Is your dream to create the next Amazon or Uber? Or do you want to make a platform that allows users to buy or sell rare and collectible baseball cards? Read along to find out how to build a successful marketplace in 10 steps.
If you want to build an online marketplace, you’ve probably taken some inspiration from the massive success of Etsy, Fiverr, Uber, and Airbnb, along with dozens of other intimidating competitors. Those businesses started off with relatively simple ideas, yet they’ve managed to create new markets, massively disrupt their respective industries, and stay relevant for many years.
But how should you start building your marketplace during this age of the passion economy? What are the best ways to dodge some of the biggest marketplace pitfalls and stand out above your competition? Here are ten steps to follow to build a successful marketplace!
One could say that successful marketplace all share a similar business backbone. They are an essential part of the sharing economy. What’s more, services like Airbnb have managed to prove that online marketplace businesses are highly scalable. Currently, they can be applied in nearly any business area, and the best time to move your store from offline to online is now, especially due to the growing popularity of the passion economy.
Successful marketplace requires a detailed strategy, a knowledge of the best approaches, as well as plenty of time and effort. Still, if you take too much time, you could lose momentum, and your competition might create something bigger and better.
What are the Marketplaces?
Generally, marketplace or e-commerce marketplace are websites/apps that offer products or services. Those products/services may come from company’s or various third parties. marketplace connect the sellers, buyers, and sometimes platform owners.
Instead, the marketplace provides a platform, that regulates the relationships between the buyers and vendors while managing all transactions and processes. However, that’s easier said than done since building a marketplace focuses on several underlying characteristics.
They may include liquidity, price, speed, network effects, trust, improved experience, and more. Additionally, service launches, revenue growth, customer and seller acquisition, competitive positioning, expansion, and margin improvement are all things that prospective entrepreneurs will need to consider.
The Playing Field
Looking back, some could say that even the Yellow Pages were an early form of marketplace. In the 1990s, the marketplace craze began on listings platforms like Craigslist or Yelp. After that, the 2000s and 2010s saw the rise of transactions, delivery, and trust services. In 2019, the sales on the marketplace made up 57% of all online retail sales.
Estimates also say that two-thirds of marketplace generate over $50 million each year. Moreover, nearly 40% of those all hire around 1,000 to 5,000 people. Plus, the average commissions range around 10%, 15%, or 20%.
Currently, the top marketplaces in the U.S. are Amazon, eBay, Walmart, Wish, and Houzz. Even though those major players may seem frightening, the steps to building a marketplace are relatively similar across the board.
Before we reveal our best tips, note that the marketplaces face an ever-evolving future. Currently, the passion economy is revolutionizing business across the board, and it can create many new opportunities for the online marketplace. So before you act on your marketplace idea, think about whether your business wants to follow your passion with a creative idea or if you want to play it safe and offer basic tasks or services online. Nevertheless, this won’t be an either/or decision for many. It will require compromise, experience, effort, and time.
Top 10 Tips for a Successful marketplace
To develop your idea into a successful marketplace startup, follow the tips below!
1. Choose Your Industry
Obviously, one of the biggest reasons why businesses fail from the get-go is a lack of need or demand. It’s critical to pick a viable industry and a fitting business model. When it comes to industries, there are several variables. These include critical mass, purchase frequency, and market availability.
It’s definitely not a bad idea to think big regarding marketplace. Namely, if you find that your field will generate plenty of buyers and suppliers, it will be much easier to stay relevant and provide value.
In contrast, niche markets will have fewer buyers/suppliers. With smaller sectors, buyers are more inclined to spend their money directly through the supplier. In turn, the suppliers deal with a smaller customer base. They may not be interested in paying fees or doing business through a marketplace. That means there’s a chance your business won’t generate interest from suppliers and buyers to sign up on the platform. Ultimately, your marketplace could end up being irrelevant.
Another crucial step that could bring you closer to success is the frequency of purchases. The rule here is to have a high value for each sale if your industry has a low sale frequency. Conversely, simply lower the value if the sale frequency increases. For example, if your buyers are looking for furniture, they’ll probably make a purchase once every few years. However, if they want food, a buyer might be interested in your service once per week.
