3 Strategies To Building a Marketplace Startup

3 Strategies To Building a Marketplace Startup

Building a two-sided market is probably the hardest thing you can build as an entrepreneur.

It’s so hard that a few weeks ago, I organized a Marketplace Founders Dinner because I felt like there needed to be an “AA type meeting” for providing support to those founders :).

I don’t know if you know what a marketplace is, but it’s like an Etsy, Ebay or Clarity (my startup).

It’s where you build a platform and you hope that people on the supply side (sellers) and on the demand side (buyers) can come together to complete a transaction and get a lot of value from it.

If you can make it work, it’s a magical and extremely defensible business.

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The reason why it’s so challenging, is that you have both sides of the market to figure out.

When you build a normal technology company, or you build any business, you have a customer and you have a service and you deliver it.

But with any marketplace you have that same concept times two!

Building a marketplace is like having twins.

So how can you do that effectively?

I don’t know if you’ve checked out Clarity, but it’s a marketplace where entrepreneurs can get advice over the phone from REAL WORLD EXPERTS with experience, to grow their dreams and their businesses forward.

We’ve completed over 250,000 calls in the last 18 months and it’s been growing 30% month over month. It has really taken off!

The challenge in the beginning of any marketplace is getting the fly wheel going, or what many call liquidity.

Everybody who’s starting always asks me, “What did you do in the beginning to get it to work?”

Here’s my answer…

1. Deciding What Version Of A Marketplace You Will Be Offering

In todays world, there’s essentially 3 different versions of marketplace structures.

  • 1.0 – Listing service (ex: Craigslist)
  • 2.0 – Listings w/ Reputation & Guarantees (ex: Airbnb)
  • 3.0 – Fixed Pricing & Guaranteed Service (ex: Uber)

Each one has different challenges and approaches to overcoming the hurdles of getting to liquidity.

That being said, I believe the world has gone from wanting a 1.0 version of a marketplace to a 2.0 version, and now we are increasingly expecting a 3.0 version.

1.0: No Commitment

A 1.0 version of a marketplace is more like a free for all, like Ebay or Craigslist.

2.0: Verified Commitment

With a 2.0 version, it’s more of a curated and very focused marketplace with identity, privacy and trust. They are leveraging social trust to build liquidity in their marketplace. Examples are Airbnb, Etsy or Taskrabbit.

3.0: Full Commitment

The 3.0 version is what we’re seeing now, where essentially they’re fixing the supply side of what you get. They set the price and say, “Look, this is the offering and this is what we deliver on.

We own that brand and that consistency.

Those people might be contractors to us on the supply side, but we will own the experience, we will be responsible for that and the price is fixed.

Examples would be Homejoy for home cleaning services and Uber or Lift for transportation.

Another example of a 3.0 version would be Fiverr.

When you go to Fiverr, the name just says it; “How much is this going to cost?” “It’s 5 bucks! Whatever you want!” (If you haven’t checked out Fiverr, you’ve got to do it and start watching some of those crazy videos!)

When you put all of these strategies together: focusing on an uncomfortably narrow niche offering, focusing on the demand side vs the supply side and figuring out if you are a 2.0 or a 3.0 offering; then it really helps you to build a marketplace with liquidity.

2. Starting With An Uncomfortably Narrow Niche

The key to success in marketplace companies is liquidity. This means someone who comes finds someone to buy from. Focusing on one specific offering (use case) is key to making this work in the beginning).

For us, it was marketing as a topic, but also within marketing – SCO (Social Content Optimization).

For example, if you’re doing a vacation rental site, like Airbnb, Arbnb or Homeaway, maybe you would start with tree houses!

Now that may sound crazy, but you may even start with tree houses in Europe or in a specific city in Europe and really get clear on a very focused “use case” and even a product set, helps you streamline the experience.

If you’re trying to do too many things within a broader market and something’s taking off, it’s really hard to understand what is working.

However, once you know what’s working, then you can add on or “stack on” these different tangential markets.

With Clarity, we started out with SCO marketing and then added other types of marketing like Facebook marketing, growth hacking, online marketing and content marketing.

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From that marketing bucket, we then tacked on business development, then sales and we just kept expanding and expanding.

We are almost 2 years into it and we have 4,000 different categories and a bunch of different topics.

