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If you’re a student of marketplace dynamics then you are well aware that marketplaces are hard to get started; but once going are even harder to stop.
The trick is getting that “going” started, and scaling from there. Sure there are the ones that have become household names in less than a decade, such as Airbnb, Uber and the pioneer marketplace eBay. Just as professional athletes make their sport look effortless, these successful marketplaces make two-sided platforms look straightforward.
But they’re not. At least 64 marketplace startups that raised a total of $394 million shut down between 2009 and the first half of 2017, according to data from CB Insights.
Why are they so hard to get right? Firstly, startups may be asking the wrong questions in their quest to get their service off the ground. It’s not just about creating a marketplace to leverage the power of network effects, but understanding whether the best approach to a problem is even a marketplace at all. It’s about understanding the essence of the offering. It’s about asking which side is more constrained. It’s about creating the supply and finding the critical mass of demand. We asked three experts in marketplaces what it takes to get one off the ground and flying high.
Where to start? Demand Side? Supply Side? Do I even have a Marketplace?
It’s often the case that building a marketplace becomes the primary goal of an entrepreneur, meaning they lose sight of the most pressing question: Are they satisfying a need in the first place?
Shawn Carolan, Managing Director at Menlo Ventures, an early investor in Uber, believes entrepreneurs shouldn’t think of building a marketplace as the initial step, but rather think about the “needs” of the user.
“Don’t focus on the fact that it’s a marketplace,” said Carolan. “Rather, get crystal clear on what exactly is the user need because, frankly, most buyers don’t care about how it’s fulfilled. They don’t care if it’s a marketplace or a magic wand; they care [only] about their need and the job to be done.”
Take the Uber example. If the Uber founders had defined the business as building a taxi marketplace, they might have focused on matching riders with capacity in existing taxi services. Instead Uber is satisfying the customer need of transportation. With the ease of a mobile app, lower pricing than taxis and high availability of drivers, Uber solves customers transportation needs beyond just where they would have called a taxi. Uber riders now substitute Uber for all kinds of transportation including walking, public transport or even owning a car. Proper definition of the customer need has expanded Uber’s market far beyond just the taxi market to include the “shadow market” of all point-to-point local transportation.
So you’ve defined your customer need and now you face the dreaded Chicken-Egg problem: which is more important to build first, the suppliers or the customers? If you have no sellers in your marketplace there is nothing for customers to buy. But how to interest sellers without buyers?
Poshmark, a marketplace for buyers and sellers to exchange high-end fashion, launched with 100 fashion bloggers as the first community members. The bloggers seeded the market by bringing in their own fashion sense and followers, instantly creating demand.
“While marketplaces obviously need to bring both sides to work, it’s important to understand who is critical to the transaction. I suggest founders start by focusing on who is going to transact more frequently and make sure you are enabling a good experience for this side of your marketplace.” asked Stephanie Palmeri, Partner at Uncork Capital. “In many cases, a seller will transact more frequently than a buyer. At Poshmark, we had the unique advantage of community members being both buyers and sellers, but we placed a strong emphasis on these community members adding supply,” she said.
By focusing early on to make your frequent users happy, your marketplace is able to get the proverbial flywheel spinning. To get our FR8Star flatbed freight marketplace up and running we focused on getting frequent business to a small number of loyal truck carriers. While our buyers may only ship freight once or twice a month, our carriers (sellers) are looking for business every day. Proving to these loyal carriers that the marketplace can keep them busy keeps them engaged and builds up capacity for the market, making it more useful for future shippers.
Make my marketplace grow!
So now how do you get initial traction with transactions on both sides of the marketplace? Jeff Lu, Vice President at Battery Ventures, suggests that entrepreneurs simulate the transactions.
“When you’re starting, you have to convince yourself, employees, investors that this is an endeavor that’s worth additional resources in the form of time and money. You have to run the right experiments and have the experiments come out positively,” he said. “For marketplaces, it’s kind of hard to run the right experiments and so you have to manufacture a high density of buyers and sellers in order to ascertain whether the service will be useful enough for them to transact.”
One of the most oft-told stories of a company manufacturing its own supply and demand is Airbnb, which put its focus on cities that were about to see a huge influx of visitors due to conferences and events, most notably the Democratic National Convention in Denver in 2008. By focusing on this concentrated demand, Airbnb was able to prove out their model in miniature to gain the confidence to ultimately scale up world-wide.
In the case of Uber opening a new market, the company paid drivers to be available to meet demand. “Uber had to get enough supply on the street to meet their forecasted demand and ensure that the consumer buying experience was a superior one. If every third, or even every 10th time, I tried to book an Uber and one didn’t arrive, the result would be a bad user experience derailing the start of the marketplace,” said Menlo’s Carolan.
From traction to scaling
Getting traction is one thing; scaling is another. Palmeri encourages startups to look at scale in stages.
“Marketplaces tend to grow in these step functions. Early on, you may try things that don’t scale, then you build product to automate what you have learned. As the system begins to flow, it's natural to hit breakage points [leading to another stage or step in the life cycle of a startup],” Palmeri said.
