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You might have heard of makers selling their creations on Etsy or Tindie, individuals renting out their properties on Airbnb or Getaround, or service providers pooling their resources together on Uber, Fiverr or Handy.
All of these are examples of online marketplaces. These platforms bring together supply and demand, and provide an effective way to save costs by skipping the middleman, while maintaining convenience and upholding quality.
Are you interested in such online marketplaces, or do you have an idea to build the next Airbnb, Fiverr or Etsy? This step by step guide will help you to get started.
As you can see in the timeline image above, we have broken down the entire process into four phases, and also in two areas of activity that run parallel: Marketing & Business, and Technology. For each phase there are a number of important steps to take for both areas. Each step has a short description, and a link to a more in-depth article on the Marketplace Academy.
At the very beginning, it is all on Marketing & Business. You shouldn’t even think about what kind of software or platform you will use. Instead, focus on finding or finetuning your idea and validating it with actual people. There’s no need for building anything, if you can’t prove demand.
This phase can be divided into four steps. For each of these steps we have written a dedicated article on the Marketplace Academy, linked below:
>Learn about marketplaces
What you need to know before starting your marketplace business
>Find your marketplace idea
A method to find a good marketplace idea
>Validate your marketplace idea
Arguable the most important step in the beginning: is anyone in need of your idea?
>Find the right marketplace business model
How will you make your money?
Now that you’ve validated your basic business idea and model, you can start building the platform. There are essentially three different ways to building an online marketplace:
#1 Code it from scratch yourself
#2 Build it using existing software or a platform
#3 Pay someone else to build it for you
Each of these methods has its own pros and cons. What is the best method for you, depends mostly on these things:
- What kind of marketplace are you going to build?
Is it a multi-vendor e-commerce site where multiple big companies sell new products to their customers, or a platform where parents can sell second hand baby gear, or a location based marketplace for renting boats nearby?
- What is your budget?
If you have only $1k to spend, your choice might be different than if you have $100k. With a lower budget, you probably don’t want to spend a lot upfront on design, hosting, development etc.
- What are your own technical capabilities and resources?
Are you a talented coder with loads of time on your hands? Are you a relatively internet-skilled person (have you had a blog for example)? Or are you really not that great with technology? However, even if you are technically very capable or not tight on cash, as a general rule you should to try to launch your site as early as possible, without spending too much money and time up front.
Remember: The trickiest part in building a marketplace business isn't building the software, but actually making the marketplace idea work both for your customers and your providers.
The true learning and validation process only happens as soon as you've launched your Minimum Viable Platform, and to avoid waste you should get to this point as fast as possible.
Now, if you decide to go for option #2, an existing software platform, here are things you should think about:
- Does the provider of the software platform offer hosting, server monitoring, automatic software updates, backups, payment bureaucracy, and technical support?
It comes often as a surprise especially to non-technical people how big hurdle this actually is. Many people think you simply install a chunk of code to your server as a one time thing, and that's it. That's not the way it works. If you want to run things on your own server, you really need to have a technical person in your team, since there's always something to do in this front.
- Is the software you're planning to use open source?
This is quite important. If you're using proprietary (non-open-source) software, you're locked in to the services of the marketplace provider. If you later wish to hire a developer team and build new features, that might not be possible. With open source, you can just always move to your own server and continue development there.
- What are the costs?
What's best obviously depends on your budget. In general, a big payment upfront should be avoided, as it will leave you with a lot of risk. You want a software provider who has invested in your success, which means that it should be relatively affordable to get started, but you will pay more if you are successful.
If you aren't a coder, or if you don't have a huge budget and you want to launch something fast, our platform Sharetribe is an excellent option. You can create, configure and launch your site in one day, without technical skills. Hosting is included, and Sharetribe handles all the tricky technical stuff related to installation, maintenance and software updates, so you can focus on building your user base. The free trial lasts 30 days, and after that there is an affordable monthly fee, starting at $79 per month. What's more, Sharetribe is open source software. This means that you're not locked in to the hosting. If you're not satisfied, you can move the code and data to your own server at any point and modify the code as you wish.
One of the biggest hurdles in building an online marketplace is the so-called chicking and egg problem: How to get customers with little supply and how to get supply with only a few customers.
For marketplaces it is usually a better idea to start from the supply. Providers typically have more incentive to use your platform, as it could be a major and constant source of future revenue for them. You can (and should) start building the initial inventory without actually launching your site to the buyers. It's perfectly ok to communicate this to your sellers: they should not expect any sales yet, as you are currently in a phase of building the initial supply, and will later launch to the customers with a bang. It's very important that when the first customers arrive, they already have plenty of selection to choose from.
