Accelerating growth: Key strategies for scaling a two-sided marketplace

Janet Bannister, Kijiji.ca founder and Real Ventures partner, digs into the best strategies for growing an online marketplace.

While it may seem that eBay, Airbnb and Uber are unstoppable marketplace leaders, new marketplaces are being created every day and many of them will go on to be hugely successful businesses that transform entire industries. In our last post, we discussed Janet Bannister’s three core principles for kick-starting a two-sided marketplace based on her experience working with eBay and founding Kijiji.ca. This time, we’ll delve into the best ways to build on success once you have that important initial traction.

To recap, the essence of Janet’s advice for kick-starting a marketplace is to focus on matching buyers and sellers, choose specific markets in which to refine the product and marketing playbook, and double down where you have traction. (NB: the terms “seller” and “buyer” are used to denote to the supply and demand sides of the marketplace and may take a different form such as an employer/job seeker; renter/lessor; service provider/customer; etc.) So once you have that initial success, what’s next? How do you accelerate growth and ensure that your business thrives?

Janet suggests considering three main lines of inquiry:

  1. The “direction” in which you should expand;
  2. How to best evolve your marketplace’s product features; and
  3. The non-obvious key metrics you need to track as you grow.

“One of the things I love about marketplace businesses is that there is no end to the strategic and operational challenges to solve. Marketplaces are certainly not a “set it and forget it” type of business,” says Bannister. “There may be a market expansion playbook, but figuring out how to expand from the core, how to continually evolve and improve the marketplace’s features and functionality, and how to continually evaluate the health of the business keep running a marketplace business interesting.”

1. In which “direction” do you expand?

One of the biggest questions that marketplace entrepreneurs face once they have a strong core in a couple of markets, is whether they should continue to focus on launching in new markets with the same model or whether they should add additional “categories” to their platform in their existing markets. Bannister suggests that a good approach is expanding into multiple markets in order to secure a toehold in important markets and then later working to add additional categories. In other words, focus on breadth to get into several key markets initially and then focus on depth.

“Your focus in the early days should be on honing the playbook for launching in new markets and quickly getting to critical mass,” says Bannister. “Your “market expansion playbook” should be the key proven principles of how to initially establish traction and grow. In developing this playbook, you need to recognize and balance the need for replicating proven tactics with understanding the local market dynamics and adjusting accordingly.”

For instance, Uber started expanding to new cities in May 2011, just ten months after launching in San Francisco. They launched first in New York City, where they used the same tactics that had worked for them in San Francisco. Four months later, they launched in Chicago and then began international expansion with Paris three months after Chicago — which coincided with the announcement of their $37 million Series B.

Once you’ve established a toehold in key markets and you have a strong enough team and playbook to continue expanding into new markets, it’s worth looking at how to expand your offerings. For instance, Uber launched UberEATS in 2014, after having gained critical mass in several cities across North America and internationally. Another example is Airbnb’s launch of Airbnb Experiences in 2017, which gives locals the ability to host and promote activities to Airbnb users. This came only after Airbnb had become a significant presence in many cities around the world.

2. How do you evolve your marketplace’s product features?

As you grow your marketplace, there will be countless product features you will want to add to enhance the user experience, speed growth, and make the marketplace safer, among other things. Bannister suggest you keep the following guiding principles in mind when you’re making these decisions:

When forced to choose, put the buyer ahead of the seller

Sellers are entrepreneurs. Get the buyers to your marketplace and the sellers will follow. The reverse is not necessarily true. An example of this was when Kijiji Canada beat AutoTrader by catering to buyers rather than sellers. At the time, AutoTrader focused on getting the most cars onto their site (most supply) through partnerships with dealers and with a product tailored to helping car dealers run their businesses. In contrast, Kijiji focused almost exclusively on getting used car buyers to their site.

“Over time, the car dealers walked away from AutoTrader because they were not selling vehicles on the site and banged down the door to get on Kijiji because that was where they knew they could sell their cars,” says Bannister. Autotrader has now shifted their strategy, and are making a comeback by tailoring their product to the way people want to search for and buy used cars.

