Looking to build a marketplace to bring a real disruption in the sector you want to tackle? There are some rules, coming both from best practices and personal experience (building marketplaces with Altar.io & 10kstartup) that you should follow to bring effective value to buyers and sellers within your business:
- Choose a viable Industry
- Define your UVP
- Assess your Market Size
- Design your Distribution Model
- Choose the right Business Model and assess the Economics
- Make a 10X better product
- Build Trust on both sides
- Safeguard and Grow Your Realm
A small (& outdated) sample of Vertical/Niche marketplaces
1. Choose a viable Industry
Buyer and supplier critical mass
If there are many suppliers and buyers, it is easier to provide value and be relevant as opposed to when there are fewer suppliers or buyers. Why? It’s likely that fewer suppliers will sign up to your business because all buyers know who they are and won’t need you. Few buyers also are already approached by the whole list of suppliers and won’t fancy a middleman either.
How many times is a buyer likely to purchase a product or service from your platform? If it is a home design : once every 10 years? Furniture: once every 2–3 years? Food: once a week? If you are aiming for a low frequency you must have a high value per sale. If yours is a high frequency business, you can tolerate a lower volume.
I will detail this further in the market size section (see below), but in order to quickly address this point — it is really hard to assess the current size of your market and much harder to estimate what it will be like, when you start a digital disruption the way Uber did. Uber probably doubled the number of drivers taking people from A to B prior to its existence.
2. Define your Unique Value Proposition
Ask yourself, would creating a marketplace for X really make a difference by connecting buyers/renters to providers/owners over the web?
How big a difference would it make? A very large saving of time or money? Or would it create significantly improved access? Or a drastic time reduction?
As in real life, marketplace abundance needs to be the norm. Being digital is almost a by-word for ‘from anywhere’ and customers expect a price reduction due to a bricks and mortar structure (and its associated costs) not being a necessity.
There are 3 drivers which can be used either separately or together.
A market access focus — dramatically offering access to more suppliers and products to the consumer.
A price focus — providing a dramatically better price than found locally.
And a convenience focus — reducing time on something you personally do not need to do.
Therefore a common narrative/pitch for a digital marketplace could be along these lines:
Market access driven — abundance of choice
Join Sap.io (fantasy name) and reach out to over 3,000 mentors for over 7,000 specialty topic guidance sessions.
Price driven — strong cost saving
Sign up to Ritz.io and get the best bulk hotel furniture deals with up to 40% discount.
Convenience driven — strong time saving
Download Rosey.io and order flowers to be delivered anywhere in London within a 50 minute time frame.
3. Assess your Market Size
After solving the marketplace drivers, you then need to establish the size of your market that is digitally addressable.
If you come from a very specific vertical (e.g. hotel furniture), you probably have a good grasp of both the sector’s statistics and distribution channels. If not, you should talk to the industry specific associations that have access to such information or — as a last resort — either use Google or other trusted sources such as statista.com.
Besides establishing the current market size, it’s useful to know the current immediate digital marketplace potential.
Google’s search engine marketing business (Adwords) is all about letting a vendor access potential buyers, (i.e. all the people in a specific location who are Googling a specific term). Below is a SEM analysis for a search term that potential hotel furniture buyers could use — ‘hotel furniture’. The tool for this is the KeyWord Planner.
1–10 is always a margin that’s too big. Projections are worth little. Actual results mean a lot.
It is easy to see that there are 1k–10k monthly searches in the US for this term which then allows one to estimate that the cost per click is 1.92EUR/2.4USD. The vagueness of the 1–10k visits is explained by seasonality.
This will help you sort out, for instance, that currently there is a national turnover of X and a global turnover of Y and that 95% of it is still offline in which the retail space has 50% of sales (with a margin of 40%) of which you could be shaving off 20% and making the sales process more efficient.
4. Design your Distribution models
Digital distribution — Users mostly
As described above, Google Adwords allows not just for market sizing but also to actually tap the market by asking people to click your link when they are looking for your products. This is comparable to a pharmacist telling you to buy xyz product when you complain about your symptoms. And it does work.
The same goes for YouTube videos, particularly on ‘how to do’ x. If a smartphone specialist shows you that a product is really good you will be more likely to make the decision to pull out your credit card. If one or several YouTubers are covering your vertical, it is always a good idea to have them test your product.
There is no right or wrong answer and what works now digitally tends to phase out over time as others copy and consumers get tired of seeing specific ad types. A remarkable example of that are display ads. When the first one came out it had a 95% click rate. Now the average display ad has a 0.05% click rate..
Therefore nothing beats a continuous effort of experimenting patiently with all the different digital channels to try to find the ideal mix of mean and message and novelty.
