Here are some important aspects of building a marketplace.
- Track marketplace health metrics
- Focus on creating trust between buyers and sellers
- Balance liquidity as you scale
- Leverage buyers and sellers to scale fast
- Try to raise standards for even happier customers
Understanding the health of your marketplace
As with any other digital business you should pay careful attention to buyer metrics like cost per acquisition (CPA), lifetime value (LTV), retention and your conversion funnels.
In addition to these, there are a number of marketplace specific metrics that you should pay close attention to.
Liquidity – this is the most important metric for your business. It varies slightly by the type of marketplace but the number should reflect “The percentage of the marketplace that is transacting over a given time period”. For example for AirBnB this might be “proportion of rooms that are booked each night”. Ideally you should be able to break this data down so you can see revenues and transactions for each buyer and seller as a % of the total.
Gross merchandise volume (GMV) – All marketplaces track this value as a lot of marketplace valuations are based on this number. This is the total value of goods or services sold over the platform in a given time period. I usually report this on a monthly basis.
Take % – Although this won’t change very often it is important for a number of reasons. A higher percentage take (especially on the first transaction) means you can scale faster being able to spend more to acquire customers. Be careful though not to make this too high as increasing your take may incentivise buyers and sellers to transact outside of the platform. We have typically seen take % between 10-30% for companies we have backed.
Trust is crucial to any marketplace and it is best to develop this through a number of different initiatives.
Great design. Make sure your site is well designed, has a strong consistent brand and is easy to use. This should be obvious, but I still see too many companies not giving enough attention to design.
Reviews. Most marketplaces incorporate reviews and ratings for a good reason. They allow buyers (and sometimes sellers) to make choices on who to trust based on previous experiences whilst also encouraging good behaviour. Make sure to allow sellers to respond to bad reviews and don’t allow historically bad reviews to negatively affect a seller if their behaviour has improved.
For example, Lexoo’s review system provides its lawyers a few weeks to respond to reviews before they get published. Lawyers are also reviewed across different dimensions to really help customers understand the lawyer’s expertise for their own context.
Help sellers look professional.
The more professional the seller comes across, the more likely the buyer will purchase from them. You might want to consider creating “how to guides” to help sellers present themselves well. Well known marketplaces like Airbnb provide professional photographers and Appear Here and Onefinestay takes this one step further by writing product descriptions themselves to ensure even greater quality.
Controlled communication. Consider providing tools that let customers talk to each other over the platform. This builds up trust with the parties while keeping them within the platform. However, you may want to block personal details being shared to stop transactions happening outside of the platform.
Balancing buyers and sellers as you scale
Growing a marketplace startup means you have to scale while you keeping your buyers and sellers happy. This makes it harder than other types of startups and can often be a dampener to early growth. For example you might have a scaleable way to acquire buyers but if you can’t scale sellers at the same time the marketplace will not take off. While you are still focussing on your initial pocket of liquidity you should run lots of experiments in order to identify the right liquidity tactics for your business. Once you have a good understanding of how you build liquidity you can start thinking about expanding outside of your initial niche.
In our experience, you will often find that buyers or sellers are already operating in an adjacent location or sector and are requesting you to expand. This makes it easier to seed the expansion as you already have built in trust, demand and supply. If you don’t have this then think about expanding into an area where you can envisage getting some efficiencies with the initial niche. This will provide you more insight and let you build a more robust model for the business at scale.
Some marketplaces grow faster than others
Some types of marketplaces can grow a lot quicker through leveraging their buyers and sellers. You should always be thinking about how you can use your customers to help you grow faster.
For example, Kickstarter is a marketplace that leverages their user’s networks really effectively. Firstly, every campaigner on Kickstarter will promote their campaign to their social network to find backers for their campaign. Backers are also incentivised to do the same so that the campaign reaches it goals. This acquires a huge number of new people to Kickstarter without paid acquisition. In addition, companies like Kickstarter, Airbnb and eBay are all examples of marketplaces where buyers can become sellers and therefore exhibit better unit economics.
Another way to leverage your sellers is to allow them create content on your platform to help promote themselves. This content is then indexed by search engines and drives new buyers to the platform with no additional cost.
Disintermediation is a big risk in a marketplace business and you need to make sure you reduce this to a minimum otherwise it can really affect long term success.
To put it simply, buyers and sellers are less likely to disintermediate if they believe the value they get from staying on the platform is greater than going outside. So the only way to stop this happening is to either take a smaller amount from each transaction or to provide more value. I would advise you to focus on adding value in the first instance.
Below are some examples of ways to avoid disintermediation:
Take the payment. Important for many reasons and disintermediation is just one of them. Lots of people find it awkward handing over money by hand and prefer paying online. By taking the payment through your platform you can remove this area of friction and also guarantee that you will get paid immediately and helping with cash flow.
Help when things go wrong. Buyer and sellers are transacting without knowing each other. As a marketplace you can provide lots of value in giving security to the transactions. This might be through offering an insurance policy for when things go wrong and delivering amazing customer service.
Reward good behaviour. As long as sellers are making money on the platform then they will stick around. You might want to consider reinforcing this behaviour by rewarding sellers with better promotion.
Increase their productivity. You can add immense value to sellers by providing them tools that help them run their business more productively. For example, Appear Here handle payments, provide legal documents, facilitate communication, offer concierge services and have landlord dashboards as value add services to keep landlords transacting through them.
A good marketplace works hard to ensure that buyers get a good consistent service from the sellers. Depending on the marketplace, this might be deliveries arriving on time or goods delivered as they were described. Marketplaces like Uber have had to build this in from day one. Other marketplaces might want to introduce this once they have enough scale so that they can start to encourage good behaviour in return for greater revenue potential.
Airbnb does this nicely with their Superhost programme. Those hosts that respond quickly and keep getting great reviews will be treated favourably by the company.
A final thought
Remember, that each marketplace is unique and a tactic that worked for one company may not be the right one for yours, so try to work from first principles of really understanding your customers and getting your business fundamentals right.
About the Author
This article was written by Dharmesh Raithata of the Path Forward. The Path Forward was developed by Forward Partners, a VC platform that invests in the best ideas and brilliant people. Forward Partners devised The Path Forward to help their founders validate their ideas, build a product, achieve traction, hire a team and raise follow on funding all in the space of 12 months. The Path Forward is a fantastic startup framework for you to utilise as an early stage founder or operator. The framework clearly defines startup creation as being comprised of three steps. The first step of this framework involves understanding customer’s needs. Dharmesh is Product Partner at Forward Partners and helps founders the’ve backed go from ideas to a great products and businesses. He has a passion for User Research, Lean UX and using data to inform decision making. Dharmesh has a background in artificial intelligence and has been doing product for over 12 years in his own or other high profile startups. see more.