“There’s always a constant struggle to balance supply and demand at scale. Are you adding both sides at the right speed and pace? Is one outpacing the other? Sometimes it's necessary to constrain one side in order for everyone in the system to be successful. This will look different in every marketplace,” said Palmeri. “As a marketplace scales, it may throttle supply to maintain quality or it may introduce features to make matching more efficient." Dating sites for example may gain members by featuring more attractive people, but they must then figure out how to deal with the those disappointed suitors that never get matched with them.
And once you have your core interaction working and scaling, how do you know what next features or services to add? Battery’s Lu advises to add services that increase trust and reduce friction in enabling matches between market participants.
“The core values that a marketplace offers are trust and frictionless discovery and transactions. So, to the extent that marketplaces can do things to increase trust and reduce friction, you improve liquidity,” he said. “But if I were to choose which to focus on first, I would start by improving trust, then reducing friction.”
For example, StockX and GOAT, two marketplaces offering high-end sneakers, offer authentication services to protect buyers against counterfeit goods. Airbnb offers insurance to give hosts peace of mind if a renter tries to sue them or should their house be trashed. Amazon provides warehousing and fulfillment for its marketplace sellers to ensure that customers can trust them for on-time delivery. In each of these cases, the marketplace has added services that increase trust for their participants.
In some cases, new services help more in reducing friction, helping either or both sides of their marketplace to grow faster. For example, Uber offers financial products so their drivers can acquire vehicles. This reduces barriers to bringing more Uber drivers into the platform and also increases the quality of Uber’s rolling stock giving riders a better experience.
B2C vs B2B vs incumbents
While we can probably count several dozen B2C marketplaces, B2B marketplaces are not as ubiquitous, and there’s a reason for that: the buyers are far more scrupulous.
Customers on B2C platforms are more homogenous. Using Uber as an example, even if one customer wants an UberX and another wants an UberBLACK, the services provided largely will be the same: they both have the same app; they pay the same way; they see the same map.
“There is generally less variability from customer to customer in most consumer marketplaces,” said Menlo’s Carolan, while the B2B customer is more complex. “With B2B, you’re integrating with a company’s operational systems, which could be a multi-week engineering project. With larger transaction sizes, you often need a lot more hand-holding; differentiation of services and strong customer focus is also indispensable. The expectations for customer support are going to be much higher when the client is paying a premium because repercussions for customer dissatisfaction are, in turn, much higher.”
But put a B2B marketplace up against the incumbent business model and the marketplace has some killer advantages.
“New marketplaces have cost advantages relative to incumbent businesses and can leverage them to create an innovator’s dilemma scenario: addressing a segment of the market that incumbents couldn’t previously service in a cost-effective manner,” said Battery’s Lu. “An example is Catalant; they are going up against the McKinsey’s of the world, and they’re selling into a segment in the market, middle managers, who didn’t have access to traditional management consulting services.
Other advantages include the ability to directly access the decision maker, bypassing the sales cycle.
“On B2B marketplaces, a customer is the decision maker, which makes for faster sales cycles. Alibaba is the classic example of that, as their platform is selling directly to the entrepreneur who’s making the decision. This results in a network effect feature in their product with a SaaS business model,” Lu added
Additionally, there’s still ample opportunity for B2B marketplaces to upend the traditional transaction models that exist today across many markets.
“On the B2B side, there are still plenty of industries that exist primarily offline, and behind the scenes, their automation is no more than a fax machine or an Excel spreadsheet,” Palmeri said. “I’m always excited and interested to meet marketplaces founders focused on sectors where transactions are primarily offline or where there isn't yet to a dominant, modern player.”
Asking the right questions
Building a successful marketplace can pay off big, but there are more than a few pitfalls for entrepreneurs along the way. Probably the most important advice for entrepreneurs would be to ask the right questions even before you get started:
What is my customer’s core need that I am trying to solve?
Which side of my marketplace transacts more frequently and needs to be the initial focus?
How can I concentrate my market to get traction on both sides quickly?
What features or services can I add that will build trust and lower barriers to discovery?
And perhaps most importantly according to Battery’s Lu, ask the right questions to decide if there is even a need for your marketplace.
“Some of the best marketplaces have this dynamic where a lot of investors are initially concerned by the current market size but if you poll their existing customers, ‘Have you used something like this before?’ many of them will say, ‘No.’ I think that’s probably a better way to ascertain whether the market is big enough for a service, rather than, ‘How big is it today?’ Big marketplaces are built by dominating a small, but fast-growing market that eventually becomes massive.”
Editor's note: Steve Loeb and Bambi Francisco Roizen contributed to this piece.
(Image source: b2bmarketing.net)
Matt is CEO of FR8Star.com, the digital marketplace for flatbed and oversized truck freight. Bringing together 10 years starting Internet 1.0 companies and 10 years consulting for truck manufacturers to build a killer team to transform trucking.All author posts
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Joined Vator onStephanie is a partner with Uncork, where she invests early in companies empowering individuals, families, businesses, and communities, like Poshmark, ClassDojo, Clever, Survata, Lantern, Fatherly, Pared, Carrot, Chariot (Ford), and Niche (Twitter).
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Joined Vator onMatt is CEO of FR8Star.com, the digital marketplace for flatbed and oversized truck freight. Bringing together 10 years starting Internet 1.0 companies and 10 years consulting for truck manufacturers to build a killer team to transform trucking.