The Marketplace Starter Pack
The beginning of the 21st century was marked by the rise of tech startups and one of the most common business models from the beginning are online marketplaces. These companies connect two sides of a market as a middle man, most times providing an organized and safe environment for a transaction between these two parties.
Nowadays we have a huge number of successful companies on a wide range of markets, a lot focused on general goods such as Ebay, Mercado Livre, AliExpress and even Amazon but we have marketplaces in transportation like Uber in real estate like AirBnB on food & groceries like Rappi on services like Thumbtack and so on. Here in Brazil a lot of our Unicorns are marketplace companies: QuintoAndar, 99, iFood, Loggi, Gympass.
It might seem like this business model is saturated but there’s still a lot of opportunities with segments not well served (or even ignored) by current solutions. It’s still a great idea to build a brand new marketplace and it's pretty much possible to become a unicorn doing so.
My entire career so far was in marketplaces: working at GetNinjas and OLX and now as Founder of JáVendeu. In this article I provide some tips that I learned from these experiences and hope to instigate some interesting discussions on the comments to be able to learn even more. I’m passionate about marketplaces and the huge impact that they generate in our society so please, feel free to reach out!
Kick off: Start with a Niche
The most important thing in the beginning is to start with a niched market as much as possible, regarding both the service/product category and geographical location. A category niche could be something like used sports products, or maybe even something more niched like used soccer products. But you should not try used goods in general to start off for instance, that would be too wide.
The main reason to focus on more narrow niches is to offer a much more specialized and even personalized experience — maybe even with more services or features attached for both sides. With this factor alone your chances to attract traffic from the generalistic colossus such as Ebay or MercadoLibre are much higher.
If the segment of your marketplace requires both parties to be geographically near you should also focus on a small radius, such as only one city to begin. The higher your area of service the harder will be to balance supply & demand.
There’s something called network effect, which regarding marketplaces means that the more users you have the greater the value you provide for each one of them. It’s easy to understand, if you have a crowded network the sellers will sell faster and the buyers will find interesting items easily.
Given that, if you choose a small geographical area to begin with, it will be easier to reach the maximum network effect value of your marketplace, and only after reaching this full potential point you think about geographical expansion.
"JáVendeu starting Niche was used furniture & home appliances. We started out in São Carlos, a very small city and just afterwards moved to São Paulo (50x larger)"
How would you reach both sides of the market?
Most of the time when building a marketplace you must think about user acquisition over the two different types of customers that you will connect (buyers & sellers, providers & clients, etc). You have to control supply & demand keeping both sides of the market balanced and that is a very challenging task.
How to decide which side to focus on first? This problem is referred to as The Egg & the Chicken problem, usually “buyers” are more expensive & more difficult to acquire, and once you have them, “sellers” should be more easily converted (that’s not always the case). Try to narrow your acquisition channels as much as possible.
If you could have one reliable way to acquire one of the sides in the beginning it’s perfect, so that you could bring the necessary quantity and then stress out how to grow the other (more complex) side.
Most marketplaces are B2C companies (Peer-2-Peer model by nature) and that implies that you will need to have scalable & most of the time organical growth channels — SEO optimization, member get member strategies and PR are commonly used for that. You must look for that since your foundation, keep in mind that if you neglect it you will need a huge amount of money to expend in digital marketing to scale up.
"We decided to leverage buyers from other classifieds platforms to sell our products so that we could focus our acquisition efforts at the Seller side"
There’s plenty of monetization options, but commission is king
There's a lot of monetization models used by marketplaces among all the segments:
- Commission Fee: The transaction occurs inside your platform and you keep a percentage
- Listing Fees: Sellers/Providers pay to list at your platform
- Subscription Fees: You charge recurrently to use certain features
- Lead Fees: Sellers/Providers pay to acquire potential client contacts
- Advertising: Monetize your website traffic with paid ads
Among all of these options, commission is always preferable when possible, and the reason for this is that you guarantee the greatest retention of value for your company. If you’re charging for the lead you’ll only capture the value once and cannot control properly the percentage (same for insertion fee), advertising on the other hands requires a gigantic amount of traffic to be able to provide good revenue and subscription might cause a higher entry barrier.
"JáVendeu uses commission model and captures around 30% of the GMV, aiming to raise to at least 50% in the future. Platforms like Ebay and MercadoLibre captures only 10% and others based on advertising or pay per lead models usually captures less than 1%"
The environment has to be safe for both parties
When you go to a hotel you won’t be amazed by hot water in the shower, but if the water is just cold you definitely will be enraged and will destroy its reputation on social media. Safety in a marketplace is kind of the same situation, it’s not something that should amaze users at glance but if you have problems regarding security it can easily become scandals and destroy your reputation.
Depending on how deep you manage the transaction could be easier or harder to guarantee safety, in open platforms such as Ebay it is much harder to do so but despite of that it’s a required effort — an extra point for more niched marketplaces here, you could even train the supply side (such as Uber did) or require validation for customers (such as documents or even more).
Build a state of the art content discovery experience
For most product/services verticals you can find quality content on the web, via Google or even more generalistic marketplaces but the experience is similar to finding a needle in a haystack. Here comes the importance of a great content discovery experience at your platform: will make it much more appealing and referenced among users at your segment.
To begin with, the search engines and filtering should be adequate for the segment of your company. It’s possible to find a lot of already implemented algorithms and great design references are available (such as airbnb’s) — so don’t mess up in this part.
Quality and transparency regarding the content are also very interesting differentiators that you could invest — platforms like AirBnB or Quinto Andar and even Uber (with driver stats) has shown the huge value of investing in great content for your users. This factor is very hard to measure but most of the time are easy to implement and worth doing.
"JáVendeu team tests each product before selling them and provides a great search experience at its marketplaces - with great photos taken on our studio, product videos and a detailed description with all pros and cons"
Tips when searching target market segment
There are a couple of factors that should be considered when you choose the market segment (or Niche) for your marketplace.
- Size & Density: Look for big and more geographically concentrated markets
- Dormant/Informal Markets: Look for sleeping markets or more informal ones, so that the bridges you build might be
- Online Penetration: Preferably search for markets that are already online in a good proportion (much cheaper to grow that way)
- Uncentralized segments: Markets that are too pulverized in many platforms and/or between online & offline players
- Also look for references with success in similar countries!
"JáVendeu hits a dormant market with lots of people having products in their homes without use that they would like to sell, with most of buyers already in online world via classifieds and with bunch of references outside Brazil!"
Conclusion
I hope that up until this point I could provide you with at least some tips on how to build a brand new marketplace. I didn't cover all of the necessary points (such as how to keep a healthy unit economics or dealing with logistics when applied) but I tried to focus on highly important dimension. Please feel free to reach out or leave a comment below so that we could discuss even deeper over marketplaces together.
To conclude, I'll leave a reference to a book called The Lean Marketplace which helped me a lot during the foundations of JáVendeu. Thanks for your time reading this article, now let's change the world together! ;)