Also, while it’s clever to assess market availability and size, note that it’s actually quite difficult to estimate it correctly, especially due to rapidly changing trends. If your idea is good enough to cause a disruption, you could outright change the market. Just think of how Uber revolutionized transportation.
2. Vertical vs. Horizontal marketplace
Before you make the jump, you need to consider three key aspects during planning. They are marketplace structure, trends, and specialization. You should weigh and understand the benefits and disadvantages of your marketplace type. Then, move on and plan your development strategy according to that.
Picking a structure will enable entrepreneurs to create a full roadmap for the development of their marketplace. But first, it’s essential to know the difference between horizontal versus vertical marketplace.
Basically, vertical online marketplace caters to niches and specific spheres. You can also gear your business towards an industry or a demographic. They require targeted insights, specialized knowledge/experience, and they focus on a smaller customer base.
Like we’ve said before, choosing a niche market results in fewer transactions. Yet, there are some great advantages to vertical markets. Mainly, your revenue could increase with larger transaction fees. Also, marketing campaigns will be easier, faster, and cheaper for this type of marketplace. If you want to offer unique products that don’t appeal to the mass market, you can generate more value for buyers. Even better, you can ensure that the products/services are of high quality.
On the other hand, a horizontal marketplace offers services or goods in multiple categories. It also caters to a diverse client base. That means your platform would have to offer services/products that are widely used. The goal is to generate a wide target audience and profit from as many transactions as possible.
However, the downside here is that the competition is fierce and intimidating. It could cause problems if you want to enter the market, attract your user base, create an effective marketing strategy, as well as build trust or value.
Nevertheless, this type allows entrepreneurs to operate using a standardized model. That means you can streamline sales to lower the costs. All the while, it’s possible to generate a wide audience and offer a diverse range of everyday goods. Plus, your marketplace can operate across countries and even the entire world. If you create a sustainable marketplace using this model, you’ll gain a higher transaction volume and bigger profits.
How Should You Decide?
It may be simpler to get a head start with vertical marketplace platforms. You can pick a niche that is still relatively unknown and develop your business plan around it. As mentioned, a vertical marketplace makes marketing much easier and provides lots of value for your client base. It’s also less risky to switch types if you start with vertical. That is, you can expand your platform by offering additional services/goods later on.
However, a horizontal marketplace could lead to a huge success if your idea is better than your top competitors’. If you have something unique that appeals to a wide audience, go for this option.
3. What’s Your Value Proposition?
Concerning unique marketplace and innovation, always consider how your platform will resonate with buyers and sellers. How will it create a disruption? Will it enable the vendors/buyers to save money and time?
Since we’re dealing with digital, prospective entrepreneurs should always know that the client base will instantly expect lower prices. The marketplace should also be available at all times. Moreover, the main goal of your platform should be to offer transactions and experiences that aren’t already possible/available. Moreover, rather than aggregating the market, it should also improve it. So how can we predict the true value of an idea?
Obviously, the first step is to investigate the market, its trends, and the top competitors. That way, you could find some gaps that will boost your competitive advantage. Consider some factors like seller/buyer experience, technological innovation, market expansion, fragmentation, and network effects. Afterward, think about your value proposition. Is it driven by convenience, price, or market access?
Creating a strong value proposition will allow you to see if your marketplace can quickly provide a higher value to your audience compared to already-existing services.
4. For High Profits, Choose the Ideal Business Model
As stated earlier, it’s easy to launch a marketplace and fail because the service ends up being irrelevant or unprofitable. However, some examples like Amazon have shown that it may all depend on the business model. After all, the company took seven years to make its first profit, even though it had generated millions in sales. In fact, there are several marketplace models that you may not have known about. The models include:
- Subscription — A fee that users pay to register
- Commission — A fee or percentage taken from gross sales (e.g., Airbnb, eBay, etc.)
- Listing Fee — The seller is charged for their listing
- Featured Listings — Allowing members to pay for featured listings and ads
- Lead Generation — The seller can pay a fee per generated lead
- Freemium — The essential functionalities of the marketplace remain free. However, users can pay to upgrade for premium features (e.g., Etsy)
As you can see, there are several options, but not every model will work for your marketplace. Alternatively, you can work with multiple models and offer various options. Customers love options, and free services could increase the value.
