How to create an online marketplace?

Hi There! Thanks for landing here. I have written this blog post to help anyone understand how an online marketplace is created and operated by sharing my learnings. Similar techniques are used by successful marketplaces like eBay, Etsy, Craigslist, Airbnb, Uber, and many others.

Photo by Phi Tran on Unsplash

I will be sharing my learning and key findings as below

1. An image of marketplace evolution: Yello Pages to Yelp
2. Tools needed for creating a new marketplace
3. Four key findings that every marketplace companies should remember
4. Three successful seeding strategies for marketplace startups
5. Three new seeding strategies that are successfully
6. Four Loyalty models that help in creating repeating customers for low-frequency apps
7. Step by step process that can help in creating a winning marketplace
8. Finally, when to obtain VC money

An image of marketplace evolution: Yello Pages to Yelp

Sourced from Anand Iyer

Tools needed for creating a new marketplace

Reused or Sourced from Leah Busque

Four key findings that every marketplace companies should remember

1. Winner takes all. It’s not who comes to market first. It’s is someone who scales first.
2. 10% is product 90% is market and people.
3. Find ways to provide Convenience(Payments, Messaging, Transactions) and Trust(Identity Verification, Reviews, Assurance, Showing how other facebook friends are using the marketplace app) for both supply and demand customers.
4. Frequency creates a habit which creates loyalty which creates profit. Figure out a way to create habits and loyalty for your customers.

Three successful seeding strategies for marketplace startups

1. Single Player Mode / Trojan Horse approach (Used by OpenTable) — Create tools that add value to supply people so they get interested in using your marketplace down the road.
2. Fill Empty seats (Used by Uber and Groupon) — Offering to fill empty seats at a resultant while telling supply folks that we will only take a % of what we were going to sell.
3. Buyers are Sellers (Used by Let go) — Create a marketplace where Buyers are Sellers. Here you can use advertisements to attract initial users

Three new seeding strategies that are successfully

1.) Own supply (Used by Sprig and Spoonrocket ) — They are delivery only restaurants that make their own food and have their own delivery drivers

2.) Own delivery network (Used by Instacart) — In this model Instacart doesn’t just allow you to buy groceries online, but their workers deliver the groceries to you.

3.) N-sided marketplace (Used by AngelList) — Bring all suppliers together so they can perform transactions using tools you provide. As an example, you can bring startup founders, legal team, investors, together and provide tools to get a job done.

Four Loyalty models that help in creating repeating customers for low-frequency apps

Remember that frequency creates a habit which creates loyalty which creates profit. For low-frequency apps, below techniques can be used for creating loyalty with customers or demand-side people.

1. The Expedia Model — In this model SEO(Search Engine Optimization) is used to show blogs, videos created by Expedia. This helps travelers get information about places while also registering Expedia as a travel booking company that can be used for booking travel in the future.
2. The Airbnb Model — Providing a better and cheaper place to stay would help in remembering Airbnb.
3. The HotelTonight Model — This is kind of an insurance model. You purchase an insurance policy with the intention that it will help you when needed.
4. The Houzz Model — In this model, we can take advantage of an inherent human desire to stay up-to-date on things important to them. As an example, Zillow provides information on your home prices and also providing other useful information like crime rate, school ratings, etc..

Step by step process that can help in creating a winning marketplace

Step 1 — Research

** We will use airbnb as an example where possible **
1.) Figure out a starting group for your marketplace. Do you need supply people(Ex- Airbnb hosts) to start or Demand People(Ex- Customers who book places)?
2.) Lets say you choose supply people(Ex- Airbnb hosts) then figure out where you can find them in bulk. You might find them at events, colleges, offices(A Connect with HR will enable you to reach entire office), artificially creating profiles and requesting supply people to claim their profiles, asking 3rd party person/companies to provide you with demand initially.
3.) Now that you know about your supply people-try to figure out the approach you will follow for scaling your marketplace. Some of the popular methods are vertical scaling (used by Airbnb) or horizontal scaling (used by Craigslist).
4.) Let's say you choose vertical scaling them figure out a place and geography to start with.(Ex- Choose NYC during summer as many events take place and most of the hotels are sold out). You also need to find out the niche community of people who are willing to try your product(Ex- Landlords with multi unit homes or people willing to share their homes).
5.) Identify the value your product will add to these supply people(Ex- Airbnb hosts).Some of the techniques you can use would be 'Build a community for hosts to share tips and get help when needed', 'Creating a profile for them' ,'Developing tools that help them run their business such as finding a photographer'
6.) Fix on a particular marketplace model and  follow it. Refer to'Three successful seeding strategies for marketplace startups and 'Three new seeding strategies that are successfully

