low with discounts in between is a much better approach.
9. Making it Official
Finally, after checking off the aforementioned points, you’re ready to build your platform. Remember to always keep your credibility as a neutral connective platform on the front-end. This will help users and producers to trust you, thereby attracting more people on your way.
Keep in mind that revenues are not generated overnight – successful transactions take time to build up and to gather momentum. For this purpose, you should know how to promote your eCommerce venture as well. There are various tried-and-tested techniques which you can implement, like creating quality content about your platform, optimizing it to rank higher in search engines, and getting it shared on social media. All these are organic ways.
You can also go for paid marketing methodologies as well, like pay-per-click ads. Email marketing is also one of the best ways of gaining a good customer.
It’s an understatement to say that building a successful marketplace startup is tough. Getting both sides of a transaction at the same place, at the same time for the same product can feel like it’s an order of magnitude more difficult than a more traditional one-sided commerce business.
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