Starting a company is hard. The market is like a river, you’re trying to jump in and lead the river in a new direction. Out of all companies, marketplaces are the toughest to start. Most companies have one customer to focus on – the consumer. They make a product or service and sell it to the consumer. Marketplaces, on the other hand, have two customers to focus on, the consumer and the supplier. A hotel sells its service to the guest, while Airbnb must sell its service to the guest and the host. It has to create a solution that will make both sides of the marketplace happy.
This is what makes a marketplace business more difficult to get off the ground, which I’ve learned first-hand. To save you time and trouble, here’s some insight into what it takes to start an online marketplace. My marketplace is not ultra-successful yet, but it’s creating transactions, so it’s a working marketplace at the very least.
Before diving into starting a business, your idea must be refined. How do you know a marketplace is the right solution? Can you just create a marketplace for any issue?
A marketplace is a great solution for a broken market. A broken market is when supply and demand cannot easily find each other to create a transaction. A clear example of a company that seized a broken market is Uber/Lyft. It used to be difficult for taxi drivers (supply) and riders (demand) to find each other, so Uber/Lyft created an online marketplace where these two sides could come together and easily make a transaction.
Perhaps a market isn’t fully broken, so it’s not that difficult for the supplier and consumer to find each other, but you could still make it even easier. Strengthening a market could also be a good reason to create a marketplace. For example, shopping wasn’t that hard before Amazon, you could just go to a store. However, Amazon made it even easier by giving you the ability to buy and receive products without ever leaving your home.
Before starting a marketplace, ask yourself if your market is truly broken. If it is, a marketplace is a good solution. If the market is not fully broken but can be significantly improved, a marketplace can work there too.
An important piece to remember is how your marketplace will capture value, or make money. If a transaction happens between the supplier and consumer on your marketplace, that’s best because you can easily capture value by taking a commission. If no transaction takes place on your marketplace, you will have to think of a different way to monetize, like selling ads or taking fees. For example, Etsy is a marketplace that makes money by taking a commission on sales. OpenTable is a marketplace helping people reserve a table at restaurants, which is free, so it makes money by charging restaurants a fee.
Once you find the right idea for a marketplace, you will need to build it. The challenge with building a marketplace is keeping in mind both your customers. The suppliers and consumers both should be happy with the experience you build. As a non-technical founder, I made some mistakes with building that you can avoid.
The most important advice I have for non-technical founders of marketplace businesses is…find a technical cofounder. My first move when starting my company, Choobs, was to license a marketplace from an Indian company. I basically paid a fee and was handed a blank marketplace which I could customize with my logo, add vendors, etc. It took about 3 weeks for me to realize it was a terrible idea. It lacked a bunch of features I needed, and since I couldn’t code, I would have to pay the company more cash to make any changes.
I needed to build Choobs from scratch. I looked at development agencies, which have great talent and can build exactly what you need. But as a guy on a small budget, I couldn’t afford to pay them cash to make the product, much less the additional payments whenever I needed a fix or change.
With licensing a marketplace and hiring an agency out of the question, I decided to seek a technical cofounder who could work for equity instead of cash and would be invested in the long-term success of Choobs. This partner would build the best product and would make changes/fixes without needing more cash. Looking back, we’ve done so many changes to the product, I would be completely broke if I had worked with an agency. Unless you’re well funded, don’t waste your time with the other two options, go straight to finding a technical cofounder! (Finding a cofounder is the hardest part of a startup and deserves its own article, but if I had one piece of advice it is to put your idea out in the world and see who comes to you.)
One good thing came out of my mistake of licensing the marketplace from the Indian company. I quickly had a prototype of a product to email to suppliers and gauge their interest. I found out what they thought of the idea and what features they needed to join my marketplace, which helped me know what to actually build once I found a cofounder. You should do this too by creating a quick prototype of your marketplace and trying to sell it to customers. They’ll likely deny you, but then you can ask them for feedback.
As I said, you have to focus on creating a good experience for both sides of your marketplace. For my marketplace, I decided to focus more on the suppliers’ experience than the consumers’ experience. I thought we needed suppliers to join before consumers would, so I wanted to create a great experience for suppliers that would entice them to join. This turned out to be correct, and now we’re focusing more on enhancing the consumers’ experience. In a marketplace business, you must carefully balance your focus on the two customers.
Go To Market
Once you build your product, you “go to market,” or sell it to customers. This is very challenging, but it can be carefully navigated. (Tip: It’s important to have a go to market plan early because it helps you build the product.)
Picture you’re starting a brand new outdoor market, like a farmer’s market or a christkindl market, in your hometown next weekend. You want vendors to set up booths at your market and sell their goods. You also want lots of people to come by and buy these goods.
So you pitch your market idea to your first vendor, a candlemaker, and the first question she asks you is, “How many people will come to the market?” This is the most important factor in her decision to spend her time and money on a booth at your market. You need to figure out how many people will show up, so you go to people and tell them to sign your list if they plan on coming to your awesome market. They say, “Cool! Which vendors will be there?” Uh oh…
Now both the vendor and the customer want to know who else is coming to your market, and you can’t get one side to show without proof that the other side is coming. You’re stuck! This resembles what it’s like to bring an online marketplace to market. It’s called the “Chicken or Egg problem”… which comes first?
I navigated this problem by focusing on getting some suppliers on my marketplace first. In order to do this with no consumers and no traffic to show, I had to completely de-risk the supplier’s decision to join. Picture you went back to that candlemaker for your market and said “I want to help you sell more products next weekend! I’ll set up a booth for you at my market and also get someone to work the booth, so you don’t have to worry about coming. Just give me the products to sell and I’ll return any stock we don’t sell. Oh and it’s free, I’ll just take a small commission on any sale I get you!” Now you’ve de-risked her decision. For her, zero sales is fine and even one sale is great! This is what I did with Choobs to entice my first suppliers to join.
Once I got a few suppliers to join because it was risk-free, I looked for consumers to come buy from them. Since consumers came, I could show traffic and sales, and get even more suppliers. This was how I got my first customers, or how I went to market.
Starting an online marketplace requires careful planning. Now you know a little more about verifying your idea, building your product, and going to market. Having a plan will save you time, but don’t overthink too much, go get started!
Email me at firstname.lastname@example.org with any feedback or questions.