Step 1 — Gathering information while planning

Gather information-
1.) Identify the key onboarding process that supply people adopt today when providing service to customers or demand people. You need this when devloping the product as this will be your automated onboarding experience for customers.
2.) Identify the key information that supply and demand people research before booking a service or providing one. You can use this information in your app to provide extra benefits for both sides.
3.) Talk to demand people and figure out if they like to have a community to interact with other demand people to share ideas and problems. If yes, plan how to do this.
4.) Talk to supply people on how they differentiate each other while providing services to similar crowd or demand people. This helps in building search that removes confusion for customers or demand people when finding services to book.
5.) Talk to customers or demand people to identify key metrics they look before booking a service along with websites they visit to perform this research. This helps in creating custom search filters while showing curated search results. As an example you can show ratings, verified icon,top performers,custom filters when searching.(Figure out what abundance of data  they need or they research before offering a service?)
6.) Talk to both supply and demand people to understand the expectation of service and standardizing the work.
7.) Talk to customers on how they find service providers today along with how service providers find customers today.
8.) Talk to demand people and figure out what tools are used by them when creating or providing services. You can create these tools in your marketplace to add value for demand people.
9.) Talk to your supply folks on the acquisition channels that worked for them (Instagram,Facebook,Word of mouth,Discounts etc..)
10.) Talk to your supply folks about peak business days and how they handle high demand. This helps in creating better search results in your marketplace.
11.) Talk to customers and supply folks on maximum/minimum distance they are willing to travel for obtaining a service or proving one.
12.) Talk to your supply folks on how they reach their customers. You can build this as a tool inside your app.
13.) Talk to demand people on number of visits a customer makes before becoming a repeat customer.
14.) Talk to supply people and demand people on the most common reason for not booking a service ot offering one
Plan on doing below thing -
15.) Define a referal program for both side of the marketplace. Referrals happens in 3 ways:-
* Inherent virality (Facebook,Paypal)
* Word of mouth
* Artificial referal - You provide some befit for customers when they share your site
16.) Create a playbook or  training material on how an interaction between supply and demand people should happen based on your conversations with supply and demand people.
17.) Capture FAQ's based on your conversations with demand and supply people. You can use this as a FAQ guide on your website when needed.
18.) Plan on offering freebies to customers when they visit your service providers. As an example- free coupon or a bag etc..
19.) Based on your understanding and conversations with supply and demand people you should have a plan in place to control supply and demand. This helps in creating search results when developing product along with providing hyper-local filters that people are looking for. As an example showing 5 service providers for a given area with custom filters tailored for that search.
20.) You should also have a plan in place to handle extra demand or supply by having regular price and surge price for services. Uber uses surge pricing to manage excess supply. When supply matches demand ride prices will go down automatically.
21.) Have a plan for meetups and one-on-one meeting with your marketplace users.
22.) Have a plan in place for a weekly newsletter for old customers,new customers and abandoned customers.As an example - you can share 5 must try services in your area for abandoned customers to get their interest.
23.) Plan on hiring local team lead and create a local language page to overcome competition. This helps in showing you are local.
24.) Plan on initial services you provide as they play a key role for new customers.
25.) Plan on providing subsidies for the harder side. If it's harder to get customers, then  give coupons.
26.) Make sure you convey the story that your commitments are long term so both parties stay with you.
26.) Plan on opening globally (Helps with network effects) as it can help your marketplace grow organically while new places and people lead to new business opportunity
27.) Plan on making service providers or demand people as partners rather than a commodity
28.) Plan on asking if marketplace provide a better experience to customer “n+1000” than it did to customer “n” directly as a function of adding 1000 more participants to the market? You can pose this question to either side of the network – demand or supply. If you have something like this in place it is magic, as you will get stronger over time not weaker.

Step 2 — Product, community development and SEO/blogs

Produt features to have in your marketplace -
1.) Have a good landing Page. (I will write a  detailed blogpost on this in the future)
2.) Have a good onboarding experience for customers(Supply people)- Include trust in the process. As an example you can you can provide trust by letting customers know that you are available anytime they run into problems or cancellations.
3.) Have a good boarding experience for demand people - Include trust in this process. As an example you can provide safety for unexpected events like delays or cancellations.
4.) Do mobile first designs.
5.) Include social proof.(Helps in creating trust) (As an example you can connect to customers profile and say that 10 of your friends already use our service Or you can show reviews and ratings from facebook.
6.) Include payment processing. You can save customers card information and make it easy for he/she to make a booking faster.
7.) Have messaging feature for supply and demand people to talk.
8.) Provide customers with a dashboard to view services they purchase and messages they sent/received along with recommendations if any.
9.) Make it easy for customers to cancel a booked service.
10.) Provide a review/rating system (Helps in creating trust).
11.) Have a reward system in place that benefits customers and creates a strong bond to your product.
12.) Provide feature that will help customers follow their interests. As an example create a follow system like instagram.(This is a growth tactic)
13.) Have customer profiles with information on his likes. You can use this info to send curated emails when needed.
14.) Show verified and trusted badge next to service providers (Helps with trust)
15.) Include assurance text in emails and communications like money back or we support you for last minute changes or call us asap for issues.
16.) Provide extra useful info for service providers or demand people when creating a service. As an example - you can provide weather info if it helps them. 
17.) Provide extra useful information to customers when booking a service-like weather, time to travel.
18.) Allow supply folks or service providers to add draft services that can track before making it public. 
19.) Create tools that help demand folks manage their day to day operations.
Community features to have in your marketplace -
19.) Create a Community portal where demand folks can interact with each other to share ideas,tips and ask questions. This can help in identifying bottlenecks that should be fixed while knowing requirements that should be built.
SEO/Blogs -
20.) SEO - Check if your web page links are being shown for keywords that customers are searching for on google.This helps in marketing and service discovery along with loyalty in case your services are not being booked as frequently as uber. This also helps customers to remember you on top of their mind over a period of time
21) Blogs /Podcast - Same as above. Helps with marketing and discovery.

