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3 Strategies To Building a Marketplace Startup

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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 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 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.

Exclusive Bonus: Download my Growth Guide: The Top 7 Apps I Use To Growth Hack My Startups.

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, too 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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What follows below is a lightly edited transcript of the video.


Dan: Building a two sided market is probably the hardest thing you can do. You know what, a few weeks ago I organize a marketplace Founders dinner because I felt like there needs to be almost like a, you know, an AA meeting type for those founders that have decided to build marketplaces. You know, like, and I don’t know if you know what a marketplace is, but like an Etsy or an eBay or a Clarity, my startup, it’s a, it’s where you build a platform and you hope that people on the supply side and on the demand side come together to complete a transaction and get a lot of value from that. And the reason why it’s so challenging is you’ve got 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.

Dan: But with any marketplace, you have that same concept times two. So what I want to talk about is how do you do that effectively? You know, I can only speak from my experience. I don’t know if you’ve checked out clarity, but clarity.fm, we’re a marketplace for entrepreneurs to get advice from experts, real world experts with experience over the phone to grow their dreams and businesses forward. And you know, we’ve completed over 250,000 calls in the last 18 months. It’s been growing 30% month over month. It’s, it’s, it’s really taken on. And the challenge though is in the beginning is getting the fly wheel going, right? I mean, everybody that’s tried to start, they always say like in the beginning, how do you start? Here’s my suggestions to you. Number one, focus on one use case, right? So for us it was marketing as a topic, but also within marketing SEO, right?

Dan: So if you’re doing a, you know, a vacation rental site, you know, like an Airbnb or HomeAway, maybe you would start with tree houses. Now that sounds crazy, but you might even start in Europe or even within a specific city in Europe. But really focusing on a very focused niche and even a product set helps you streamline the experience. Because if you’re trying to do too many things within a broader market and something’s kind of taken off, it’s really hard to understand what is working. Once you know what’s working, then you can add on or stack on as I like to say, stack on these different tangental markets. So we started off with SEO and marketing and then we added other types of marketing like Facebook marketing, growth hacking, online marketing, content marketing, and then from that, from a marketing bucket, we then tacked on business development, then sales and we just kept expanding expanding.

Dan: Whereas two years into it almost, we have different categories, we have 4,000 categories and a bunch of different topics and that’s the way I believe to start by building a very focused use case, focus on doing one thing really well and making it niche. It’s sometimes people call it uncomfortably narrow as a niche. So try to think of my really uncomfortably narrow as how specific this marketplace deliverable is. The other thing I would say is focus on the demand side. You know, a lot of people they, they think, okay, well I want to do this kind of marketplace. I need a bunch of supply. And is the people delivering the service? If it’s buyers and sellers, it’s the sellers. And I would argue that it’s better and easier if you focus on a narrow offering to fake the supply or essentially pay this supply to be there.

Dan: I mean, Uber was famous for, you know, 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 would I pay you to just have them respond to these messages on this iPhone app that they gave them? And then that service would just tally up all the drives and send them one invoice. And that was the beginning of Uber. Now a multibillion, I think they just raised at a $16 billion valuation company started with that same concept. So fake the supply or restrict it to a very specific user journey where that you can control and deliver on that promise and focus on the demand. Focus on finding the ideal customer that has that use case, that need to for your marketplace. You know, those are the two big things.

Dan: And then the third thing I’m going to say is I believe the world has gone from a 1.0 version of a marketplace to a 2.0 to now where we’re in a 3.0 and a 3.0 well I’ll start with the one one was eBay, one was Craigslist where it was kind of a free flow, a 2.0 is more like a curated, very focused marketplace with identity and privacy and trust, which would be more like an Airbnb or an Etsy or kind of like where they’re leveraging social trust to generate liquidity in the marketplace. The third kind is what we’re seeing now where essentially they’re fixing the supply or the demand, the supply side of what you get. Right. And that would be, um, you know, home joy for home cleaning services, Uber and Lyft for delivering where, you know, I guess the way to look at is they set the price right. Whereas, you know, in the task rabbit would be a 2.0 example, but a three is where you say, look, this is the, this is the offering, this is what we deliver on. We own that brand, that consistency. Those people might be contractors to us on the supply side, but we, we will own the experience. We will be responsible for that and the price is fixed. So there’s this consistent ever going, I mean another example would be Fiverr, right? When you go to Fiverr, it’s like the name says it. How much is it going to cost? It’s five bucks, whatever you want. So Fiverr’s an example of a 3.0 if you haven’t checked out Fiverr or you got to do it. I mean, if you haven’t been there, start watching some of the crazy videos.

Dan: Here’s an example, a 2.0 version of Fiverr will be like oDesk. But what they said is, look, no, we want to reduce the friction and create liquidity. And they said, look, everything’s five bucks. Everything’s bought in this format. You know what you get the person’s offering is exactly that thing. And when you take the first, you know all these strategies put together, it really helps you build a marketplace with liquidity.

Dan: One: Focus on a very narrow, unkind uncomfortably narrow niche offering.

Dan: Two: Focus on the demand versus a supply.

Dan: Three: Figure out are you at 2.0 or 3.0 offering and it’s even easier sometimes to go three and maybe backfill to 2.0 anyways.

Dan: Those are my ideas on how to build liquidity in a marketplace as a challenge. And a lot of entrepreneurs and founders are facing right now and I hope that brought value to you. Leave a comment below with one of the number one takeaways you got from this video, and I hope that you continue to grow, stack your success, and you live a passionate life. Have an amazing day.

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