Why, oh why isn’t my marketplace making money ?!?
Dear Struggling Marketplace Founder,
One of the biggest mistakes I see marketplace founders make, is trying to make a profit where the mentality of the target market and the marketplace business model don’t match. This leads to a tonne of frustration as the numbers simply don’t add up.
For example. Your marketplace may charge a 10% commission per transaction, but the average value of a listing in your marketplace is low (say $20). This means you make on average $2 per transaction.
If your goal is it to earn $3000 per month, you need 1500 transactions to go through your marketplace per month (and that’s not accounting for your overheads). Now that’s a lot of transactions, particularly if you’re just starting out.
If your marketplace is established, with lots of members and each member transacts multiple times per month… great! This makes sustainability feasible…. however if your marketplace is new, with few members AND the average number of transactions per member is low you’re in for a very hard time.
If you look at the most successful marketplaces out there, they tend to be marketplaces where the transaction value is high (ie. look at Airbnb with the average transaction being well above $100), they have high recurring transactions per customer (ie. Uber or Deliveroo where customers would transact multiple times per month) or the ones that have the highest sustainability are the marketplaces where they have high transaction value and recurrence rate (ie. look at the car sharing platforms like CarNextDoor, Turo or GetAround).
At the other end of the spectrum, you have marketplaces where the transaction value is low and the recurrence per customer is low, meaning the marketplace needs to reach a huge scale in order to become sustainable, let alone profitable.
If you add to this equation, the market mentality…for example, to rent a sandwich press or drill on a rental marketplace, the desire to rent that item must outweigh the inconvenience of driving across town and finding a time for the exchange that works for both parties, compared to dropping into the local Kmart and simply purchasing that item for a fraction more of the cost.
This is where it’s incredibly important to truely understand your target market and their mentality. You may find your audience is limited to people who have very strong ethics around the sharing of items where this helps to outweigh the potential inconvenience over simply purchasing. Of course this then will impact on the ability to scale your marketplace and create a sustainable marketplace.
So what can you do about it?
1) Take a step back and ask yourself these important questions…
a) How much do you make per transaction?
ie. Average Transaction $20 with 10% Commission = $2 per transaction
b) How much profit do you need to make per month to consider your marketplace being worth the time and energy?
ie. Goal of $4k per month to cover costs and earn enough to make it worthwhile
c) How many transactions do you need to make per month to make this amount of profit?
ie. $4000 / $2 = 2000 transactions per month
d) How often do your customers transact, and how many unique customers do you need to make your marketplace sustainable?
ie. Customers transact 2 times per year (12/2 = 0.16 per month). Goal of 2000 transactions per month at 0.16 per customer per month = 12,500 unique customers per month…
2) Now consider mentality of your market… how does the convenience vs desire of your solution add up in their mind?
Based on what you know now, what is your gut saying? Have a chat to some real customers… who are your best customers with the highest transaction value and/or transaction recurrence?
Knowing this information can help to focus on what your marketplace is doing well… vs areas that may be letting you down.
3. It may be time to review some vital areas of your marketplace
If you’re feeling a little defeated at this point, that’s ok. It’s simply a sign that it’s time to review some important aspects of your marketplace.
Take a step back and review:
- What’s working well & what isn’t
- Who you are targeting
- Your revenue model (remember there are 8+ revenue models that could work for a marketplace, so don’t feel defeated yet!)
4. Ask for help.
I work with marketplace entrepreneurs, helping them to pinpoint areas that are holding them back. If you’re feeling a little stuck, I offer a Free Strategy Call to help you get unstuck.