8 Steps to Follow to Build a Successful Marketplace
If you’re reading this, most likely you want to build a marketplace that brings real disruption to your sector.
The truth is, like with most things, there is no secret recipe that will guarantee your success. However, there is a structured process that can significantly reduce your chances of failure.
vTo bring effective value to buyers and sellers within your business you should:
- Choose a viable Industry
- Define your UVP
- Assess your Market Size
- Design your Distribution Model
- Choose the right Business Model and assess the Economics
- Make a 10X better product
- Build Trust on both sides
- Safeguard and Grow Your Realm
1. Choose a Viable Industry
Buyer and Supplier Critical Mass
It’s easier to provide value (and relevance) when you build a marketplace in a sector that lots of suppliers & buyers.
When the sector is small (or too “niche”) it is unlikely that a lot of suppliers will sign up for your marketplace. This is because all the buyers know the suppliers personally and, therefore, will not need you.
On top of this, those suppliers have probably already approached the buyers in their niche. Meaning they don’t need to — or simply don’t want to — deal with a middleman.
Frequency
How many times is a buyer likely to purchase a product or service from your marketplace?
- If it is home design: once every 10 years?
- Furniture: once every 2–3 years?
- Food: once a week?
If you are aiming to build a marketplace for a low-frequency product or service you need a high value per sale. However, if your business is high-frequency, you can tolerate a lower value per sale.
Available Market
I will talk about this in more detail later in this article, but I would like to quickly address this point. It’s really hard to assess the current size of your market and much harder to estimate what it will be like.
When you cause disruption you may change the market entirely. For example, when Uber came to market they probably doubled the number of drivers taking people from A to B prior to its existence.
2. Define Your Unique Value Proposition
If you build a marketplace to connect your target buyers and sellers, how will it make a difference?
Will it create a large saving of time or money? Would it create significantly improved access? Or a drastic time reduction?
As in real life, marketplace abundance needs to be the norm. Being digital is almost a by-word for ‘from anywhere.’ Customers expect a price reduction due to a brick and mortar structure (and its associated costs) not being a necessity.
There are three drivers which can be used either separately or together:
- Market access focus — dramatically offering access to more suppliers and products to the consumer.
- Price focus — providing a dramatically better price than found locally.
- Convenience focus — reducing time on something you personally do not need to do.
Therefore a common narrative/pitch for a digital marketplace could be along these lines:
Market Access Driven: An Abundance of Choice
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Price Driven: Strong Cost Savings
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Convenience driven — Strong Time Savings
Download QuickFlowersMarketplace.io and order flowers to be delivered anywhere in London within a 50-minute time frame.
3. Assess your Market Size
After solving the marketplace drivers, you then need to establish the size of your market that is digitally addressable.
If you come from a very specific vertical (e.g. hotel furniture), you probably have a good grasp of both the sector’s statistics and distribution channels.
If not, you should talk to the industry-specific associations that have access to such information. Or ( as a last resort ) use Google or another trusted source such as statista.com.
Besides establishing the current market size, it’s useful to know the current immediate digital marketplace potential. Googles Keyword Tool can help you here!
Let’s take the hotel furniture industry as an example here.
Say that, through assessing the market, you learn that within the hotel furniture industry there is:
- A national turnover of X
- Global turnover of Y
- That 90% of it is still offline
- In which the retail space is 50/50 B2C suppliers & professional B2B suppliers. Talking to some of them, you’ve found out that the margins are typically 40%.
Meaning? If you build a marketplace to address these users, you could be shaving off 20% in commission for buyers. Thus adding value to the chain. This makes the sales process more efficient — and your marketplace the go-to solution.
4. Design your Distribution Model
Digital Distribution (Mostly Users)
Google Adwords allows not just for market sizing. It also allows you to actually tap the market — by asking people to click your link when they are looking for your products. This is comparable to a pharmacist telling you to buy X, Y or Z product when you complain about your symptoms. And it works.
The same goes for YouTube videos, particularly ‘how to’ videos. If a smartphone specialist shows you that a product is really good you will be more likely to make the decision to pull out your credit card.
If one, or several, YouTubers are covering your vertical, it is always a good idea to have them test your product.
There is no right or wrong answer — and what works now tends to phase out over time.
Other platforms copy and consumers get tired of seeing specific ad types. A remarkable example is display ads. When the first one came out it had a 95% click rate. Now the average display ad has a 0.05% click rate.
As with all things, nothing beats the continuous effort of experimenting patiently. Test different methods on your chosen digital channels to try to find the ideal mix of mean and message and novelty.
Referrals
Referrals are a key growth lever to bring along more users by rewarding current users for “digital word of mouth”. The earlier on, the better for the users involved. When you build a marketplace, it makes sense to use a referral program.
Having, personally, been a Dropbox early adopter (which is not a marketplace, by the way) I accumulated some 20GB of free space.
