How not to build a digital marketplace
Best practices from the coalface of corporate marketplace building
Your company has been an unrivalled market leader, since time immemorial. You sell a premium physical product to consumers or other companies with a loyal customer base, built up over generations. However, recent financial statements report profits that shareholders are less than happy about. New digital competitors have entered the market and are challenging business-as-usual, so you are faced with a dilemma.
Should you sell the same physical goods online to build up your eCommerce sales channels? Or should you go one step further and build an online marketplace for others to sell on as well, repositioning your company as the orchestrator of a new ecosystem? Every market is changing and some legacy companies are struggling to reinvent themselves for the digital economy. Who are they in the new global digital marketplace? Their reputation was built on offline excellence, quality products built by talented individuals, then the digital disruptors came along, forcing an existential crisis for the old players.
Impact on sales
Note: Based on responses to questions about (i) how digital technologies have affected the respondent company’s sales and (ii) the overall impact that the adoption of digital technologies is expected to have on sales over the next three years, with answers ranging from “significant decrease” ( — ) to “significant increase” (++).
Get the green light
In your network you have spoken to other sellers who are thrilled about the idea of reaching a larger customer base and internal sales departments are excited about the initiative. Great, so you’ve got additional sellers of physical goods and services who are enthusiastic. You ask some of your best customers what they think about buying your goods online. They tell you it sounds good. So you commission an external company to build an online marketplace for you, onboard the sellers and create a sales team to acquire customers and generate sales pipelines.
Half a year later you are left wondering why your revenue remains stagnant. Indeed, your sellers are also disappointed by the lack of sales uplift, so you are still not able to charge them a service fee. What went wrong? Based on learnings and insights from working with corporate clients over many years I have compiled four of the most common mistakes companies make when creating a digital marketplace.
1.Supply-side first
Every seller wants to sell more and get new customers. Unless there are legal, regulatory or other insurmountable hurdles there are few justifiable reasons not to sell more of your product. So the supply side is usually covered. But what about the demand side? Is there enough interest? Only if you are sure that there is sufficient demand for the specific value proposition you offer is it worth building a marketplace.
Indeed, sometimes customers, don’t even know they want something unless you offer it to them. But their desire is the result of an underlying problem or need that will make their life easier in some way. It’s apt here to mention the famous Henry Ford quote “If I had asked customers what they wanted, they would have said faster horses.” What exact form the solution has is not your first concern as an entrepreneur, but more so the problems or needs that are at play.
Don’t find customers for your products, find products for your customers. — Seth Godin
2. You didn’t validate whether going online would solve a demand-side problem for your customers
If a significant benefit doesn’t accrue to your customers from buying your products online why would they do it? Most people, incl. your customers are resistant to change. They have always bought from you in your physical stores, on the phone, via email or fax. Even if on an objective level this buying process is inefficient you will not convince your customer to buy online if they have no incentive to do so. We’ve heard all kinds of justifications: “Yeah, I guess that would be faster. But then I would have no job,” or “I prefer a call with a real person to clarify questions instead of a chatbot.” It is nice if your marketplace can save five percent in procurement costs, but if your product is not a high priority for your customers — it’s a hard sell.
Problems worth solving
So what are some actual problems worth solving?
The energy sector provides a good example. Bunker fuel for cruise liners, oil tankers, liquefied natural gas, and bulk containers has to be bought for ships while at sea. They may need fuel in Beijing for one of their ships. Shippers who provide goods worldwide to large corporates are constantly pressured by the Fortune 500 on paying for shipping costs. Indeed, shippers are often forced to pay for fuel upfront and have to wait to get paid by the big companies.
The market for marine fuels was valued at $137 bn in 2017. Previously, resellers and brokers would add substantial margins for buyers that did not have credit with sellers. Now, buyers can go through a b2b trading platform to make spot buys for the fuel needed in London or Buenos Aires.
The construction industry is also ripe for a digital marketplace. Sana Construction conducted a survey of 300 B2B companies and the results shine a light on the endemic inefficiencies that could easily be solved. When respondents were asked which B2B e-commerce solution characteristics were most important for them the results were:
- Reduce manual data errors (95%)
- Lower system administration requirements (92%)
- Minimise order handling for inside sales (90%)
Innovation needs to be part of your culture. Consumers are transforming faster than we are, and if we don’t catch up, we’re in trouble.
— Ian Schafer
Consumer industry is primed for new marketplaces
We all know that physical activity contributes to better health. Many people inexperienced with fitness and sports would like to work out or are even required to work out due to already deteriorating health conditions. However, the risk of injury is high if you perform exercises incorrectly. And, it is also hard to keep motivation high over time without a personal trainer. Then again hiring a personal trainer is not possible for many people due to the high costs. Imagine there was a marketplace connecting people searching for personal training at low costs and personal trainers who want to take on additional clients via video training. The digital communication channel could decrease the price significantly as travel time would be eliminated, but she could also train several people from different locations in one session.
So how do you discover these problems in the first place? Your customers both current and prospective will tell you. If you ask in the right context and medium. Han Gust, Head of Ventures at FoundersLane outlines in further detail how you can reveal unmet needs to find the elusive white space.
3. You asked biased customers for their opinion in a biased way
In the scenario above you asked established customers whether they would buy your products online. Most people would say yes either out of politeness or respect for you or because they are not in the real situation of having to order. It is fine to start with existing customers who already know you. But the real value lies in potential customers who don’t know who you are and who have no affiliation to your business. They will not reply positively out of politeness. But they will tell you the truth if you give them an incentive.
Maintaining an inquisitive tone of voice is crucial. For example: Some customers told me that the communication process for ordering complex sheet metal parts is largely manual and time-intensive. What is your opinion on this process? Which benefits do you see for yourself and the industry if the communication would largely be online?.
Asking and testing are also two entirely different things. While testing a prototype / MVP (minimum viable product) customers can show usage behaviours of which they were unaware of. That is why rapid testing and iterations of MVPs are necessary before fully committing to developing a solution.
Assuming you got the first three factors right. There is still something fundamental that could go wrong: your customers go to your marketplace because it solves a problem, they find their perfect supplier, but never use your marketplace again. What went wrong?
4. No incentives or lock-ins
Let’s take a different example: a marketplace connecting consumers with hairdressers. If consumer A finds their perfect hairdresser after a few attempts the hairdresser could ask for direct contact offering a ten percent discount (instead of paying 20 percent commission to the marketplace). The consumer will take that deal and never use the marketplace again unless it offers additional benefits above simply matchmaking:
- Loyalty program with valuable rewards (e.g. higher discounts or vouchers towards other relevant services and products)
- Community where “expertise” or status is highly regarded
- Online payment option: as payment convenience becomes more and more important in everyday life, marketplaces that facilitate cashless, easy transactions will be in demand.
Many other factors impact the success or failure of a marketplace such as the team, market dynamics, timing etc. The above issues arose when I worked with established corporates to build a digital marketplace, either from scratch or from an existing marketplace. Every industry is nuanced and designing a digital marketplace for each new company takes deep industry knowledge and extensive practical experience, which serial entrepreneurs have in spades.
Interested in knowing more? Feel free to reach out to me!
Jen-Yie Chen, currently located in Berlin, is passionate about building digital companies and networking with other digital leaders. She benefits from 9 years of hands-on experience in validating, building and scaling tech companies in leadership positions as well as strategy consulting at BCG. She is founding partner of Boulesse and co-created the consumer vertical at FoundersLane. Other interests include photography, food, art and travelling for memorable experiences.
