Four Questions Every Marketplace Startup Should Be Able to Answer

I identified four key factors that shape every marketplace: network effects, type of supply, incentives, and size and frequency of interaction.

Defining a Marketplace

  • They involve low capital costs, as inventory is brought to the market from the suppliers.
  • The market can self-correct by offering more of the good or service as buyers demand it more, making each marketplace function like a mini economy.
  • Because marketplaces need a certain amount of supply from day one, they are super hard to start.
  • It is hard to control the quality of inventory.

1. Type of Network Effects: How will your marketplace grow?

2. Homogeneous vs. Heterogeneous Supply: Is your startup a search marketplace or a matching marketplace?

  • Decreasing the number of choices for the demand side by artificially constraining the number of options
  • Providing filters to curate available options
  • Developing taste profiles of users to adjust search to reveal the most desirable listings up front

3. Two-Sided Incentives: How will you keep both buyers and sellers in the marketplace?

  • Identity Verification — Who is this person and do I trust them?
  • Reviews — Have others stayed here and do they like it? What do other hosts have to say about this guest?
  • Assurance — If something happens, can I call on someone during my travels? If my home is a mess, will I be covered for my loss?
  • Payments — As a host, will I get the money for the stay? If I send money, can I be sure the listing exists and isn’t a fraud?
  • Messaging — Can I easily communicate and reach out to the other party?
  • Transactions — Did I buy the good or service? Did it reduce the burden of going back and forth multiple times?

4. Size and Frequency of Interaction: What are the unit economics of your marketplace?

Closing Thoughts

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