Step 3— Paying close attention to users, Reporting and Analytics

Supply side reports 
1.) Track ratings and reviews. Try to act immediately on a 3 star rating to fix the problem (This helps in gaining trust)
2.) Track and report on problems based on emails being sent to your support team. Classify them by grouping based on issue type and users requesting it. If same problem happens more than x times a week then you should automate it or solve it.
3.) Count and report on the number of visits a customer makes before becoming a repeat customer. Having this metric helps you in targeting customers so they might become repeat customers.
4.) Measuring how long a a customer sticks with your platform.
5.) User search based on location. (Ex- Lets assume people from NYC midtown area are looking for certain services. You can use this information to manage heavy demand)
6.) Report on how often users book other service providers or demand people within your marketplace.
7.) Report on customers not booking a service within first 24–72 hours of visiting your site  or signup. You can try to send a personal email or set up a call.
Demand side reports - 
8.) Report on top service providers or demand people. Notice what's special with them and their services. You can then replicate it for others in new regions
9.) Measuring how long a demand person sticks to the platform.
10.) Net profit made by service provider or demand person.
11.) Track conversations in the community portal. Identify what problems are being shared and see if technology can help there.This helps in building new features in your app.
12.) Report on service providers or demand people not getting a booking in the first 24 hours. You can act on these listings and help service providers before they lose interest in the platform.
Generic reports for scaling -
13.) Extract Stats based on services offered at a location with relation to people joining the marketplace. This helps in identifying scaling ratio.  As an example - Having 20 service providers of which 10 of them have a 5 start rating yields 50 bookings at location y - then your scaling ratio will look like(20 & 10 & y location equals 50). You then try to achieve this magic number for new markets or services your provide.
14.) Total transaction value with respect to total money exchanged(contracted) and total profit made(delivered). (Lets say for every 100 bookings a value of $1000 was exchanged for a net profit of $700 in your marketplace). Having this number helps you in identifying how the future might look based on increased bookings
15.) Report on the number of demand or service providers you have while comparing with your competitors. Helps in knowing where you stand in the overall market
16.) Report on the number of sessions or services or booking available while comparing to your competitors in a particular place. Helps in knowing where you stand in the overall market
17.) Calculate NPS and review counts (5,4,3,2,1 star reviews)
18.) Report on most working acquisition channels like podcats, seo,instagram, word of mouth. This helps in focusing on the most important channels where your customers are comming from.
19.) Report on number of view a service  gets before it gets a first booking and being filled . This helps you in getting those many views to services so it can be booked (10 views: 1  booking)
20.) Most used services? This helps in focusing your efforts at the most needed location and service through ads or by increasing supply.
21.) Report on number of minimum booking a customer makes before becoming a repeat customer(frequency creates a habit which creates loyalty which creates profit). 
Generic reports for maging service and demand-
22.) Top days and times of bookings. This will help in managing supply and demand
23.) Report on number of messaging exchanged between supply and demand people categorized by peak days and months. 
24.) Report on top days of activity so you can focus on getting more supply on those days.
25.) Report on top places of activity in a state/city- This helps in identifying where your demand is.
26.) Supply to Demand ratio (1 host : 10 customers)This helps in understanding how much demand you need to meet supply.
27.) Report on irregular bookings. If booking are being made every 1 week or 1 month by customers - You should then plan for a on-demand solution for those customers and regions. As an example, if people in NYC up town keep booking a session every one month-then you need to make sure supply is available at that time so you meet the demand.

When to obtain VC money

You might need or will need VC money for scaling and supporting your operations as needed.

In a marketplace where there is huge competition the cost of switching for customers or supply-side users is very low, so companies must manage margins carefully by controlling both rates and utilization so that they can attract adequate workers while also remaining a compelling proposition for customers. This is where the VC money might be needed — extra cash enabled the most successful companies to weather the ups and downs of competing on margins.

This article presents my learnings and is not afflicted with any company or person. I would like to thank Andrew Chen for putting together 20 must-read essays for marketplace startups.