Five tips to build a successful marketplace business
Today I decided to write a note on how to build successful marketplaces. We have all seen marketplace businesses fail to take off. Every failure is unique. Speaking to people who have operated marketplaces , I have identified some common themes. This is my interpretation of how you can avoid them. This note is targeted to people working on marketplaces but should be an easy read for all.
I want to start by defining a marketplace. A marketplace is a place where sellers (supply) and buyers (demand) meet to exchange goods or services. The Grand Bazaar in Istanbul is the oldest marketplace in the world today. Once upon a time it was a place in the town where people came to barter. The concept today applies to a very wide spectrum of businesses. A website for playing games, a dating app all embody the concept of a marketplace in different forms. There are some people who want to sell things (eg games they have made). On the other side there are people who want to buy something (eg games they want to play). There is a civil authority (eg app where you can buy and play games). that makes sure no one is up to any hanky-panky.
All marketplaces want to get buyers to visit them. If there are buyers there will be sellers there too. If buyers buy things from sellers and are happy, they will return. Sellers will end up selling more and they too get happy. A powerful feedback loop which Jeff Bezos famously drew up in a napkin.
It seems like a simple business model. Success should be easy. Just get enough buyers and sellers in one place, that’s it. Or is it? You hear about so many marketplaces failing to take off (just google it).
Why? What did they miss? Probably, lots of things. You need to do a postmortem of each case. Every case is unique in its failure. Most of the times it’s not because of money or funding. A lot of marketplaces have enough funding to have the first set of buyers and sellers using them. Still, they fail to kick start the flywheel. Through my conversations with people working on marketplaces I discovered a few common themes, which may explain the why. The following five tips are my ideas on how to avoid that.
Tip 1: Give buyers a compelling reason to buy the products from your marketplace
You are strolling down the local high street one day. You see a new shop there selling vegan candles. You do not care too much about these things but you like how pretty the candles look. When you go in you find out the candles have a lovely scent, and you end up buying a pair of them. When a buyer comes to a marketplace, they need a reason to buy from there. Is it because you can find the washing machine spare part not available anywhere else? Or is it because your printer cartridge is 10% cheaper there. Or is it that they promise to deliver you your favorite brand of laundry soap the next day.
In the early days of the internet there was value in having a lot of products in one place. Today that value of mere aggregation is rapidly diminishing. So think about the reason you can give to buy from here. Is it about sourcing (you have the most unique of items)? about prices (Cheapest in the area ) ? Or is it the information you have that makes decision making easy (You have pictures on how the garment looks on everybody shape)? Find your niche.
Tactics: A clear value proposition, Marketing messages on website or app
Tip 2: Give buyers confidence to buy from a stranger ( you). Assure them that you have their back.
You have decided to learn driving. The first day the driving school instructor comes to you with a special car. She tells you that she has a set of controls on her side of the car. So you can drive the best you can but if there is an issue she can control the car too. You are sure she has your back and you can start your driving lessons.
Now imagine you have visited an online marketplace for the first time . They are asking you to pay $50 for a purchase. It’s a scary experience, you think, what if I have a bad experience. Then you see the customer service number in bold. There is a message in a big font that says no questions asked money back policy. You see another message saying free returns and no fine print. The payment page looks professional and says your card data will be secure. You are confident the site has your back and make your first purchase.
Tactics: Generous returns policy, Money back guarantees, Easy to access customer support, Buyer testimonials.
Tip 3: Keep your buyers safe. Follow through with bad sellers.
Every marketplace has a set of responsibilities towards its buyers. To operate a successful marketplace buyers need to have a safe trusted experience. One of the ways of doing that is looking into seller quality. Like security guards make sure that every seller is genuine. Establish regular checks of seller performance. Eg are they shipping items on time ? are there buyer complaints ?. Even more important, act on the bad guys. Make the threats and follow through. If the word gets out that you can fleece buyers on the marketplace , rest assured the worst guys will flock to you. Do not let that happen. Ever. Set a high-quality bar and make sure you maintain it.
Tactics: Seller quality checks, Reduce visibility of sellers based on performance, ratings and reviews for sellers
Tip 4: Love your first set of sellers. You are not important for your sellers when you begin; but they are for crucial for the marketplace
Most marketplaces start by getting supply in one place. It sounds obvious that if you get buyers where there are no sellers there is no transaction. Its a safe assumption that sellers are more patient and will wait for the first buyers. Sounds logical ? The truth is not so simple.
All existing sellers have an existing business, that’s why you started with them. When you begin your marketplace your value to the sellers is very small ( you dont have a lot of buyers) in comparison to their business. So there does not seem any logical sense for them to spend extra effort for your marketplace. Some of them will do since they see the value but not the majority. Your best bet is to keep them engaged and happy. Without them you have no marketplace, they still have a business if you go bankrupt. Invest enough there.
By the way the tip is a bit misleading. You should love all your sellers and your buyers and your employees. But I think I made my point about your first set of sellers.
Tactics: Handholding / Account management for first sellers, seller incentives to start
Tip 5: Make it low touch for sellers. They are here to run a business and not to spend time learning the new tools you made.
Expecting sellers to spend a lot of time and effort learning about the marketplace tools is a mistake a lot of us do. This is more acute in the initial days of a marketplace but true even later. The Seller’s main occupation is to service customers and run their own operations. They do not want to spend time learning a complex systems or spending time on tools. A lot of seller facing tools are built assuming sellers will spend time learning about them and operating them. The truth is you are better off making it easy for them to use your marketplace in its early days.
This may come as a contrarian view. There is an argument that if sellers spend more time on the marketplace they get more committed. This creates a positive feedback loop for seller success. I don’t deny that. It's just that we need to think about when in the lifecycle of the marketplace that loop is important. You may be better off making your marketplace a low time sink to begin with before you add complexity.
Tactics: Easy to use tools, low complexity of operations, plug ins with existing tools.
Summarising the note
Each party in the marketplace have specific goals
- Buyers want to find and buy the right products with confidence.
- Sellers want to sell products to reliable buyers with the least amount of effort possible.
- The marketplace itself wants to be the preferred location of buyers and sellers to make the transactions.
For marketplaces to be successful this needs to happen hundreds, if not thousands of times. For a lot of them this does not happen. Maybe with following my tips some of them can find success. That is my goal :)
