What is a Marketplace?
A Marketplace is an online platform that connects Supply & Demand by partnering with different Vendors to provide their services or assets for sale/rent to the Marketplace’s consumers. In exchange for providing a digital platform, the Marketplace will normally take a “rake” from either side of the transaction. A rake is normally a percentage of the GTV (Gross Transaction Value) that the Marketplace takes as payment for their services. The rake is anywhere from as little as 5% to 70%, it varies depending on the vertical, volume, or different services that the Marketplace is offering. The rake is usually referred to as a “Service Fee” or “Usage Fee” and noted on the checkout or the payout.
A common Marketplace success that is widely known is Airbnb that connects property Hosts to the community of renters seeking accommodations. They have become a massive success and have inspired many entrepreneurs to create their own marketplaces or even compete against Airbnb. Their founding story is one of the most interesting, I encourage you to read about it at Growth Manifesto – https://www.growthmanifesto.com/airbnb-growth-strategy.
Some Marketplaces attend to needs for a niche market or a specific vertical (category), but some attempt to replicate Amazon.com’s success and become a one-stop-shop for all verticles or categories. There is a large digital cemetery of businesses that have attempted to create a marketplace from scratch but ultimately failed due to a variety of reasons. Some of those reasons will be discussed later in this Ultimate Guide.
Common Problems That Lead to Death
When you’re building a digital marketplace platform, you face many challenges in hopes of achieving huge success a few others have found. Luckily, marketplaces or The Sharing Economy have become more widely known and people are willing to participate and adopt.
I wanted to highlight a few common problems that one will encounter when creating an online marketplace platform such as:
Is your platform solving a problem?
Is there a need and a market for your platform?
How do you create trust online?
How do you ensure participants are safe?
How do you solve the chicken & egg problem?
How do you grow adoption?
How do you achieve a K-Factor of 1+?
How do you protect yourself against leakage?
The list can go on forever about different problems that will arise when you’re building a new online marketplace platform. Some of these problems should definitely be answered before even writing your business plan or creating a business vision statement, and some of them, you will solve as you go. I can assure you that you will never have a more exciting time than when you’re creating a new marketplace that addresses a certain problem for your target market.
The good news is that entrepreneurs have started creating more and more marketplaces to get a slice of the pie of those like Amazon or Airbnb. There are more and more articles being written explaining the problems founders face and the creative solutions that solved them. COVID-19 has created financial uncertainty for a lot of people, and they need to either supplement their income or find a new source of income. The Sharing & Gig Economy are being adopted faster because the world has forever changed.
Solving The Classic Chicken & Egg Problem
This is the first problem or question that you will need to solve when you’re starting a new online marketplace. Do you build your Supply first or do you generate your Demand first? This can be done, either way, it would certainly be easier to build supply if you can tell the vendor that there are already users willing to pay for their service/asset. But how does a marketplace generate demand for the platform without having anything for them to purchase? One of many options is to build a waiting list or use a lead capture to see the interest of your users or your platform. Your platform may provide enough value to a user without Supply that your users need to use the platform to fulfill their needs, and when supply is added it will only generate more Demand.
That is why we believe that the right option is to build your Supply first while you nurture leads for demand. This can be done differently for any marketplace, but without Supply to generate a sale, there is no way to earn from your platform rake or service fees. The value propositions for your platform should produce enough interest to your Supply to join and take little to no effort for them to get on the platform. Think of it as opening a traditional grocery store, you wouldn’t let your customers in unless your shelves are stocked.
Of course, Supply looks different for every platform and there can be many different ways to build it. If your platform can solve a problem for a vendor without any demand or without any other users, this will certainly help the conversation when you give them the sales pitch to join. You do not want to be like most SaaS companies and just talk about the shiniest feature that your marketplace has to offer. Instead, talk about what problems your platform will solve for them. Solving problems should drive your features, and always be the focus of your marketplace.
An example would be a business that pays its employees an hourly wage, but they have an issue with employees showing up late or forgetting to punch in and out. Your platform has a tool to solve this problem, and they can use this tool regardless of having any demand for a sale. If you have an app, it likely has a location tracking permission on the user’s phone. Your tool allows the business owner to easily create a geo-fence around the business location, and it will automatically punch in an employee when they breach the geo-fenced area. It will also automatically punch them out when the employee leaves.
In the example above, you are leveraging technology that you need to build into your mobile app and also building on top of it to solve a key pain point for your target Supply. That tool is providing value to the business owner, solving a problem for them, and helps drive adoption and app downloads.