Initially, I acquired 250MB and then 500MB for each new user. I achieved 20GB by inviting my mailing list and having over a dozen people joining with my referral links.
Dropbox, in turn, famously got 4 million new members this way.
Airbnb also interestingly had a scheme that gave you $75 initially for each new host and $25 for each new traveller. This way I accumulated around $300 for free travels (while spending a couple of thousand).
Referral programs help you grow your number of buyers/users exponentially.
This is key if your marketplace is to stay relevant.
But what typical referral programs could be good for a Marketplace?
- If you happen to manage the price of all or some of the items offered OR if you have fixed percentage commissions you can give a percentage off for new users when referred by a current user.
- If you don’t manage prices you might stick to giving away a cash discount that’s a percentage of the LTV. Say $50 for the new and current user ($100 total) at the moment of their first purchase — if your average user generates $250 in commissions over five years.
- If you intend on having each user signup many people from their mailing list why not do the following:
- Allow the user to choose, from his/her Gmail contacts, the most likely people to adhere to the marketplace and maximize the chances of both users gaining some benefit.
- Promote incremental gains: If a power user adds 5 paying customers at a $50 bonus each at a bronze level, tempt him with a silver level that equates to a $60 bonus for each new customer up to 20. Then, Gold at $70 for each up to 50, platinum at 100$, etc. Gamify and make your power users your best word of mouth, they may even YouTube about you!
Offline Distribution (Mostly Vendors)
To gain initial scale on the supply side you might need to resort to a good old sales pitch. Through meeting suppliers in person, calling them or even a letter explaining your case.
This might sound inefficient but it’s most likely not. Just ask yourself, from the dozens of sales emails that you ignore every day, how many would you NOT ignore if those vendors reached you over a friendly, well-crafted letter — or phone call?
After all, in your vertical, the supplier shouldn’t be hard to pinpoint. They should be easy to find via their professional associations along with their leaders’ names, emails and addresses etc.
Giving a lot of attention to your first key suppliers is important to show your relevance to other suppliers coming next. This means letters, arranging personal meetings, speaking at speciality conferences and of course media coverage/PR.
This brings along a unique hyper-relevant inventory to your marketplace to make it relevant from the start.
5. Choose the Right Business Model and Assess the Economics
This brings you in turn to the CPA/LTV rationale of your business. In ‘regular’ businesses you factor in shop or office rentals, warehousing, staff, cost of advertising, sales etc. Online, it’s different — particularly when you build a marketplace.
In a marketplace, you need to simultaneously make an effort to attract supply and demand, while offering suppliers a cheap way to sell and buyers an abundance of items at great prices.
Commission Model (Transactions)
This is the simplest one but is now rare in a marketplace model. Charging a flat, all-inclusive 20% used to be the norm for marketplaces where payment transactions are made online but, due to the likes of Uber, this is now being replaced by more complex business models.
Pack of Actions Model (Leads)
This is usually directed at vendor-centric marketplaces, such as OLX or TaskRabbit. Here you list an item that will be visible until the number of actions the vendor purchased expires. These actions that the vendor purchases are views/click to see phone number/click to order/contact requests. In this model, the vendor is purchasing visibility and potential business — the main transaction happens outside the marketplace.
Highlight Model (Leads)
This is possibly the oldest model. Craigslist, back in the 1990s, was unable to charge online for offline transactions. It, therefore, allowed users to pay to put their ads on the top of the list, highlight them in yellow, use big fonts and other perks.
Subscription + Actions + Commission + Highlight + Co-Branding + Fee Per Item + CPC (leads + transactions)
As larger marketplaces become behemoths, they tend to evolve a model that offers a myriad of options to their vendors.
Alibaba and Amazon allow certain suppliers to use their own namesakes in exchange for a steep commission plus guaranteed sales. UberEats may charge a percentage of the food from the restaurant and a delivery fee to the end customer.
Another interesting case is Booking.com which allows hotels to increase the site’s commission in exchange for higher placement in their search — or for an extra discount available only for their site’s users.
Overall and over time marketplaces listen to their communities. They progress to complex models allowing vendors to make the most of the marketplace’s capabilities — while producing novel revenue sources for the marketplaces themselves. As an example, Amazon’s seller’s option pages are clearly a result of decades of thinking through business models.
What’s Right for You at this Stage?
If you are just starting you’ll probably either begin with a commission model (that is set lower than your competitors’) — if the transaction’s payment is done via you or with a pack of actions. Adding to this I would suggest you add a smart suite of incremental exposure features to allow merchants to purchase visibility — for instance allowing them to outbid each other for the top of the list while producing more sales for them and for you.
Once you’ve figured this out you can move on to establishing your CPA and LTV.
CPA — Cost Per Acquisition
This is the cost of acquiring a paying user who will, over his/her lifetime, purchase products from your platform.
