Despite ongoing trade tensions and a slowing global economy, e-commerce is still booming. Global marketplaces are leading the way, with Alibaba Singles’ Day hitting a record $38.4 billion in sales this year and Amazon’s YTD revenue up 20% on last year. The performance of the big players is in line with overall marketplace growth which has been tracking at over 20% for the past few years. The big question though, why do only some marketplace startups reach the big time, while so many flounder and disappear?
For one, the old ‘it’s the economy’ excuse doesn’t hold water; the marketplace model is particularly well suited to challenging business environments. Their phenomenal economies of scale reduce costs, while their network effects create exponential growth and defensive moats in a manner that has not seen its equal in any other business model. They also promote better logistics, smarter use of data, wider product ranges, greater transparency, easier cross-border expansion, and more personalised customer satisfaction.
Long-term, the prognosis is even better. According to market research company, eMarketer, the global e-commerce market will reach $5 trillion in sales by 2021. More than 60% of all online business ($3.5 trillion in 2019) is already taking place on marketplace platforms like Amazon, eBay, Airbnb and Uber. In fact, 47 percent of shoppers now prefer to do their repeat purchases via online marketplaces. Prospects are also looking good for the UK – it is tipped to remain the world’s third largest e-commerce market with $124 billion in sales.
More good news. New trends and segments are constantly creating further opportunities for the marketplace model. The Fourth Wave of E-commerce will be driven by new marketplace trends like service platforms, niche B2C verticals, B2B procurement, and e-commerce malls.
But sadly, despite all those wonderful macro advantages, the majority of high-growth platform startups end in failure (a 70% failure rate seems to be the general consensus). The reality is that marketplaces are complex systems; developing a successful one is not a simple paint-by-numbers game. The good news is that there is a proven set of ingredients that can hugely improve your marketplace’s opportunities for success.
We have written about many of them previously, but now for the first time we have condensed all of the early-stage marketplace success factors in one blog post for easy reference. Based on the collective experience of high-performing marketplaces like Airbnb, Etsy, Fanpass, and Mobypark (some of which we helped to develop) here are ten key elements for a successful multi-vendor marketplace launch:
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“Product-market fit is the elusive goal of every startup. It is a single business term that denotes successful product delivery, a working go-to-market strategy, and customer satisfaction. Some startups declare they have achieved product-market fit prematurely, while others don’t recognize they have it until much too late. Getting it wrong can result in a waste of resources and loss of precious time.”– Adam Fisher, partner at Bessemer Venture Partners and director of Fiverr.
Product-market fit is arguably the most important factor in marketplace success. If the market doesn’t want what you are selling, you are dead in the water. Or ready for a pivot.
Rapid iteration of a minimum viable product (MVP) offers an empirical way to develop product-market fit. These advanced prototypes allow marketplace entrepreneurs to collect user feedback at speed while minimising the financial risk that accompanies a fully fledged platform. Each cycle of iteration builds on new insights to refine your marketplace value proposition until sufficient traction is achieved.
A go-to-market or market activation strategy is the game plan that outlines how you are going to use the resources at your disposal (team, budget, tools, skills) to sell your unique value proposition to a specific audience and in the process gain competitive advantages and/or create network effects that will grow your marketplace.
Key components of a go-to-market strategy include defining your target market and ideal customer personas, doing a detailed competitor analysis, clarifying your value proposition, mapping out the customer journey, choosing a business model and tech stack, identifying marketing and sales channels, and outlining your customer success process.
You will need to identify clear milestones based on a hierarchy of goals, objectives and KPIs. Objectives and goals should be specific, measurable, attainable, realistic and come with time frames.
It’s important to distinguish between business models and revenue streams. Business models describe the flow of value in your business, i.e. the benefits for the users and which products or services will be served to a specific target market. Revenue streams determine how marketplace owners can monetise the flow of that value between users (buyers & sellers).
Marketplace business models include B2C, B2B, P2P, and On Demand. Your business model should be based on the relationships between all the stakeholders (buyers, sellers, owners) on your platform.