How Do You Build Trust & Safety?
Joe Gebbia, the co-founder of Airbnb, performed a TedTalk that can be found here -> https://www.ted.com/talks/joe_gebbia_how_airbnb_designs_for_trust/transcript?language=en
Joe talks about how they tackled this common problem by solving it with design from the very beginning. Trust is an important ingredient to building a successful marketplace, but it certainly isn’t required. Craigslist is a prime example of a successful marketplace that doesn’t have Trust as a synonym to the business.
Most marketplaces are two-sided by simply connecting a vendor to a customer with the platform in the middle. Again, marketplaces vary from category to category and the operating geography, but for this Ultimate Guide to Building a Marketplace, we will put Trust & Safety as the main pillar in your business model.
Your users need to be able to trust both the platform and each other, but how do you use technology to instill trust in your users? Thankfully, technology has come a long way and become more accessible & affordable in this area. You don’t need to have cutting-edge technology in place to do this, you can also keep it simple with a few key points.
Business standards on quality of supply & demand
Have a signup workflow that every user must go through before they can purchase
Ask your users to add a profile picture
Let your users write a profile description
Have a closed review loop after a transaction
Have a rating system
Create a personalized UX for both supply & demand
Hold payments in escrow until the transaction is complete
Do not store PII or credit card information on your servers
As far as adding in technology, there are many ways to create Trust. A few simple basics your platform can do are running background and criminal/fraud record checks on all of your users, verify they have a working phone number or email address, only accept credit cards as payment, or provide a dispute resolution process. There are some exciting tools that are available as well, ones that will give you a “risk score” based on their digital profile and fraud history, a “network score” based on how that individual’s information is used on other platforms, detect the phone type to not allow a VOIP or disposable number, check the email domain for spam history, check the credit card to identify risk or fraud signals, etc.
Companies like Trulioo, Ekata, Stripe, Twilio, Sift, Noonlight are making the above possible at cost-effective rates for startups.
How Does Match Making / Search Work?
The Paradox of Choice can lead to higher bounce rates and abandonment. This is simply when there are too many options to choose from and it causes anxiety for the user. Think of the last time you went to a restaurant and looked at their menu. Did you say to yourself “There are too many options to choose from!” or you may prefer to look at the menu in advance so you know what you will order. Maybe a better example would be Google, have you ever wondered why they limit the search results to around 10 organic results on each page?
The author of a book called The Paradox of Choice, Barry Schwartz, had a brilliant TedTalk on this subject, it can be found here -> https://www.ted.com/talks/barry_schwartz_the_paradox_of_choice.
Thumbtack decided to tackle this problem head-on by creating a matchmaking tool. https://www.linkedin.com/pulse/how-we-moved-thumbtack-instant-matching-marketplace-xing-chen/.
How Do You Generate Network Effect (K-Factor)?
How do you build a platform that your users love and become fanatics of your marketplace, inviting everyone they know to join? It starts with the problems you’re solving for them to fulfill their needs. From there, it will depend on the methodology that you use to create your platform. There are many ways to build a product and create an MVP to prove you can achieve PMF (Product Market Fit), and it depends if you’re creating something that hasn’t been seen before or if you’re innovating on an existing product. No matter what you’re doing you have to talk to your users to make sure you’re building what they would expect in UX terms.
To ensure you’re always getting your target personas’ opinion while you’re building, we suggest using The Design Thinking Methodology. What is Design Thinking, and Why isn’t every company using it? It all starts with empathizing with your user and doing research on the industry. There are a total of five phases—Empathize, Define, Ideate, Prototype, and Test. This allows you to test your prototypes with your defined user personas before it hits a developer’s screen. This does add a considerable amount of time before you’re able to develop to feature, but it helps make sure that you’re building the right feature, the right way. We used Design Thinking Sprints to shorten the amount of time it takes to complete, bringing it down to 2 – 4 weeks.
Once you’ve achieved PMF, trust me, you’ll know when you’ve reached the mark. You can begin worrying about generating a K-Factor which is essentially how many new users does one invite to join your marketplace? This is no easy feat to accomplish, but it will help drive signups and revenue. Here is a great article explaining how K-Factor works -> https://medium.com/@adjblog/basic-overview-of-k-factor-in-viral-growth-models-for-your-startup-2ee641b04bfb. It is a simple formula to calculate your K-Factor,
User Invitations: How many users are invited to use your platform?
