Four Steps to the Marketplace Epiphany
Starting a marketplace business is notoriously difficult, because it requires a company to attract two sets of customers: supply side customers and demand side customers. At TRED, we’re fortunate to have arrived at a marketplace model that seems to work for our supply side consumers, for our demand side consumers, and for us. I’m going to attempt to provide a retrospective roadmap for how we got here, because I don’t think we could have “arrived” had we skipped one of the four steps outlined below. If you don’t read good, here’s the CliffsNotes version:
1 — Evaluate Supply and Demand Independently
2 — Commit to the ‘Harder’ Side
3 — Ride the ‘Harder’ Side to Positive Contribution Margin
4 — Rip to Profitability
Step I — Evaluate Supply and Demand Independently
When evaluating a marketplace (or a marketplace idea), it’s important to keep in mind that you’re evaluating two independent sets of customers with different default customer experiences, pain points, wants and needs. In many ways you’re evaluating two businesses, two sets of unit economics, etc. Sometimes marketplace businesses look similar on one side, but mission-critically different on the other side. For example, consider two used car platforms that looked similar on the demand side, but that were different on the supply side: Carvana and Beepi. On the demand side, both Carvana and Beepi took an Amazonian approach by building an online platform allowing consumers to purchase a used car and have it delivered to their doorstep. However on the supply side, Carvana primarily sources inventory by leveraging its network of 130 pre-existing used car dealerships, whereas Beepi primarily sourced inventory via uphill consumer marketing efforts. Inventory sourcing strategies have had a significant relative impact on both businesses. In the beginning, you should consider the uniqueness of your supply side and demand side, and you should favor one of them.
Step II — Commit to the ‘Harder’ Side
As an early stage company, nailing a single value proposition and customer journey is tough enough. Adding a second dimension creates focus-busting challenges. So, if you’re building a two-sided marketplace, you need to simplify your life by picking one customer, and by doing everything for them.
First you need to determine which side will be easier to explain and market to customers. For example, one side of your marketplace might be well developed through some channel or partner relationship, or at least have some pre-defined distribution network or pre-existing customer experience or behavior waiting to be ridden. You should be able to quickly game-plan ways that you’ll be able to leverage these partnerships or draft off of these pre-existing channels or behaviors to hack your way to success. Once you’ve identified the ‘easier’ side, you’ll want to focus a significant majority of your acquisition and product development efforts on the other ‘harder’ side. Keep in mind that as a marketplace, your pace of growth will be bottlenecked by the speed at which you can add ‘hard’ customers anyway, so although this one-sided strategy might seem risky, it’s actually the best way to grow quickly. Even as your product and acquisition efforts inevitably get sucked over to the ‘easier’ side of your marketplace, you should commit a minority of your efforts to the ‘easy’ side only with the conscious intent of improving their experience so that they stick around to support your ‘harder’ customers. For example, we help people sell cars, and to improve that service, we had to make it easier for counter-parties to buy their cars on our platform. We couldn’t completely ignore our ‘easier’ to source car buyers (we attract them from pre-existing distribution channels such as Truecar and AutoTrader), because if we did, we would have lost our ‘harder’ to source car sellers. You must operate from the premise of helping one set of ‘harder’ customers, otherwise your brain will explode, you will waste time on non-growth initiatives, and you will be sad.
Step III — Ride the ‘Harder Side’ to Positive Contribution Margin
Now that you’ve thoughtfully considered both sides of your marketplace, and developed an acquisition and product development strategy catering to the ‘harder’ side, here comes the hard part: executing! To that end, you have to find a way to prove that your variable costs will scale — in other words, that you can create a service and acquire ‘hard’ customers for a fraction of their lifetime value. Until you do, you’re the business equivalent of a chicken running around with its head cut off, because you might be adding customers in a way that moves you further from, rather than closer to, profitability (and again, you need to accomplish this feat while staying laser focused on that pesky ‘hard’ customer bottleneck, lest you loose focus on early stage growth). Primarily there are two ways to do this: (1) increase unit revenue, and/or (2) reduce unit cost of goods sold and unit customer acquisition cost. Regarding the former, don’t settle on pricing without adequately testing different tiers, and ensure that you maximize what you can charge as early as possible (barring some exception, such as data proving that your customers will pay more for an improved product offering that you haven’t built yet). Regarding the latter, you will be constantly in the lab testing various acquisition strategies, channels, ad copy, etc. In this stage you will also figure out which metrics matter most to your business: monthly growth rate of your ‘harder’ side, sell through rate, etc. Only once you reach a positive contribution margin will it make sense to broaden your focus to growth initiatives outside the scope of ‘hard’ customers.
Step IV — Rip to Profitability
Congratulations, you’ve reached level nine Tetris. Time. To. Rip. The bad news? These are the hardest challenges of all because the priorities, headcount, stakeholders, competitors and dollars are increasing. The good news? Every additional unit moves you closer to profitability as you overcome fixed costs such as salaries and SG&A (although this doesn’t mean that you can take your eye off of customer acquisition costs, which might increase with scale!). Now that you’ve proven that your marketplace can achieve this milestone, you’re ready to focus on other types of growth initiatives such as investing in an infrastructure to support ‘hard’ customer growth, improving your product for ‘easy’ customers, realizing network effects and/or expanding geographically. Fortunately, since you’re a marketplace, you have many levers to pull. Now you can build those features that ‘easy’ customers have been begging for. Now you can realize synergies by converting your ‘easier’ customers into ‘harder’ customers, and vice versa. Now you can leverage scale and data to improve your platform. Now you can assemble a local launch playbook to expand rapidly to new markets as quickly as possible. Now you can acquire ‘harder’ customers more quickly and cheaply by developing strategic partnerships that allow you to source someone else’s or by purchasing equipment / processes that help you manufacture your own. Now you’re getting somewhere exciting, and setting the stage to build defensible barriers to entry that have the potential to fuel a (h)uge company that customers love.
DISCLAIMER: despite the confident tone of the title of this post, TRED has not yet reached profitability, so consider with caution!
