The Basics of an Online Marketplace
Online marketplaces have become popular business models. When done correctly, they’re businesses that require few resources and generate continual income.
They rely on two main components: ‘Suppliers’ and ‘Demanders’. The marketplace is the facility which allows for the two to interact. It allows for the Suppliers to provide a service or product which the Demanders need, and then facilitates that process easily and efficiently.
There are different types of marketplaces, broken down into four main categories: Business to business (B2B), business to consumer (B2C), consumer to business (C2B), or consumer to consumer (C2C).
Note that the lines are often blurred between these categories and the definitions are not always clear-cut.
Here are some examples of each:
- Business finance marketplaces, matching businesses looking for funding with business lenders. Become.co is an example.
- Alibaba is a massive multi-national marketplace where businesses can go to source products from other businesses.
- Professional services marketplaces where professionals (plumbers, electricians) can be sought by consumers looking for someone in their area.
- Amazon is the best example. Businesses offer their products to consumers through the Amazon marketplace.
- Bloggers using affiliate links.
- Customer feedback tools like Yelp (though this doesn’t involve a monetary transaction).
- A lot of auction marketplaces like eBay (though there are lots of businesses operating on these platforms, too).
- Facebook Marketplace is a great C2C example(though they don’t actually generate revenue from it — yet(?)).
Key takeaway: To have a successful marketplace you need a healthy supply-side and a healthy demand-side. Both users of the platform need to find the value out of using it. Without both, you don’t have a viable, sustainable marketplace.
Step 1: Finding the Idea
Absolutely the most important part of finding an idea for your marketplace is going towards where there is demand.
You have to solve a problem. Luckily, there are a few ways you can find out where there are problems to be solved.
Let’s look at them.
PS: If you think you already have an idea, skip to Step 2 which will help you pick it apart and see if you can make a business out of it. If, by the end of that process you find your idea might not be as clear-cut as you first thought, come back here and see if you can modify/pivot it into something that works.
Consolidate a Market
A great place to look for an idea is in a market where the suppliers are fragmented and would benefit from a central repository where the customer can shop for what they are looking for. Upwork solved this issue for freelancers.
Look at Craigslist/Gumtree
Find an active category or vertical in Craiglist that has an active supplier and customer base. Then look at how you can make that experience better. Better might mean; facilitating the transaction better, providing a layer of security for either side or even just making it more convenient by displaying and filtering ads which is better for the user.
Marketplaces are popping up all over the place which are slowly taking market share away from each of Craigslist’s most popular verticals.
Make Decisions Easier
Marketplaces are great for the customer in that they provide options. When there is a big decision on the line — like financing your business, for example — as a business owner, you want to know you’re getting a great deal.
If you can build a place that provides options to the customer when there is an important or expensive decision to be made, you could have yourself a winner.
A great example of this is Bankrate. One of the biggest decisions you’ll make in life is buying a house — it involves a lot of money exchanging hands. Naturally, you want to make sure you’re getting the best deal. Bankrate makes that possible.
Step 2: Idea Validation
This is definitely the most crucial step in starting a successful online marketplace. If you are thorough during this step, you will save yourself a lot of hassle and money down the line.
The biggest mistake (first-time, especially) entrepreneurs (in general, not only in the marketplace space) make, is investing huge amounts of time and money into a product that they haven’t validated the need for properly.
Do you ever find yourself fussing about the color of the logo when you haven’t yet spoken to one potential customer about whether they would use or buy your product? That’s exactly what I’m referring to. I’m often guilty of this.
Idea validation is tricky. You almost always need a product to show the customer, but you don’t want to show them a slim-down or ‘ugly’ version because you have the perfect version in your head. If they say, “No, I wouldn’t use that”, you can justify their decision by the fact that its ‘not the full version’.
Here are some checkboxes you should be going through to validate your idea.
As mentioned, you need to have demand from both sides of the equation. There are a few ways to do this:
- Engage with your potential customers as much as possible. Phone, email, speak to directly. Whatever you have to do.
- Run some paid ads that advertise your service and just go to a ‘Coming Soon’ landing page. Depending on the amount spent and volume of interest you garner, you’ll be able to judge what the demand is like. PS: Put an email-capturing form on the landing page so the money spent isn’t wasted.
- Find competitors in your market. If there are none, the first thing you should see is a warning sign. Sure, you might think you’ve got a winning idea because no one else has thought of it. Chances are that’s not true. You want a healthy amount of competitors in the space to validate your assumption that there is a need for the service you’re creating.
2. Market Fit
So you’re satisfied with the demand for your product is there. Now you need to decide whether your customers are going to use an online tool to fulfill their needs.