Signup Conversions: Out of those who are invited, how many convert to signup?
To drive the virality of your platform, you need to build a successful referral program. One program for each side of your marketplace, one for supply, and one for driving demand. One common mistake companies make is that they simply do not promote their referral program enough. There is a term commonly used called Growth Loops, meaning at the end of every workflow a user goes through, are they asked to invite their network? Here is another great article from Reforge explaining how Growth Funnels work, and how you can optimize yours -> https://www.reforge.com/blog/growth-loops.
Many referral programs have been created and there are many examples for you to become inspired by. PayPal for example literally gives away free money if you invite a friend and they complete their Golden Path. Airbnb would give away travel credits for those that convert on their own Golden Path, and DropBox would give away free storage space. Usually, the program rewards the user with a value prop from your platform in the form of credits. The reward needs to be worthwhile for your users and worth the time to invite their friends to signup and complete a transaction on your platform or to successfully add supply.
How Do You Grow Geographically?
Now is the time to ask yourself how you plan on growing your marketplace? Will you grow hyper-locally by going postal code by postal code, become established city by city, or will you build localization into your platform to allow you to offer it to the entire country/world? The answer is yours to choose because it is completely dependent on your business model.
At the beginning of Airbnb, they allowed anyone to post in the country, and then they would focus on building supply at peak travel times/seasons in popular destinations, using Craigslist as a supply source. Getaround would build zip code by zip code to ensure they have density of supply for their users so that when a user completes a trip, they can park the vehicle and quickly find another when they need to leave their destination.
If you look at Uber, they would win city by city and have boots on the ground when entering a new market. They would focus on large events that served alcohol such as professional sports, concerts, extreme sports, etc, and they would pay drivers to sit around and wait until Riders were ready to go home or to their next destination. Here are some examples -> https://hbswk.hbs.edu/item/how-uber-airbnb-and-etsy-attracted-their-first-1-000-customers & https://growthhackers.com/growth-studies/uber.
How Do Your Measure Adoption?
When you’re in the early stages of having your MVP or MLP released and gaining traction, it is hard to find comparing benchmarks in your industry for adoption. E-Commerce has many, and Shopify even has their own for their merchants, but there are none for small-scale marketplaces (excluding Amazon & Airbnb).
You may find that your marketplace platform is getting a lot of signups, but the transactional volume is not aligned with the signup metrics. An important metric to track that should become a KPI for your Product Team is “Time to X Action”. How long after signing up does it take the average user to add supply to your marketplace? How long after signing up does it take the average user to complete a successful purchase? Following that up with an even more important KPI is “Return Frequency”. How many times does a user return to transact on your platform? How many times does a user return to engage with your platform on a weekly, monthly, or annual basis? Once you’ve accumulated enough data, you can start tracking these KPIs and re-build your business plan forecasting around them.
The CAC (Customer Acquisition Cost), CPT (Cost Per Transaction) & LTV (Life Time Value) are two important components of your business plan. Most companies have these three metrics calculated in a simple matter by only having Marketing spend, and salaries divided by the number of estimated signups and bookings. This is okay when you do not have enough data to calculate your actual CAC & CPT, the more granular you can get this formula, the better off you will be. https://medium.com/@natalieluu/how-to-measure-cac-in-a-two-sided-marketplace-86a48db64bf8 & https://www.linkedin.com/pulse/ultimate-guide-vcs-ltvcacanalysis-two-sided-pt1-gianluca-valentini/.
CPT is not a one-dimensional metric because the user’s first transaction will cost more than the number of transactions that follow. The User’s first booking may contain your CAC, and their returning CPT might contain your CTS (Cost To Serve) or CTB (Cost To Build). Calculating these numbers will ensure you stay true to yourself and will not end up creating an overly ambitious business plan.
CTS can be relatively simple by only having the salaries of your Support Team divided by the number of transactions. CTB is more complex on the other hand as it will certainly include the salaries of your Development Team, but what about the QA & Product Team driven down to the feature/bug level.
Do You Build or Buy?
With the years 2020 and now 2021, there are more and more no-code or low-code solutions becoming available. They are great for getting started and creating a prototype for you to test with your users. Tools like AirTable and Tadabase will let you get a jump start on creating your database tables, APIs, and integrating them into other tools. Then you have tools like Bubble, which give you a no-code way to build a frontend. Learning to use these tools to your advantage can certainly help save you on Development time and costs if you plan on building a marketplace yourself.
