What came first — proteins or nucleic acids like DNA and RNA? Quite an abstract question, isn’t it? Yet the answer to this question supposedly explains the origins of life. At least to some extent. In business, we also tend to look for ideas on how to put a complex idea in motion. And how to do it fast. In one particular business model, the chicken-or-egg question is most likely the hottest topic at founders’ or board members’ meetings.
Marketplace business model
In general, marketplaces connect demand with supply, leading to a financial transaction. The business owner doesn’t own any supply or provide any service directly. They provide an online platform where supply and demand can meet and end in transactions. Airbnb, Amazon, and even food delivery apps are excellent examples of marketplace-based businesses.
The chicken-or-egg question here is what came first: Supply or demand? The stakeholders often wonder which one they should focus on first. Who to address: The suppliers or the ones in need of service? Answering this question is one of the keys to success. What are the others? We decided to gather together the 12 important ways of growth for the marketplace business.
1. Build the user base before launching
You can set up a landing page a few months before launching. This way, you will build a mailing list, you can use later on. Remember, the landing page must correspond with your business idea. You can simply ask to sign up to know more about your product or give something related in exchange. An ebook or a promo code to use later are usual ways to go.
Look into existing Facebook groups, forums, and other places where you can find an existing user base. Post a link to your landing page and attract users to join the mailing list.
2. Find your niche
It’s good to find small groups that will care about your marketplace. Gather enough data to find them and then go after them. It will be much easier to figure things out in a small, dedicated group and then expand later on. For example, Craigslist started as Craig Newmark’s email distribution service for his friends. Now they are in 70 countries! For this to be possible, they were scaling little by little.
3. Geographic constraint
Start operating in one place before expanding too much. It will give you more control over the market. It’s good to choose the place you know to make it easier to make certain decisions. Airbnb founders decided to go to New York City first. They only started expanding after they gathered some traction there. When launching internationally, they used the same tactic. They targeted the most important international markets first and then went for the less valuable ones.
4. Category constraint
Similar to the geographic constraint, you can limit yourself with the categories you’re offering. It will also be easier to find and appeal to the niche communities this way. Ebay launched in 1995 as part of its founder Pierre Omidyar’s personal website. It wasn’t until 1997 that it has notably grown, thanks to Beanie Babies. They were hard to find in retail stores and many collectors wanted to have them all. Thanks to eBay, they were able to trade them. At some point, Beanie Babies accounted for 10% of eBay listings.[1] Scaling got much easier with the knowledge eBay got from this experience, because it allowed them to see how marketplaces work on a smaller scale.
5. Help your sellers look professional
Would you order food that looks disgusting in the pictures in the food delivery app? Or get into an Uber with a driver that doesn’t have a picture or a license plate number? As a person responsible for a marketplace, you should either force the sellers to do certain things (i.e., Uber drivers have to provide their license plates) or help them do so. When Airbnb had troubles growing, the founders started looking into why it was happening. They figured out that the pictures for most hosts weren’t good enough. After getting help from Airbnb with taking better pictures, the number of bookings has grown! As a marketplace operator you need to manage trust and control the quality of your merchants, constantly raising the bar. At the same time it’s crucial to provide guidance and services to help them thirvie. Airbnb example is not scalable, but it’s crucial that part of your development agenda should be to provide how-to guides and self-service tools for your sellers.
6. Building community
Your users will be much more eager to come back if they feel like part of a community. There are many ways to help them feel this way. You can set up a social media group (they are popular on Facebook and LinkedIn) where users can discuss things that will make them feel like part of a bigger group. Etsy, a marketplace for hand-crafted goods, uses this tactic by encouraging users to spend time on their website, even if they’re not buying anything. Checking out the page daily should eventually lead to a purchase.
7. Grow supply with the viral effect
Viral marketing can help greatly with growing the user base – both on the supply and demand side, but it’s more widely often used for demand. It’s good to start a referral program, where both the referring user and the new one get something – a coupon, free month, a discount. Uber uses this tactic, as well as Airbnb. People are glad to refer something to their friends, especially if they get something in return. Some of them will even get out of their way to promote you on Facebook groups or forums to get others to sign up and get something from you.
8. Go with simplicity
When you look at some of the marketplace apps, the variety of options might trick you into believing that’s the way to go. It’s not the truth. In the beginning, it’s important to keep it simple and focus on the most important features. One clear value proposition grabs attention. Too many options can scare people off. Here, Uber is a good example. At first, Uber was only offering rides with black limos. The offering, geographical area and service itself was simple. Right now they expanded into a variety of ride options, users can schedule their rides, pay with a wide array of payment methods and expense their trips to their companies. On top of that, the company offers food delivery and scooters. The result is clear – now, they are one of the global leaders.
9. Be prepared to lose some money first
Sometimes you need to be prepared to start losing money before making them. It’s easier to reinvent the wheel than invent something of equal importance from scratch. Let’s go with Uber’s example once more. When it didn’t exist, regular taxis were providing almost the exact service to users. Of course, Uber has added perks. But to first convince New Yorkers to use it, instead of yellow cabs, they decided to go with way lower prices. That lost them money at first, but otherwise, they wouldn’t be in the place they are now.
10. Avoid growing too quickly
Growing too quickly might kill a marketplace business. If there are flaws in your idea, growing too quickly will only amplify them. Going back and fixing them might get too expensive, and your business will collapse under its weight. Marketplace businesses require balance between all parts to take off – and balance requires patience. You are running a marathon, not a sprint. It’s better to figure things out on a small scale and iterate as many times as you need, without huge costs.
11. Supply or demand?
Going back to our chicken-or-egg question… Should you focus on the supply or demand side first? The answer is: it depends. There are too many factors to consider to give a conclusive answer. Lenny Rachitsky’s research showed that for most marketplaces, it was the supply. Creators of Lyft, GrubHub, or Eventbrite all admit they had to convince the suppliers to come to them. But not always!
For example, Rover – a dog-walking and dog-sitting app, instantly had the supply. There are plenty of people who work from home and would love to earn an extra something by dog sitting. Same for those who already walk their dog and wouldn’t mind some extra money for walking two of them. Convincing dog owners they can leave their beloved pets with a complete stranger was another story. That’s where Rover had to put their efforts into.
12. Think of the markets where buyers also sell
One way to mitigate the chicken-and-egg question is to find a market where users can create both supply and demand. Etsy is an example. They figured out early on that people who buy handcrafted goods are people who handcraft themselves. Knowing this, Etsy doesn’t need to focus on one side only. A person who sells their paintings may buy somebody else’s pottery the next day, and definitely is in the market for crafts supplies! This improves CAC economics and grows the revenue per user. That’s a dream for marketplace businesses.
Decide where to put your attention
Which of those tactics should you use for your own marketplace business? It’s good to always start with research. Knowledge of what your potential users want will take you a long way. Based on that, it will be much easier to decide. Some things are always a good idea, though! For example, starting small and then scaling up will always save you some extra costs and help to decide the path for growth.
Good luck!