All too often online businesses are built on the premise that everyone will use an online tool if its there. The reality is, a large part of the population won’t. There could be numerous reasons for this, here are some examples:
- Online dealings are not part of their day to day operations. A panel-beater or farmer is the perfect example. They aren’t sitting behind a desk all day and so going to the internet to find a solution is often not their first port of call.
- Some people don’t believe online marketplaces can deliver the value they require. There is still a stigma that the people using these services are sub-par.
- Sometimes, Google does the job just as well. A marketplace might be an unnecessary step that the user doesn’t need to take in the journey they’re going through to find the service or product they are after. A quick search for ‘plumbers near me’ returns more than 10 results immediately — with ratings and their proximity to me. Why would I need a marketplace?
There might be demand for your product, but make sure a good percentage of your marketplace is searching for your solution online.
A great test for this is the paid ads testing mentioned in the section above.
Another important note — especially in the B2C space — is the supplier side of the equation. Will the businesses on the supply side be able and/or willing to offer their services online?
Consider the friction points here. Are they too big to overcome? Again, some market research might be required.
A great example of this is how the food delivery service gig-economy has changed how restaurants operate.
In the early days, restaurants were reluctant to sign onto delivery services like Uber and DoorDash. There was extra admin involved for restaurant owners and sometimes it was more of a pain to manage than what it was worth in revenue. If you were an early user of these apps, you’ll know the selection of restaurants wasn’t great.
However, as more and more restaurants joined, a culture of ‘eating-in’ grew, and restaurants started seeing a decline in foot traffic. Suddenly, the motivation to sign on was much higher.
3. Business Model
Finally, can you make money out of it?
You may have the greatest idea in the world which creates value for both sides of the marketplace exchange, but if you can’t generate sustainable revenue from that exchange, you don’t have a business.
Luckily, there are a number of business models that work for marketplaces. Here are some of the popular ones with a brief explanation of each:
- Commission. This usually comes from the demand side. So the user who wants the service being offered usually pays the marketplace a certain commission percentage on the value of the transaction. An example is Airbnb’s Fee which charges users when they pay for accommodation.
- Pay per lead. This is usually only applicable when the value of the lead to the buyer is stagnant. So the transaction is mostly the same value every time.
- Membership and/or subscription. This is usually when the marketplace offers something which creates recurring, frequent value for the user, so much so that they would be willing to pay the same amount monthly for the service. Amazon Prime is an example.
- Premium listings. An opportunity for the sellers on the marketplace to set themselves apart from the normal, ‘organic’ listings. You would have seen premium listings on Craigslist or Gumtree where the suppliers have paid to have their ads featured at the top of categories, or on the home page.
Step 3: Chicken or the Egg
This is perhaps the most asked question about marketplaces: Where do you start, supply-side or demand-side?
The reason I say this is because people are inherently geared to survive. In today’s world, it’s difficult to survive without money. If you drive customers towards a platform and build up a healthy database, it is much easier to convince a potential supplier to join. People will go where there is money to be made.
It is difficult to say “There will be money to be made here”, without giving any proof of that potential. So, drive growth on the demand side, even if it means an initial outlay of capital, and the supply side will be much easier to bring on board.
Ideally, once you then have enough suppliers to meet your demand perfectly, you should grow the two simultaneously.
One mistake some people make in doing this is marketing to the two groups the same way. In my experience, this doesn’t work.
A customer looking for a product needs to be approached differently from a business looking to sell a product. The method, copy, tone, and delivery of the marketing needs to all be different.
Step 4: MVP
The most important takeaway from this section will be this: Launch before you think you’re ready.
If you aren't embarrassed of the first version of your product, you took too long!
The earlier you get a product out there, the earlier you are receiving feedback on your product and noticing patterns in how your users engage with your platform. Some essential tools I’ve used for doing this include:
- Google Analytics
- Google Data Studio
Even if you only open to a small number of beta testers before a full live launch, make sure you’re getting a product into the market.
By building an MVP using an agile, iterative method, you’re consistently developing your product to align with what your user needs. This is in contrast to building out a full product and launching with a “Big Bang”. The bang could = success, but it could also be the demise of your company.
This great graphic from Henrik Kniberg explains the agile build method perfectly.
By receiving this feedback, you’re able to focus your development efforts better. This is because you will be testing the underlying assumptions that you’ve made in the development of your platform.
Here’s an example: Let’s say you’re building a job board for skilled professionals. You may have assumed the most effective way to get users to look for skilled professionals is by location. So, your landing page has two fields: 1. Profession, 2. Postal Code. That assumption could be entirely incorrect. Maybe most of your customers turn out to be large corporate companies who will pay and encourage potential candidates to move to their location and actually, they’d prefer to search by 1.Profession and 2. Years of Experience.
