This is the first post in a three post series.
Read part 2 and part 3.

Peer-to-peer marketplaces can be great businesses. They combine the convenience of online stores with scale that comes from the notion that every consumer can also be a provider.

This combination is so powerful that starting a new peer-to-peer marketplace might be one of the most popular online business concepts today. Many people are inspired by the recent successes of Airbnb, Etsy, Lyft and the likes, and want to apply these ideas to new markets.

However, building a truly successful marketplace can be a notoriously difficult task. Many previous promising efforts have failed. I’ve been building marketplaces since 2008 and seen both a lot of successes and failures. In these posts I have tried to compile the most common reasons for marketplace failure, and the lessons that can be derived from them.

You’re not solving a real problem

This one is probably the most common reason for startup failure in general, but with marketplaces (especially those operating in the field of the collaborative economy) there is one specific caveat: everyone seems to love your idea.

Adam Berk has written an insightful story about his experience with neigh*borrow, one of the first “share with your neighbors” style startups, which he co-founded in 2006. Berk started off with a familiar concept: everybody owns lots of valuable stuff (power tools, sports equipment, cameras, and so on) that spends most of its lifecycle collecting dust in the closet. If these assets could be shared with neighbors, there would be a lot less waste, neighborhoods would become closely-knit communities, and everybody would win.

Everybody loved the idea. The company was invited to all kinds of startup events, and the press was all over them. But they never reached liquidity. People who said their concept was great never actually used the product.

Neigh*borrow hit the issue described by Jeremiah Owyang & Vision Critical in their report Sharing is the New Buying: How to Win in the Collaborative Economy. The report shows that while people like the concepts, the masses still use peer-to-peer marketplaces for the same reasons they consume products in general: to get a cheaper price, better quality or convenience. While people find sustainability and sense of community important values to themselves, these values do not necessarily guide their actions.

The marketplaces that are most likely to struggle with finding the right problem to solve are the ones that enable sharing of relatively low-value items like power tools, bikes and kitchenware. The problem with peer-to-peer marketplaces is that they often create a lot of friction: I have to sync my schedule with another person twice (to pick up and to return the item), and trust the person not to break anything. When we’re talking about low-value items, the money saved is often not enough to make up for the inconvenience. Furthermore, while Airbnb can compete by offering “unique experiences” (like staying in a castle) not available anywhere else, the same does not apply to tool sharing: a power drill is a power drill.

This does not mean that tool sharing marketplaces are a bad idea in general, though. It just means that more creativity is needed to overcome these challenges. A recent example that is currently seeing exponential growth in this space is the Dutch Peerby. They have innovated by creating a “reverse marketplace” based on borrowing requests instead of the traditional inventory-based model. With that model they have managed to optimize convenience: their value proposition is that you will get the item you need within 30 minutes. That is usually quicker than buying it from a store. A recent study found that convenience is the main reason people use their service. Their most popular asset? The power drill.

Lesson: Make sure you are solving a real problem for your users. Try to validate as soon as possible whether people will actually use your product.

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    Article by: Juho Makkonen

    Juho has been building marketplace websites since 2008. He is a Co-Founder of Sharetribe and currently serves as the CEO of the company. He’s also a OuiShare connector in Helsinki and a long time advocate of the sharing economy.

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