Next comes the out-of-the-box solutions that give you a basic and almost cookie-cutter marketplace. Some of these are fantastically built and provide amazing resources to educate you on running a marketplace business like the folks at Sharetribe. Sharetribe gives you a marketplace platform from day 1 that can be configured to match your business needs. This has its obvious advantages from trying to build a custom solution like saving time & money, and it is a great solution when you do not have a Development, QA, Product, or Design team at your disposal.
If you plan on investing some capital to bootstrap or have investors lined up to back your marketplace to go the custom route, it can be a long road. Make sure that you first hire a Product Manager, and a Senior UI/UX Manager to build your prototypes before even thinking of hiring a development team. If you use The Design Thinking Process, you can create high-fidelity mocks to test with your target audience to ensure there is a proper UX before there is a line of code written. Your PM can research what your tech stack should look like, what languages are optimized for SEO, have a large developer community to make easy hiring, and then the ultimate decision to choose if you build a mobile app or a website first.
A website will have far more traffic than a mobile app, however, a mobile app is more sticky to your users and can create a higher adoption rate. While the PM is performing research with your target market, they should be including questions to see what they’re more likely to perform certain actions/ workflows on. Building a perfectly mobile-optimized website should give you enough room to create an MVP. The most common negative reviews on the larger marketplace apps are that they don’t have complete functionality as the website. See for yourself, go to the App Store, find Airbnb and look at their oldest negative reviews.
There is also the route of hiring a marketplace shop that can provide you with a white-glove experience, managing every single part of the process for you. The great part about this option is that usually, they can provide you with industry feedback on what has worked or hasn’t worked in their experience with other clients. MarketplaceStudio.io for example is a shop with people leading the company who has actually been there and done it. Their experience of building (at the time) the world’s largest rental marketplace covering all categories can go a long way. They will provide you with feedback on your ideas, business plan, manage the hiring process, and build your marketplace the way you dream it to be. Of course, the user’s feedback is far more important than your dream, and Marketplace Studio will uncover that through their Design Sprints.
What About Insurance or Protection?
This is section is entirely up for debate on whether you need to seek out an insurance company to provide you a boilerplate policy or if you can go the self-insured route. It is completely dependant on what verticle your marketplace is sitting in. If you’re renting our RVs for example, you need to find an insurance company to back you with a policy because it is a licensed vehicle.
If you’re not providing access to a licensed category, you certainly have the option of creating a Protection Policy to self-insure. This can be relative to the value of assets your marketplace’ supply. Be careful that it does not indicate or seem like you are selling insurance unless of course, you have an insurance broker’s license. It is illegal in Canada to sell insurance without a license. That is why some marketplaces will wrap or include the cost of insurance in their rake/ platform service fee, or simply have an opt-out program
If you are seeking an insurance policy, you can get away without having a liability clause, and instead, you can add it in your Terms of Service. Adding in an indemnity, and hold-harmless clause can save you and your user from being sued. It is highly recommended that you seek your own legal counsel on this topic. These are simply options learned from our experience and we are not responsible for what option you implement.
Spend the time and research other marketplace’s Terms of Service and get a feel for how it is done in the vertical your marketplace platform will be in. Turo for example has a Non-Compete clause in theirs for their supply to agree to. It is commonly said that Airbnb’s Host Protection is not actual insurance, and does not actually cover you for many instances. That is why there are insurance companies like https://duuo.ca/.
If you focus on Trust & Safety, it is likely that you will weed out any bad actors on the platform and this won’t be an issue for your marketplace, but it is a high selling point to users. The most common question we heard was “What happens if my asset gets stolen?”. Our response was, we perform a background, criminal, and fraud check on every member who creates an account (through Trulioo). We have fraud detection (using Stripe’s Radar) on credit card transactions. We have a network risk score (using Ekata) that provides us with multiple signals of fraud or bad-actor actions. All of these technologies are meant to reduce risk and be preventative, and that is how we will make sure your assets are safe.
Summary
Building a marketplace is a hard business, as mentioned above there is a large cemetery of those who have tried, but ultimately failed. Make sure that you are constantly providing value or solving a pain point for your users to protect yourself against leakage. Do not compromise your integrity on Trust & Safety, and do your research on the successful marketplaces, but more importantly, those that have failed. Marketplace Studio will provide you with an hour free consultation to discuss your plans and provide you with feedback whether you plan on using them or not.
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