I believe that the way to start is by building a very focused “use case,” focused on doing one thing really well and making it your niche.

Sometimes people call it “uncomfortably narrow” as a niche.

Ask yourself, “Am I really uncomfortably narrow as to how specific this marketplace offering is?”

If you go to wide, to early, it’s hard to build liquidity.

3. Focusing On Cracking The Customer Demand

If you can get enough buyers (demand) then the sellers (supply) will show up.

A lot of people think, “Well, I want to do this kind of marketplace, so I need a bunch of supply” (and the supply is the people delivering the service – if it’s buyers and sellers then it’s the sellers).

I would argue that it’s better and easier if you are focusing on a narrow offering, to fake the supply or essentially pay the supply to be there.

Uber was famous for that when they started their black car service. They didn’t have 10,000 black cars signed up day one.

They went to a company and said, “Look, you’ve got 12 cars, how about I pay you to have them respond to these messages on this iPhone app.”

Then that black car service would just tally up all of the drives and send in one invoice.

That was the beginning of Uber, which started with that same concept and is now evaluated as a $16 billion $40 billion company!

So like Uber, fake the supply or restrict it to a very specific “use case” where you can control and deliver on that promise and focus on the demand. Focus on finding the ideal customer that has that “use case” or that need for your marketplace.

I hope that brought value to you as this is a challenge that a lot of entrepreneurs and founders are facing right now.

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  • McGee Young

    Dan, this is really helpful. I’ve been getting conflicting advice about whether to focus on supply or demand. We are creating a sustainability marketplace, where companies offset their water and energy consumption by purchasing savings from individuals. We have validated the value proposition on both sides, but are torn between adding more savers (driving up supply) or adding more rebate sponsors (driving up demand). The argument for savers is that supply creates its own demand (it’s more appealing to a rebate sponsor if you have a million savers versus 10,000). The argument for rebates is that when people have agreed to part with their money, supply will emerge to fill the need. I’m leaning toward the latter option, which is what you have suggested here. Maybe it’s confirmation bias, but your perspective resonates with me.

    • http://twitter.com/danmartell Dan Martell

      McGee,

      There’s actually a huge myth that supply will drive demand and my experience is that without “growth hacking” the tools required for the supply and winning them over, it’s really tough.

      Most supply side vendors just look at it as another lead gen source but unless you become a significant amount of their leads, they don’t invest in promoting you.

      Also, you could narrow down on a vertical within the niche or doing a geography if that makes more sense.

      Ex: Yelp, Uber, Instacart picked one supply focus and a city initially.

      All the best.

      DM

      • McGee Young

        Agreed. Thanks!

  • Nic

    Dan, great post. The key take away for me is: fake the supply. It’s good to read that it’s ok to start out on a niche. Natural tendency is to think that if it’s small it’s not big enough, won’t get enough viz and credibility etc. So thanks for that. Not sure I fully agree with the definition of the 3.0 marketplace, but hey it’s also good fuel for thoughts. Nic

    • http://twitter.com/danmartell Dan Martell

      Nic, what don’t you agree upon on the 3.0 description?

  • jpuopolo

    The reality is you need to do both at the same time, both recruiting demand and supply side. The trick is to make the transaction in the middle as frictionless as possible. I agree, growth hacking tools are key to growing any user base, but keeping the transaction and conversion process is how you keep them coming back and show value to both sides.

    • http://twitter.com/danmartell Dan Martell

      I obviously don’t agree. If you pick a narrow niche you can spend very little time on supply and more on demand to really test and perfect liquidity.

      That’s why going narrow is such an important strategy imho.

      It allows you to truly understand what’s required.

      my2cents.

      DM

      • jpuopolo

        It’s not a one size fits all approach. Your marketplace could vary greatly based upon locational offering and product specifics. I think the point I do agree with is limiting variables to improve liquidity and speed of validating and perfecting.

  • Michael Simmons

    Wow! This is really helpful Dan! Perfect timing as I’m thinking through many of these things for my new company.

    • http://twitter.com/danmartell Dan Martell

      Glad you found it useful!