While your providers should be the first ones to get access to your platform, this does not mean you shouldn’t also be talking to your potential customers from the very beginning. Creating a simple email list to collect subscribers is a good idea, but there are many other ideas on how to find customers before launch. These initial customers can help you in the next phase, when you want to test out your platform.
The launch is a very important moment in the timeline of your marketplace, but at the same time it is only a very short moment in time. One should be careful not to overstate its importance. For many beginning entrepreneurs the launch forms the horizon of their perspective, and there is some hope that some of the difficulties, such as getting supply/demand, might magically dissapear after launch, but in most cases, this couldn't be further from the truth.
However, a well-prepared launch can give your marketplace that much-needed initial boost. Here are some things you can do to make it a success:
Your platform is now ready for its first customers. Before going for a big launch, it is time to put your marketplace to its first true test: can you facilitate transactions between your customers and providers? A private test can still reveal some pain points in your design. Can your customers find what they are looking for? Maybe your transaction flow requires redesign, or your value proposition needs to be rewritten.
Besides continuing the work on building supply & demand, valuable work can be done in working on PR for your big launch. Good press coverage is a lot of work, consisting of crafting your message, finding and building a relationship with journalists and influencers in your industry and preparing all the materials.
You now have launched your marketplace, have a stable initial user base and some transactions are flowing in. However, the size of your user base is still quite small. It’s time to grow your marketplace.
Marketing & Business: Track your performance
How do you know if your marketplace is successful? Growing your user base and having transactions occur is not enough, if you don't know where your users are coming from, and why they are doing transactions. You need set up a number of Key Performance Indicators (KPIs), that you track and follow. They will help you identify areas that need improvement, as well as which marketing channels are working and which aren't.
Usage metrics, such as Monthly Active Users (MAU), Bounce Rate and others help you understand how many people visit your site and how they spend time on it. These metrics are not specific to marketplaces. Every website monitors the same basic metrics to track their growth.
The number of transactions alone is not enough: it doesn't tell you how you can improve. Instead, we recommend to focus on Liquidity, Provider-to-Customer Ratio, and Repeat Purchase Ratio
These should answer questions related to your revenue, profitability, and customer acquisition. The three most important figures are gross merchandise volume, customer acquisition cost, and customer lifetime value
Read the article below for an in-depth description of each of these metrics.
The key to growing a marketplace is to reach a virtuous cycle: high-quality providers bring in more customers, and the growing customer base in turn attracts more providers. However, it is important to note that marketplaces usually grow slower than other online business. For one thing, you need to establish both buyer and seller communities, and that simply takes more time. For example, Airbnb took 4 years before it really took off.
In addition, it isn't always healthy to grow too fast in the beginning, while you are still figuring out your platform and your business model. Potential flaws can be amplified by too fast growth.
How to find the right growth channels
Different kind of growth strategies exist for all types of marketplaces. To find out what works best, you need to quickly test different channels, and focus on the ones that work. An effective way of doing so is a framework called Bullseye, which consist of a simple method:
1. Start by brainstorming potential growth ideas.
2. Select the most promising ones, and perform quick tests with each, all in parallel. Each test should last no more than a month.
3. Once the tests are done, select the channel that worked the best and focus on it until it no longer “moves the needle”.
Repeat these steps over and over again. Observe where you marketplace could improve, Experiment with a test, Analyze the results and Learn for the future.
The steps that the technology needs to take after launch, should follow a similar "scientific" & data-driven approach as the marketing for growth. It is crucial to develop your marketplace in close cooperation with your users. Find out what is lacking on your platform, by looking at a combination of metrics and customer feedback.
For example, if you see from your metrics that a lot of user are not finalizing a booking, try to contact them and aks them why they didn't. Perhaps they feel that listings are missing crucial information, or there is a lack of trust in your marketplace community. These are problems that can be solved through technical improvements, such as adding more fields for specific info to your listings, or motivating users to use the review feature.
By looking closely at the data and regularly interacting with your users, you will be able to quickly identify areas that need technical improvement, and they can help your marketplace grow tremendously.
For more in-depth articles and information about marketplaces, please have a look at the Marketplace Academy, and don't forget to subscribe to the newsletter. If you have any feedback or other questions, please email us at email@example.com.