5. Analyze the Market Size Correctly
While thinking about vertical vs. horizontal, it’s always a good idea to consider the market size. When you determine what drives your market, you can assess its size. If it’s a vertical marketplace, you will need to pinpoint the distribution channels and market statistics. Through this, you can gain insights into local/global turnovers, how much of the market is offline, profit margins, etc.
With large markets, there is a bigger addressable audience. That is, the supply/demand is matched much better, and your marketplace can offer increased accessibility and transparency.
Still, anyone can easily underestimate market sizes. For example, Uber, Lyft, and Airbnb did not fare so well with the majority of investors at first. Their initial markets were thought to be much smaller, and so their predicted revenues were also not high enough. However, the latent demand (potential size) was ignored, and it turned out that the markets were actually much larger.
6. Pick Effective Distribution Models
Digital distribution, referrals, and even offline distribution can all enable you to win over your target and bring your service/products to more people. Still, digital distribution will probably take up most of your efforts.
Of course, Google Adwords is effective, but you may not know that you can actually use it to tap into your market. Simple things like asking users to click on a link while browsing through your products can go a long way. This is also effective in YouTube content, especially for a vertical marketplace. Some forms of digital market access that are currently the most effective are influencer endorsements from Instagram, YouTube, or blogs. Others are your own video channels/content/blogs, search engine marketing, and similar. Consider their cost, reach, potential conversion rates, and durability.
7. How to Increase Trust and Loyalty Quickly
It may well be true that trust can make or break your potential customer’s decision. If clients see a threat, chances are that they’ll immediately leave your marketplace. To make matters more difficult, it could take a long time to build your reputation. Your goal here is to increase the trust in your services/products while also making sure that the users can trust each other and your entire platform.
Some shortcuts to this are investing in growing your reputation via ratings, reviews, success rates, etc. Also, you can implement security measures, such as ID verification and screening checks. Another trick to build trust is to connect users and show them their mutual connections. Services like Airbnb have shown the effectiveness of this method. With member profiles and mutual friends/connections options, people will be more likely to trust a marketplace.
Other ways to generate trust in products/services and your platform is to have effective customer support and regulated payments. You can also verify users/products with photos, feedback, or reviews, as well as provide guides/how-to’s regarding your marketplace.
8. Specify the MVP
MVPs or Minimum Viable Products are incredibly useful for any development process. They involve only the bare minimum. That includes the crucial features of your marketplace. It may take less time to build a backbone and focus on having it function perfectly as opposed to creating a complete platform.
This can save time and lower costs. Another benefit of an MVP design is increased analytical data and feedback after your launch. It’s a Lean Startup concept, and it’s recommended to those who want to lower the risks. If you’re worried about perfection, you can test your MVP in-house without actually launching it. Our company offers MVP development services, just in case you’re interested.
9. Start Growing
Always remember that your launch is only the beginning. After it, you will have to make a constant effort to satisfy customers, solve problems between buyers/vendors, reconsider your marketing tactics, reassess your budget, etc. A successful online marketplace will always need active management. Focusing on and growing your marketplace will improve trust while allowing you to be one step ahead of your rivals.
However, increased trust and traffic also come with downsides. You will need to focus a lot on sustainability. One way is to create increased frequency and constantly offer new solutions for sellers/buyers. That could include management dashboard options. It could also involve price-drop notifications, promotions, special discounts for regular customers, repeat purchases, and even gifts. Those tactics should be enough to keep your customer base intrigued, even if other marketplaces offer different terms like lower commissions.
10. Don’t Stop Innovating
Finally, the last tip is fairly self-explanatory and even a bit cliched, but you can learn from other companies that also took this approach. Uber, for example, offers five rideshare services at different rates. But the company has also expanded to Uber Eats. This idea managed to bring in profits when its ridesharing services came to a halt during the Covid-19 slowdown. Like we’ve said repeatedly, innovation is pretty much the name of the game when it comes to the marketplace. However, even if you start with a basic product, you can always improve it later on and make it even more original. If you need great software development services, then you know whom to call.
In the end, entrepreneurs who are interested in the marketplace should always focus on timing. There’s no guarantee that some trends and demands will last. If you take too long to start, your idea may not be relevant anymore. So follow our tips, rethink your business idea, and strike fast! Good luck!