If you spend too much time going down the rabbit hole of developing out a rich product that you’ve imagined in your head, you could have a hard (and/or expensive) time pivoting that idea if it needs to be down the line.
So, feedback is important. But how do you know when you’ve got a product that is not too ‘minimum’?
No words can describe this as well as the image below:
So you have an idea for what your MVP should look like and how it should perform, but how do you go about making it a reality?
If you’re not from a technical background, this is where the hurdles might seem to get big. I would recommend not outsourcing your project development to a freelancer or software dev firm. Because its an MVP, you’re not 100% certain of how the product should function. This means communicating with an outsourced team about how things should work and look is going to be tough. You’ll almost never get an outcome that you’re happy with.
So, what then? Luckily, there are a few other options.
DIY: No-code option
This would be and is my go-to option.
Sure, it might not be the most efficient product, but it's definitely the quickest to get out the door.
Here are some tools which can help you do that:
- Bubble. Building a no-code marketplace in Bubble is completely achievable for beginners. If you're looking to build a custom marketplace, this is your way to go. I've got a book - Build - that teaches non-technical founders how to build an MVP with Bubble.
- Wordpress. with a dedicated marketplace theme. Usually, no recurring costs unless sophisticated plugins are required.
- Adalo. Another no-code option that provides more customisation options than Wordpress, but less than Bubble.
- Webflow with the required app connections and possibly Zapier*. Recurring monthly cost and more manual work required.
- Sharetribe. Saas specifically for building marketplaces. Probably the leader in the Saas marketplace industry. Quite expensive monthly plan.
- Shopify. It’s based on the traditional B2C e-commerce model. Very good for quick and easy setup, not great for customisability. Monthly cost (they also take part of your revenue) as well as a setup cost.
*If you’re not using a dedicated Saas platform, you’re more than likely going to need Zapier for API connections between apps, allowing your marketplace to operate efficiently.
Get a technical co-founder on board
You can find someone who believes in your product and has the skills, time and motivation to build the product.
Make sure you’re partnering with the right partner, and the terms of your arrangement are clearly outlined. Make sure an exit clause, ownership rights, and responsibilities are all there.
Where to find that person?
- Indiehackers: A place where makers of products hang out. You might find someone wanting to work with you in the forums.
- ProductHunt: A place where new products are launched every day. The forums are starting to become more active too. If you look around there you might find someone wanting to work with you.
- Kern.al - An online community of people sharing business ideas, and working on them together.
DIY: Learning the coding required
This is a long process and not one I would recommend unless you have a lot of time to burn. However, because the industry is changing so quickly, by the time you’ve learned the required tech stack presuming you get that right off the bat, which is unlikely) your idea might’ve already been pounced on or missed.
Step 5: Launch and Grow
Once you’ve got your MVP out the door and have received the feedback that has helped you shape the direction of your marketplace, it’s time to launch.
You may have heard of the 10X rule. If you haven’t, here it is in a nutshell: Whatever you’re planning on achieving for your launch (it isn't launch specific, but I’m using it for this now), you should times that goal by 10.
Why? You need to have the confidence in yourself that what you’re doing is going to be a game-changer. If you’ve gone through the process rigorously and you know you’ve got a winner, then back yourself and aim stupidly high. It’s the only way you’ll set yourself apart from those who are happy to be average.
So what does 10X-ing look like in the real world? Sure, its easy enough to say, “No, my revenue goal for year one isn’t $1 million, it's $10 million”, but how do you actually make that happen?
- You double down on what’s working for you. Use the 80/20 principle to figure out where 20% of inputs that are affecting 80% of the revenue are, and then go hard at those.
Work smart, and work hard. Be singularly focused on one thing at a time and once you think you’ve maxed that opportunity out, move onto the next element and improve it to the best it can be.
- Back your value proposition and make sure your customers know why they should use your platform. Then make sure that’s the value they’re getting from your platform.
- Another gem for the 10X rule: Too often when you’re launching a company, the focus is on beating the competition. Shift the focus from competing to dominating. During your launch period, blow the competition out the water.
Change the way you think about your business’s trajectory, and you’re more likely to achieve the growth you need to succeed.
- Collect feedback as much as possible. As you grow, your user base will diversify. You may need to start catering to a wider market. Be aware of this through structured feedback and keep providing a valuable service.
- There is only one thing worse than bad feedback — no feedback, from a customer that never was. People not knowing you exist is a problem.
Fundamentally, marketplaces are a great business model — if you find a winning idea. Don’t let the hurdles along the journey get in the way of creating something truly valuable.