How to survive while starting a marketplace?
Marketplace companies can eat entire industries. What is a marketplace company? It is a platform that connects buyers and sellers of a specific product or service. These companies have the ability to challenge the status quo of an industry, which can result in great success as well as controversy. AirBnB for example has created an entire new market and is challenging the hotel industry.
Marketplaces work really well at scale. But building a marketplace start-up, it can be a struggle getting to scale. You need both buyers and sellers to create value. This form of positive network externalities happens when there are more users, which attract each other (Li & Pavlou, 2013). If there are buyers but few sellers, the buyers leave. Yet if there are no buyers, what will convince sellers to sign on? This referred to as the network effect (Eisenmann et al., 2006). The platform’s value depends on the number of users on the other side of the platform (Eisenmann et al., 2006). Because of this problem, online marketplaces are not built overnight. It can take years before a break-out takes place.
Five tips for surviving while building your online marketplace:
- Don’t be to quick to pivot
With a SaaS or e-commerce start-up, you should see sings of traction after six to nine months. It this is not the case, it might be wise to reassess your market or model. For marketplace businesses however, you need to establish both buyer and seller communities. Building a two-sided marketplace means you need more time to prove out your business.
It can take years for a marketplace to get going. It takes a while before the network effects start kicking in. Until that moment, stay focused on the core.
- Lower your burn rate
Because you need to give yourself more time to build your online business, you need to lower your burn rate to lengthen your runway as long as possible. Speed cannot be bought when it comes to building an online marketplace.
At the start-up fase there is no need for a big team or fancy offices. Stay focused on two functions your marketplace relies on; building the product (platform) and building both the buyer and seller community.
- Tighten your focus
It is important to narrow the focus of your business efforts. This is because you have limited resources (because you wisely followed the advise of a low burn rate). A way to deal with this is to start small and expand from there. Build traction in smaller verticals before expanding into bigger markets. Start in a niche and grow organically. The growth can occurs naturally as sellers start listing products in new categories. It this growth outside the niche market does not occur spontaneously, you can speed up the process by focusing on seller acquisition campaigns.
- Focus on your most passionate user
Marketplaces are not built overnight. They are built from the niche to the masses. You need to secure the experience of the early adaptors before your platform can begin to appeal to a broader audience. You want to use WoM of the early adaptors. Make sure these are passionate users. Cater to their needs; this will increase the likelihood of them spreading the word about the experience and your marketplace.
- Believe in your vision
Obviously you should believe in your idea for the marketplace, else you should not pursue the concept. On the other hand your faith should not blind you. You need to keep an eye out for market reactions. Look for small signals that you are on the right track. These entail increases in; WoM from early adaptors, repeat usage from buyers, listing from sellers and positive user feedback.
Building both sides of the marketplace simultaneously can certainly be hard. Give your company enough time to build both sides of the platform. When you reach scale, you can profit from network effects.
Eisenmann, T., Parket, G., Van Alstyne, M.W. (2006) ‘Strategies for Two-Sides Markets.’ Harvard Business Review (10), pp. 1-11
Li, T., Pavlou, P.A. (2013) ‘What Drives Users’ Website Registration?’, Available at SSRN: http://ssrn.com/abstract=2369444, pp. 1-40.
Wertz, B. (2013) ‘5 Tips for building a two-sided online marketplace’, Available at: http://www.forbes.com/sites/ciocentral/2013/02.07/5-tips-for-building-a-two-sided-online-marketplace (assessed 10-18-2015)