Popular marketplace revenue streams are commission, subscription fees, listing fees, freemium, and advertising. Finding the right option for your marketplace can be based on benchmarking with a similar type of platform. However, using an MVP to clarify your value proposition to users and to determine if they are willing to pay for that value will give a more accurate indication.
“What gets measured gets done”
This decades-old adage (often attributed to famous management consultant, Peter Drucker) can be repurposed for marketplace startups as “what gets measured can be improved.”
Entrepreneurs need to be able to derive clear insights based on customer interaction with their marketplaces. Metrics fulfill this function by converting observable data into customer insights. The trick is to choose the right ones for your business context. Measuring the wrong metrics can send you on a wild goose chase and lead to eventual marketplace failure.
Standard marketplace metrics include liquidity, customer acquisition cost, customer lifetime value, and net promoter scores. Using a framework like AARRR provides the necessary context to identify and implement the right metrics. AARRR do this by linking metrics to various stages of the user journey: acquisition, activation, retention, referral, and revenue.
Your choice of technology will have a huge impact on the flexibility, extensibility and scalability of your marketplace platform. There’s a bewildering array of options, ranging from DIY SaaS templates to custom development. In between are plug-and-play hybrid options like WordPress and Woocommerce.
Dedicated SaaS marketplace builders like Sharetribe can sometimes be handy as an MVP for initial product-market fit testing. Hidden costs and unexpected support requirements (e.g. customisation to suit the needs of your particular concept) can throw a spanner in the works. Long-term there are challenges with flexibility, extensibility and scalability. Which means the whole platform needs to be replicated with custom development.
Custom development obviously gives you the most freedom. In the short term, the flexibility to build an MVP that can accurately measure and improve product-market fit. In the long term, the scalability to handle rapid growth and enough extensibility to allow integration with the most suitable features and functionality.
Crucially, custom development also comes with strategic insights, recommendations for the tech stack, and support for future expansion. The quality of those ‘extras’ is of course dependent on the experience and skills of your chosen development partner. Their portfolios should give you a good indication.
Features & functionality
Just like your value proposition, your marketplace features and functionality need to be tested. Adding too many bells and whistles at the MVP stage can be a waste of resources and confuse users.
Ideally you want to start out with features that support your core value proposition. Chief among them is a suitable payment system. Managing the flow of funds between buyers and sellers is one of the most important functions of an online marketplace. Look out for attributes such as easy onboarding, flexible payment options, escrow functionality, split payments, and compliance adherence.
In addition to payment systems, popular marketplace features include admin interfaces, rating and review systems, order processes and shipping frameworks, user dashboards, and custom search. Take into account that integrating some features will require advanced technical skills.
Trust & Security
Probably the second most important factor after product-market fit. Easy-to-understand order and shipping processes, transparent customer feedback, and an exemplary user experience will inspire confidence in your marketplace.
Prominent and easily accessible terms and conditions with special emphasis on data privacy and payment security are also necessary to build trust. This can be supported with social proof in the form of case studies, testimonials (sellers), and platform reviews (buyers). Don’t underestimate the power of tutorials and how-to videos.
A customer review mechanism for sellers and their products or services can be a very powerful trust builder. Contemporary consumers increasingly rely on the feedback of fellow customers instead of what vendors say about themselves. Except for trust, reviews also promote network effects which can grow your marketplace exponentially.
Implementing a well-planned technical seo strategy can be one of the best ways to drive quality traffic to your marketplace at scale. By focusing on the non-content or structural aspects of your site, its main purpose is to enhance your site’s discoverability, readability, and usability.
Since 46% of e-commerce traffic is still organic, the impact of technical SEO as a scalable organic traffic driver should not be underestimated. From an implementation point of view, technical SEO covers a wide range of activities, some more technical to implement than others. Properly implemented though it becomes the gift that keeps on giving.
Technical SEO also supports network effects and all stages of the marketing funnel, it improves the user experience, and can help solve the chicken-or-egg conundrum by driving demand side traffic.