Decide how much control the marketplace has versus the buyers and sellers

You will need to decide how much control/input the marketplace has versus the buyers and sellers. How much of the transaction will be controlled by your sellers? Who will decide how buyers and sellers are matched?

For instance, eBay manages Trust & Safety but beyond that, most aspects of the transaction are controlled by the sellers, such as setting prices, taking payments, shipping items, and responding to buyers’ questions. In contrast, Uber is a marketplace with very high control: Uber determines which “seller” is matched with which “buyer,” sets prices and takes payments.

The level of control your marketplace will exert is important to consider as it has repercussions on your value proposition, your key product features and your operating costs. “There is no right or wrong approach here,” says Bannister, “…it depends on the nature of the buyers and sellers and the desired user experience. Generally speaking however, the greater the control that the marketplace has, the greater the costs of operating the marketplace and the greater the complexity.”

Establish trust and safety

Building trust in the marketplace is absolutely critical in order to attract and retain buyers and sellers. As the marketplace grows, issues such as fraud are likely to increase, both as a result of more transactions going through the marketplace and because growth will becomes better known and will attract “professional fraudsters” who prey on marketplace users.

“Establishing and maintaining a safe, well-lit marketplace is a critical and ongoing task that must be given top priority. Few things can kill a marketplace faster than failure to take this very seriously,” says Bannister.

3. What are some of the non-obvious key metrics you need to track as you grow?

While it’s clear that you’ll be tracking growth as you work on expanding your marketplace, it’s not always obvious which metrics warrant the most attention. Absolute numbers won’t give you the best picture of how to focus your efforts, so there are a few non-obvious metrics that you would do well to keep in mind.

Category of first activity

“Category of first activity” refers to the category in which a user made their first purchase. Many marketplace managers look at the relative size and profitability of each category, but what is arguably more important is the value of the users that come through each category, explained Bannister. “For instance, when I joined eBay in early 2001, collectibles categories such as Stamps and Coins were largest. But we found that people who shopped in those collectibles categories tended to only shop in those categories. By contrast, people who made, for instance, a first purchase in Clothing tended to also shop in Home & Garden, Jewelry, Baby and other categories. As a result, they were much more valuable to the overall business. This was a fundamental insight as it shifted the mindset around the importance of non-collectibles categories that had appeared to be small but were actually generating extremely high-value users.”

Conversion rate

“Conversion rate” refers to the percentage of listed items that are sold. “Sold” can mean different things in different contexts but is basically a measure of how much of the supply on the site is being transacted upon. For instance, it could mean the percentage of items that receive bids on a classifieds site, percentage of Lyft drivers that get a certain threshold of riders in a shift, or percentage of Amazon marketplace items that are sold.

“It is important to understand your conversion rate at the most granular level,” says Bannister. “This will help to ensure that you have the right balance of supply and demand. A conversion rate that is too high indicates a lack of supply; too low indicates a lack of demand. Either will lead to unsatisfied users.” The key is not to look at conversion rate overall, as that can mask underlying problems, but to look at the each area separately and adjust the marketplace dynamics to get the optimal rate. What is the optimal conversion rate? According to Bannister, it depends on the marketplace. “At eBay we found a 50% conversion rate led to the maximum rate of organic growth. You will need to test and determine what is best for your marketplace based on the unique aspects of your business.”

Concentration of sellers

While a marketplace can often scale supply quickly by attracting large “power sellers,” this may not be desirable long term as these big fish can crowd out smaller sellers and make it difficult for first-timers to achieve the success needed to bring them back. Buyers also often prefer to deal with smaller sellers — it may be what initially attracted them to your marketplace. That’s why it’s important to monitor what percentage of your supply and what percentage of your sales are due to large power sellers. “Don’t forsake long-term health of your marketplace for short-term easy access to supply,” Bannister recommends.

Keeping these metrics in mind, in addition to the other strategies Bannister suggests, can make the difference between a slow crawl and strong continuous growth.

“One thing I love about marketplaces is that there is tons of data to dig into and analyze in order to drive decision-making. You need to ensure that you don’t become overwhelmed by the data but have the know-how to dig in and pull out the key insights and indicated actions.”

This is the second installment of a two-part series on building successful two-sided online marketplaces. You can read the first article below 👇