When you first build a marketplace, you’ll be attempting five or possibly even 10 different means of achieving users for less than they will generate for you over time.
The CPA will be specific per means (i.e. email campaigns) and blended (all digital campaigns) and hopefully will be a number that is lower than the LTV figure.
LTV — Life Time Value
This is what an acquired paying user will generate for you over time. For example, you can estimate that, in a specialist audiobook marketplace, over five years a customer will purchase two books per year for $15 each on a 20% commission. This generates the following equation:
5 years * 2 books at $15 * 20% = $30 in commissions.
The LTV — CPA > 0 from your chosen business model is crucial to understand the viability of your business.
Other metrics to keep in mind will be GMV and Take Rate:
- GMV (Global Merchandise Value) of what’s been sold by all sellers in the platform minus returns.
- Take Rate: commissions charged by your service by a percentage of GMV.
Related: 60 Active Marketplace Investors
6. Build a 10x Better Product
If you build a marketplace that is 10x better than your competitors you should thrive because you:
- Offer the best products or services from the best suppliers, with unique prices or perks.
- Have the best solutions for your supplier’s businesses to thrive, gain insights and exposure.
- Own a very well thought out marketplace that disrupts its niche and offers end customers an amazing experience.
To do that you need a savvy mix of experience and wisdom in the particular niche you are exploring — as well as product and UX UI expertise.
You will need a cutting edge technology team and the right sales/onboarding/pricing strategy to delight vendors and buyers alike.
The above will go a long way to help you hold their attention the way Amazon, Etsy, or Airbnb were able to do.
An example of a 10x better product would be the all-inclusive car renting app Fair. Several vendors — a unified experience — great value for the end customer.
7. Build Trust on Both Sides
Does your product comply with modern trust-building mechanisms and does it convey an overwhelming feeling of trust?
There are a few rules of thumb when it comes to building trust, depending on your marketplace’s industry:
Include Lots of Pictures & Videos
For the products or services that you may be selling (or indeed being the middleman for via owning a marketplace), you should show as much as possible:
For shoes that means pictures of a person who relates to me.
Furniture looks good when pictured in a stylish home.
As for cars people tend to buy based on features — such as leather seats, trunk space or reversing cameras — so why not have a video explaining each model’s features?
Over Explain, Over Document
The coveted five stars are not enough anymore. Use videos, pictures and words to attract your audience. Explain the pros and cons they felt while using the product, the value it brought to them and so forth.
The bare minimum here is using comment boxes for proven past buyers.
Go the extra mile — if you build a marketplace that trades high-value items — like high-end furniture, boats, cars and homes — then why not use video testimonials, for example.
Even better, a coveted seal of approval or in-depth analysis of your platform.
Independent, in-depth reviews are huge trust builders — especially when it comes to purchasing big-ticket items.
You can also use augmented reality to promote these items the way Ferrari has done here.
Show Authenticity
Allow room and promote the presence of the makers.
The factory worker, construction worker, designer, tour guide, the raw materials they use.
Showcase all of this on your marketplace.
The best way to build even more trust is to be completely transparent.
Ensure Secure Payments
If you want to build a marketplace that handles transactions directly, I recommend using a third-party platform like Stripe or Paypal.
This will assure your users their payment information is secure when using your platform.
8. Safeguard and Grow Your Realm
Once you’ve launched, your vendors and buyers will look up to you to settle disputes. Ensure that all parties abide by high standards and can expect loyalty (and frequency) to be rewarded.
This will attract more buyers and suppliers virally and through word of mouth. A marketplace really is an ecosystem that needs active management and nurturing. Doing this will lead to growth and prevent vendors/buyers from going to your competitors.
Organically you will keep buyers coming in via the trust-building initiatives outlined on point six. These allow for great SEO (Google’s way of ranking you).
But to actively safeguard the business in your ecosystem, you should think about making the process of buying and selling more dynamic to allow for increased frequency.
For vendors, this frequently comes in the form of management dashboard solutions — i.e. for a restaurant the ability to gain seating insights and management by restaurant booking apps.
But most importantly this means using tried and tested possibilities to drive sales such as price alerts, flash promos, exclusive discounts for frequent buyers and other initiatives that primarily focus on repeat purchases by buyers. This should prevent vendors from leaving even if they will pay lower commissions elsewhere!
Wrapping up
I hope this article has given you an idea of what it takes to build a marketplace successfully.
If you would like some more information and tips here is a dissection of one of our own marketplaces. I really recommend reading it to give you a tangible, real-world example of how to make your marketplace great.
Thanks for reading.
And By The Way,
I’m the Co-Founder of Altar.io — a team of experienced second-time founders, product experts, and talented developers based in Lisbon. We help startups and corporates build great tech products.
If you have a brilliant idea that you want to bring to life — drop us a few lines and let’s chat.
Thanks for reading,
André