“Technical SEO is becoming more important than any other SEO tactic. It is the structure of your website. Without it, everything else falls apart.”– Neil Patel – New York Times bestselling author and Forbes Top 10 Marketer
Network effects kick in when your marketplace increases the value for all its users every time a new user joins the platform.
It also amplifies the liquidity in your marketplace by increasing the chances of a match between buyers and sellers. The higher the frequency of matches, the better the chances of creating unassailable defensive moats, also known as barriers to entry.
Focusing on network effects forces marketplace owners to put the relationship between buyers and sellers at the core of the platform’s development, which means constantly analyzing user behaviour and using rapid iteration to establish product-market fit.
How users experience your marketplace is a reflection of the technical expertise applied, the go-to-market strategy implemented, and the level of product-market fit that has been achieved. Your marketplace should be well-organized, trustworthy and easy to navigate, with as little friction as possible between what users want and the fulfillment of their needs.
- 88% of online consumers are less likely to return to a site after a bad experience
- 76% of online shoppers abandon their shopping carts
- Online users take 50 milliseconds to form an opinion about your site’s visual appeal
- User experience has the potential to boost conversion rates by as much as 400%
UX design is a multidisciplinary field that combines technical skills, creativity and analytical thinking in iterative cycles of designing, prototyping, and testing. Due to its broad scope and deep impact its implementation is not a trivial matter. UX issues like unresponsive rendering and slow load speeds can have serious consequences.
Unfortunately very few marketplace entrepreneurs have combined experience of cognitive psychology, human-computer interaction, computer science, information architecture, product design, graphic design, front-end development, and QA testing. Investing in professional UX design will be your best bet to improve conversion rates and customer retention.
Additional marketplace success factors
The above is not an exhaustive list. There are other factors that can influence your marketplace success. Team composition, funding, customer success framework, and marketing strategy come to mind. These tend to be of an ongoing nature as opposed to the early-stage requirements we listed here. They are just as important for long-term success, but resource-starved startups should prioritise the factors that get them out of the gates in the most efficient and effective manner possible.
The quality of your team can make or break your marketplace concept. One of the crucial decisions you will have to make is when to outsource a function and when to manage it internally. The rule of thumb is that if it is not a core activity (sales, marketing, funding, operations) then outsource it. Lack of expertise when attempting DIY is one of the major reasons why marketplace startups fail.
Your go-to-market plan should kick off your marketing strategy. While marketing is an ongoing activity aimed at growing competitive advantages over time, your go-to-market strategy should outline how you will successfully introduce your product or service to the market. Effectively communicating your value proposition (how you are solving your target market’s problems) is the first step on that road.
Customer acquisition is expensive; which means retaining loyal customers (and thus lowering churn rate) is great for your bottom line. Delighting your customers with a superior customer experience and first-class support can be a key differentiator for your marketplace business. To that purpose, a customer-centric approach should be baked into your business from the beginning. Make sure it’s a golden thread that runs through all your teams, especially sales, support, product, and marketing.
Differentiate between proactive customer success which focuses on increasing customer lifetime value (upsell, cross-sell, repeat sales) and reactive customer support which aims to solve customer issues as quickly as possible. Invest in the right tools (Net Promoter Score, CRM, chatbot, surveys) and a well-trained team to do the job properly.
Also take into consideration that none of these factors exist in isolation. They should work together towards a single goal – making your marketplace grow and become profitable. For example, technical SEO can be considered a subset of marketing, while UX has a big impact on customer success. Choosing the right team and partners will supercharge everything.
Only fools rush in where angels fear to tread
Entrepreneurs need self-belief and confidence by the bucket load. That does not mean becoming a victim of your own hubris though. Great entrepreneurs know when to ask for guidance and when to rely on experts to get certain aspects of the job done.
At the end of the day, you and your investors want to see a good return on investment. Building a marketplace that does that is not easy, but following these tried and tested guidelines can greatly enhance your chances to get there.