Getting to Critical Mass: How to Start a Marketplace Business

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    Unreal

    Are you thinking of setting up a two-sided marketplace business? It’s a tricky thing to do, so you’re going to need all the help you can get. Why not learn from how other people have managed it successfully in the past?

    One challenge of creating this kind of marketplace is that you’re going to have to understand and meet the needs of two completely different communities and you’re going to have to somehow bring enough members of each community together to give your marketplace liquidity.

    Why are Marketplace Businesses Attractive?

    So why try to set up a marketplace anyway? After all, why not keep life simple and provide a product or service to a single community instead?

    There are several reasons why marketplace businesses can be attractive:

    1. They’re a natural fit for the information-sharing potential of the web.
    2. Operationally, they can be simple: as a purely online business, there’s no inventory to look after and no service to deliver apart from the marketplace site itself.
    3. The more users you have, the more useful the marketplace is. This network effect becomes an important barrier to entry to potential competitors and goes a long way to explain the long dominance of sites such as Craigslist and eBay that, arguably, have done relatively little to innovate and improve over the years.

    The Critical Mass Problem

    Your marketplace will only be attractive to buyers if you have things on sale. Likewise, sellers will only be interested if you’ll be bringing them buyers. Often, to start with, you have neither. This chicken and egg problem can be a hard one to overcome!

    8 Ways to Kick-Start Your Marketplace

    1. Spin Out of an Existing Community

    If you’re in the fortunate position of running a community that would be natural users of the marketplace, you could be in luck. SitePoint, a community for web designers, very successfully launched two related marketplace sites: Flippa (for buying and selling websites) and 99designs (a marketplace for web design). Both services originally started informally when people were posting messages advertising websites for sale and looking for web design services on the SitePoint forums.

    2. Partner with an Existing Community

    If you don’t own an existing community, you may be able to partner with one. You bring them new revenues; they help market the service to their members. There are various ways to do this which might involve giving them a share of the business or agreeing a revenue-sharing deal. Through white-labelling you may be able to work with multiple partners in this way.

    3. Capture Contact Details to Connect Buyers and Sellers at a Later Date

    A visitor to your site who doesn’t find what they’re looking for isn’t necessarily a visitor wasted. Why not give them a form to say what they’re looking for. If, at some point later, it becomes available, send them an email to bring them back to the site.

    GiftCardRescue, a US gift card marketplace, does this nicely.

    4. Focus on a Niche

    However broad your ultimate vision for the marketplace, you might want to start by focusing on a narrow niche. For example, a marketplace for buying and selling used electronics might seem very empty with only ten listings. A marketplace for used iPads with ten relevant listings could already deliver value and appear active.

    Geography is one dimension of focus that is particularly popular. Many now-successful sites (Craigslist, for example) started in a single city and only expanded once they’d reached critical mass in their initial location.

    5. Advertise

    This can work if you have lots of money to spend (or can raise it), but otherwise gets expensive fast (especially if the first visitors to your site see barren pages with few signs of life — they’re unlikely to participate).

    6. Contact Individuals and Invite them to Join

    This and the next two tactics were all used by the founders of crowdSPRING.

    While researching the business, Ross and his co-founder contacted freelancers and contractors individually and asked them about their problems with existing marketplaces and what they’d like from a new one. Later, when crowdSPRING was ready, he invited these same individuals to join their new site.

    7. Ask Friends and Family to Use the Site

    With a healthy number of freelancers already signed up to the site, crowdSPRING then needed to address the other site of the market: jobs for those freelancers to do. One tactic they used was to ask their friends and family to post jobs.

    8. Subsidise Early Use

    To further encourage use of the site, crowdSPRING covered 100% of the costs of the first 50 projects that were posted. They also paid 50% towards further projects until they were satisfied that the service was working well and was ready to stand on its own.

    Further Resources

    1. Brant Cooper has a post on how customer development applies to marketplace businesses. Worth a read if you’re a fan of Steve Blank and co.
    2. Mixergy has an interview in which Andrew Warner talks to Ross Kimbarovsky, founder of crowdSPRING, about how crowdSPRING got their outsourcing marketplace off the ground.

    Any Other Examples?

    How about you? What tactics have you seen used successfully in launching a marketplace businesses?

    Please share them in the comments!

    Creative Commons License photo credit: mklapper

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      Comments

      1. Great post Matt.

        Thanks for including my work.

      2. Happy to mention it. I’m a big fan of what you’re doing with Mixergy.

      3. Great post. It is definitely difficult knowing which is the best step to follow to reach critical mass – I just wish there was a cut-and-dry methodology to follow to achieve this. Thanks again for the great insight.

      Trackbacks

      1. [...] If you’re interested in how to build a marketplace, you may be interested in another post of mine, about how to get a marketplace to critical mass. [...]

      2. […] you’re interested in tactics for building marketplaces, you make like to read my posts on Getting to Critical Mass: How to Start a Marketplace Business and Skillshare: How to Build a Marketplace for Online […]

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