Marketplaces have taken the world by storm. For entrepreneurs looking to start the next big online business, marketplaces are a highly attractive proposition.
Are marketplaces the perfect business model?
The marketplaces model is all about bringing buyers and sellers together for a small fee. This makes marketplace platforms asset light and relatively cheap to launch, especially now that interfaces and backend technologies are becoming increasingly commoditized.
They tend to be hugely scalable, too. Fixed costs associated with marketplaces are relatively low due to the relatively simple technology required to build them. And revenue potential is almost unlimited, provided you can get perfect the offering and reach the right customers.
The empty room problem and how to overcome it.
So, why do so many marketplaces fail? The fact remains they are extremely hard to get right. There are many reasons for this, including a failure to find product-market fit, shaky unit economics, poor technical execution… the list goes on. But the single biggest hurdle for marketplace entrepreneurs to overcome is the so-called “empty room” problem.
To size up the magnitude of the challenge, we need to take a step back and consider the business model. A marketplace might look like one business, but really, it is two fused together - a supply side, and a demand side. It’s the job of the entrepreneur to fuse these two disparate operations together in a self-sustaining symbiosis.
In reality, this requires vision, empathy, ruthless focus and in reality, a large marketing budget. You need to start by gaining a firm grasp of the dynamics of the marketplace the psychology of buyers and sellers before you begin to build a product that makes it easy for them to transact. And then you need the financial firepower to drive huge volumes of traffic to your platform.
The first thing on your agenda when starting a marketplace business should be to prove there is demand for your product from both buyers and sellers. This might sound obvious, but it’s amazing how many entrepreneurs build products for themselves, rather than customers. 42% of startups fail because there is no market need for their product.
A great way of doing this cheaply is to offer a “concierge” service. This is a way of manually matching buying and sellers to illustrate that there’s genuine demand for your marketplace. Paul Graham famously advised entrepreneurs to “do things that don’t scale”, and this is a classic example of how unscalable process can lead to consumer insights that are highly scalable over the long term.
The founders of Airbnb did just this, listing their own apartments in order to secure their first paying customers. In 2007, Joe Gebbia and Brian Chesky knew a big design conference was coming to San Francisco and hotels were filling up. So they created a simple website, airbedandbreakfast.com, and bought three air mattresses. The rest is history.
Liquidity is everything
Once you’ve validated your business case, it’s time to get to work on the platform. When it comes to building sustainable marketplaces, liquidity is everything. Without a good throughput of buyers and sellers, your marketplaces won’t ever reach critical mass.
In reality, this means picking a clear market niche and not trying to be “Uber for Everything”. There is a reason that so many startups have failed in this mission - it’s simply too expensive to build marketplaces across multiple verticals. So grasp the power of the niche.
Focus on supply
Successful marketplaces like Amazon, Alibaba, Ebay and even Craigslist all share one thing in common. They focused on building the supplyside of their business first. Then, once they had enough inventory to offer customers a rich and rewarding experience, they opened their doors and turned on the marketing machine.
There are a couple of key advantages to this approach, and both relate to customer retention.
- The first is user experience. By ensuring that the marketplace is well supplied, you ensure visitors have a great experience, with plenty of products and services to browse and buy. Even if they don’t find something that’s right for them on their first visit, they are more likely to return to your site and give it another try.
- The second advantage is economic. Marketing is expensive. So why throw money down the drain by pushing your marketplace to customers when you don’t have enough inventory to satisfy their needs? Countless marketplaces have failed for this reason.
By first focusing on the supply side of the marketplace, you can maximise your ROI when it comes to platform costs and inventory sourcing. It’s a key strategy and one that many marketplace entrepreneurs discover too late.
The next Amazon?
There is no “correct” way to start a business, let alone a marketplace. Your approach will depend on your background, funding, technical expertise and the current state of the market. But by focusing on validating consumer demand from buyers and sellers, promoting liquidity via a clear market niche and focusing on supply to ensure a rich consumer experience before turning up your marketing, you can maximise your chances of success.
Who knows? You might just create the next Amazon, which began life as an online book store before going on to become a trillion dollar company. Great marketplace platforms, like Uber and Airbnb, make it look simple, but the marketplace business model can both make and break entrepreneurs. Which is what makes it so irresistible.
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