Building a Marketplace Business

Marketplaces stand as a frequent topic across our startup ecosystem. They also are a topic I have some exposure and experience at, if limited. Hereby I will attempt to share a part of such understanding, addressing some misconceptions I often get to encounter.

First, a short and pretty rough definition. A marketplace is a business connecting sellers with buyers, thus enabling transactions between them. Such a connection might be hard or impossible to get facilitated otherwise, or the marketplace might provide for choice and efficiency that was not otherwise available.

A prerequisite for the efficient operation of a marketplace is providing a sufficient quantity of both supply and demand. The classic chicken-and-egg problem suggests that creating a marketplace business is similar to building two companies at the same time, thus double effort and quadrupled risk.

It indeed is tough. But there are some tips of the trade that actually render the above path feasible, and I’ll try to provide such below.

a) Get the structure right

Before you start building demand, or supply, you need to make some bold decisions on how to structure the marketplace. What information to collect from and provide for each participant, what kind of choices to enable, what participants to let early in, what kind of requirements to enforce, etc.

A very deep understanding of the drivers for both ends of the marketplace is essential as a prerequisite. If that’s in place, you should work to come up with a small number of transparent and easily comprehensible rules, and then remain consistent in their application across time.

b) Build some supply

Start from supply first. Do whatever it takes to bring in the minimum number of suppliers, who will suffice to make the proposition of the markeplace clear. Be selective on who you let in; be aware that early suppliers very much shape the community that a marketplace eventually is, along with the experience and quality of provided services.

Keep in mind however that building supply is the easy part. At the end of the day, providers will be interested in a new source of revenue and you will be judged on keeping your promise to deliver on such. So, don’t get carried away by any quick wins and great volumes on this front; it’s better to keep supply limited and make your early suppliers happy, as oppossed to a growing number of eventually uninterested providers.

c) Focus on demand

If you have got the rules right and some supply is in place, you only need to focus on building and growing demand. Bring some demand and, quite magically, you will discover that supply takes care of itself and can grow organically from now on.

So, demand is the fight of all fights. And, do not expect the outcome to be encouraging very fast; there are neither shortcuts, nor easy wins. Be prepared for the worst and start pursuing every possible way of bringing a few customers in. Your ultimate target is to end up with an experience so uniquely appealing that your early adopters would very much love to talk about and spread your word.

Do not bother about volume, but rather about learning what works and what does not at first. Such experience is what really matters, and it typically does not get accumulated the easy way. You need to hit the road, talk with prospect clients, drive them in and get your hands dirty in various unscalable ways, before you end up with a proper recipe. Since you get there, the play is yours; you can now automate and scale up the recipe’s execution.

I hope the above are of value as a rough guide to anyone building or considering a marketplace business. At the same time, I would be more than happy to hear your experiences on the subject, that may render the above views right or wrong, and I very much look forward to a fruitful public discourse on the subject.

  • Alex Christodoulou

    What we learned in the very first steps in Locish, is that before starting a marketplace, one should track down where the two sides of the markletplace meet each other (geographically, virtually etc). Building supply without having assured the demand for it is not wise, and the same stands for building demand without having assured supply for it. So, the best approach is to first track where even a small demand exists, and try to deliver the appropriate supply for this demand, and then grow them in parallel. We’ll have more to say about that in a few weeks, after many tests we’ve scheduled on demand & supply, and hopefully we’ll share our experience with the community.

  • Richard Brown

    Thanks George. Struggling through these same problems at the moment! Loving the challenge.

  • aabulelas

    A good read indeed.