      DM

  • http://www.viirt.com/home Josh Davis

    Dan, I like your distinction between 1.0, .2.0, and 3.0 . I hadn’t heard it put that way. My company Viirt.com is starting out in a specific not so sexy industry (residential roof replacement) in a single marketplace Portland, Or focused on one specific type of roofing shingle. We have our initial software built and we are going to start increasing our marketing efforts in Portland in two weeks. So far we have tested our marketing strategies in small batches and we have been getting some great traffic.

    Roof replacement has brought some interesting challenges as our supply side is actually double duty. We have installation contractors and material suppliers. What we have done so far is set unit pricing for our contractors and then we negotiate pricing separately with material suppliers.

    We offer huge cost savings of up to 30% to the homeowner while at the same time streamlining the process for the installation contractor so much that they actually make more money. There is a lot of wasted $ in the roofing industry – sales, marketing, paper processes that require physical infrastructure, etc.

    One of the big things we are doing is securing the payment for all sides. This is a huge problem in the contractor space. The homeowner doesn’t want to pay the contractor until they are done and the contractor doesn’t want to start unless they know for sure they will get paid as soon as the work is done. To solve this Viirt acts as broker in between the parties and the homeowner pays Viirt 100% upfront and it is set in a secure account until the work is done, usually only a couple weeks.. This works out for everyone. The homeowner get’s their new roof at a great price, the contractor get’s paid, and we use our buying power to work more efficiently with suppliers.

    We feel confidant we are doing a lot of things right and we feel momentum.

    My question to you.. What should I be looking out for?

    • http://twitter.com/danmartell Dan Martell

      I might suggest coming up with a better name since it’s a consumer focused business.

      Trust is a key in your industry and my gut tells me the name might work against you in this circumstance.

      A quick test would be to brain storm 4 other names, then go to a mall and ask strangers to rank order the names based on perceived trust of the business.

      See where you’re name ends up? If it’s #4-5 in the list from most trustworthy to least, then I would suggest that’s a great place to start improving the top of the funnel.

      Subtle but could be a huge driver of growth if everything is working.

      DM

  • Dave Axler

    Dan – enjoyed your entry. Interested to hear what your view is on the ‘limiting factors’ of Marketplace businesses. What elements, if infused, purchased or created by the marketplace act as accelerants to growth in your view.

    • http://twitter.com/danmartell Dan Martell

      Growth comes from understanding the communities that your customers engage with to find a service provider and build tools for your supply side to embed their service in that community.

      As an example, Airbnb used Craigslist to grow by building a custom tool that helped them publish their listings to Craigslist.

      Uber uses events in an city and provides promo cards to add in gift bags for speakers and other discounts to send out to attendees.

      Each circumstance is unique but theres a pattern to follow to start experimenting with.

      DM

  • Rob

    Great article Dan, especially in regards 1.0, 2.0 and 3.0.

    For anyone building a 2 sided marketplace I’d also highly recommend reading Bill Gurley’s article, an absolute must read – http://abovethecrowd.com/2012/11/13/all-markets-are-not-created-equal-10-factors-to-consider-when-evaluating-digital-marketplaces/

  • Jackie Damelian

    Excellent post Dan, very useful. Really liked the breakdown of the 3 different versions of a marketplace. “Starting with an uncomfortably narrow niche” makes total sense and certainly strikes a chord with me. Thanks!

  • Drew Maresco

    Great video Dan! You offered me similar advice on a free call you gave me quite awhile back. Since we talked, I started the recipe website and then launched it into an iPad and print magazine. Still got a long way to go but its been about 3 years and we’re building a following. Thanks again for all the advice and help you’re offering to fellow entrepreneurs!

    • http://twitter.com/danmartell Dan Martell

      Glad I could help!

  • Ahmed Omar Yusuf

    Would anyone be able to point in the right direction (articles etc) to control or minimize revenue leakage for two-way marketplaces?

    Looking at doing a marketplace but I am struggling with this side of the business. Thanks in advance.

  • http://bradycap.com/ Greg Scott

    Thanks for laying this out so nicely Dan. The problem with the 3.0 model are the legal implications. I realize this is an older presentation. With that in mind, once you start setting the price and influencing the actions of the supply-side (labor), then you put your marketplace company in the position of being deemed an employer. I’m interested in what legal experts might think about this dilemma. How might current marketplace companies adapt and how should new ones build their foundation?

  • Bob Sanderson

    Great article Dan. Thank you.
    The article complements the information from this one.

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