SOLVING CRITICAL CHALLENGES IN BUILDING A MARKETPLACE
Critical challenges faced in building a marketplace and shorthand notes on how to overcome them.
On-Demand Marketplaces, especially those that bank on repeat transactions from the same set of users face critical challenges that must be addressed before they hit the growth curve. In Jan 2014, we started building a marketplace at TAKE ZERO as a platform to connect people in the entertainment industry with one another, and realised we were facing critical problems that needed to be addressed immediately.
The Chicken & Egg Problem:
Launching a marketplace involves a lot of variables — threshold numbers to make a successful match, targeting the right demography, scalability enhanced by technology, ability to tap into the value creation process, etc. Figuring out which side to start with — the “Demand Side” or the “Supply Side” is a million dollar question with no right answer. One of the more commonly followed thumb rules while selecting a side is to go with the one with larger numbers.
But this may not work in every case. There is no rule book. The entire premise behind this exercise is to quickly de-risk the business to a stage that actually works. If there is an immediate access to the “Demand Side” with smaller numbers rather than the “Supply Side” with larger numbers, that is where the focus of start should be.
A Marketplace is about scale. The Product needs to scale. The Business needs to scale. It is also important to note that “scale” is relative. What scale would mean at an early stage may not mean the same at a mature stage of the company. Scale is about exploding into the next stage of growth and beyond. Change of variables like Funding, Revenue, Endorsements and Traction can change the vector of scale, albeit always in a sharp rising curve.
Solving the Chicken-Egg Problem is an extremely important step as it sets the pace for validation experiments. There is enormous literature around Growth Hacking and Guerilla Marketing on how to acquire the first set of customers for validating supply-demand matching.
The Scalability Problem:
Marketplaces can evolve to have various Revenue Models: Commission, Affiliate, Subscription, Advertising, or a mix of these. The most critical step in building a successful marketplace happens between the Problem-Solution Fit Stage and the Product-Market Fit Stage. This is also the right time to experiment various revenue models and identify the ones that can’t scale.
A strategy that works for one marketplace may not work for another in the same domain. Due to large number of variables involved in building a marketplace, it is difficult to find the right revenue model that can scale. But with smart experiments, it can be quickly concluded what revenue models cannot scale.
In the early stages of TAKE ZERO, while connecting Performing Artists to Production Houses, Agencies and Event Managers as a marketplace, we realized that a commission based revenue model cannot scale and pivoted away from it. Markets like the Film and Entertainment Industry have a large number of middlemen (agents) embedded across various layers. With referral based commission models being inherent to the dynamics of the industry, introduction of the marketplace as yet another middleman positioned us as a competitor instead of a facilitator, and led to Platform Leakage affecting repeat business and eventually scalability. And we ended up evolving into a Market Network.
The Platform Leakage Problem:
The shut down of Homejoy — an on-demand marketplace for home services in US and Canada that worked on a commission based model, begs to question if Platform Leakage was one of the reasons behind the shutdown. Platform Leakage happens when both the supply and demand sides cut away the connecting platform after building a relationship. In case of Homejoy, the relationship between a Home Owner and a Contractor was established on the eve of the first job, diluting the need for Home Owners to re-use the platform. The Contractors on other hand saved on the 25% commission which was otherwise retained by Homejoy for facilitating the service.
However, on-demand marketplaces that work on a commission model have done well in other service segments like Food Delivery, Logistics and Transportation. Different service segments in the market have their own dynamics, their own variables, and what works for one segment may not work for another.
Marketplaces that are built around providing services that demand factors of trust or specialization, bank on the creation of a long-term relationship rather than a one-off job, and are more susceptible to the phenomenon of Platform Leakage.
User retention for repeat business in such cases has to be created by exploring alternative value propositions for both the supply and demand side users.