Referrals are a key growth lever to bring along more users via rewarding “digital word of mouth” from current users. The earlier on, the better for the users involved. For the marketplace it makes sense to use a referral program if
By having been a Dropbox (not a marketplace by the way) early adopter I accumulated some 20Gb of free space initially at 250mb and then 500mb for each new user due to inviting my mailing list and having over a dozen people joining with my referral links. Dropbox in turn famously got 4million new members this way.
Airbnb in turn, interestingly had a scheme that gave you some 75$ initially for each new host and some 25$ for each new traveller. This way i accumulated some 300$ for free travels (while spending a couple of thousand).
You should try out referral programs in marketplaces because they help you grow the number of buyers/users exponentially which is key for the marketplace to stay relevant. Then you need to make sure that at least in theory the CPA (Cost per Acquisition ) of a user via a referral program is under the estimated LTV (Life Time Value — which I’ll explain later about) of a user and generally speaking should be not more expensive than the other distribution channels.
But what typical referral programs could be good for a Marketplace?
1- If you happen to manage the price of all or some of the items offered you OR if you have fixed percentage commissions you can give a percentage off for new users when referred by a current user.
2- If you don’t manage prices you might stick to giving away a cash discount that’s a percentage of the LTV. Say 50$ for the new user and for the current user (100$ total) at the moment of their first hotel furniture purchase if your average user generates 250$ in commissions over 5 years.
3-If you intend on having each user signup many people from his/her mailing list why not do the following:
3.1- Allow the user to choose from his/her gmail contacts the most likely people to adhere to the marketplace and maximize the chances of both users gaining some benefit.
3.2- Promote incremental gains: If a power user adds 5 paying customers at a 50$ bonus each at a bronze level, tempt him with a silver 60$ bonus for each new customer up to 20, gold at 70$ for each up to 50, platinum at 100$ up 10 100, etc.. Gamify and make your power users your best word of mouth, they will even youtube about you!
Offline distribution-Vendors mostly
To gain initial scale on the supply side you might ned to resort to a good old sales pitch over meeting suppliers in person, calling them or even a letter explaining your case.
This might sound inefficient but its most likely not. Just ask yourself, from the dozens of sales emails that you ignore everyday, how many would you NOT ignore if those vendors reached you over a friendly, well crafted letter, if you knocked on their door or called?
After all, in your vertical the supplier shouldn’t be hard to pinpoint. They should be easy to find via their professional associations along with their leaders’ names, emails and addresses etc.
Giving a lot of attention to your first key suppliers is important to show your relevance to other suppliers coming next. This means letters, arranging personal meetings, speaking at specialty conferences and of course media coverage/PR.
This brings along a unique hyper relevant inventory to your marketplace to make it relevant from the start.
5. Choose the Right Business Model and assess the Economics
This brings you in turn to the CPA/LTV rationale of your business. Whereas in ‘regular’ businesses you factor in shop or office rentals, warehousing, staff, cost of advertising, sales etc for your price, on the web it’s different — and particularly so for marketplaces. In a marketplace you need to simultaneously make an effort to attract supply and demand, while offering suppliers a cheap way to sell and buyers an abundance of items at great prices.
Commission model (transactions)
This is the simplest one but is now rare in a marketplace model. Charging a flat, all inclusive 20% used to be the norm for marketplaces where payment transactions are made online but, due to the likes of Uber, this is now being replaced by more complex business models.
Pack of actions model (leads)
This is usually directed at vendor centric marketplaces such as Olx or TaskRabbit. Here you list an item that will be visible until the number of actions the vendor purchased expires. These actions that the vendor purchases are (views/click to see phone number/click to order/contact requests). In this mode,l the vendor is purchasing visibility and potential business as the main transaction happens outside the marketplace.
Highlight model (leads)
This is possibly the oldest model. Craigslist, back in the 1990’s, was unable to charge online for offline transactions hence allowed users to pay to put their ads on the top of the list, highlight them in yellow, use big fonts and other perks.
Subscription + actions + commission + highlight + co-branding + fee per item + CPC (leads + transactions)
As larger marketplaces become behemoths, they tend to evolve a model that offers a myriad of options to their vendors. Alibaba and Amazon allow certain suppliers to use their own namesakes in exchange for a steep commission plus guaranteed sales. UberEats may charge a percentage of the food from the restaurant and a delivery fee to the end customer. Another interesting case is Booking.com which allows hotels to increase the site’s commission in exchange for a higher placement in their search or for an extra discount available only for their site’s users.
Overall and over time marketplaces listen to their communities and progress to complex models allowing vendors to make the most of the marketplace’s capabilities while producing novel revenue sources for the marketplaces themselves. Amazon’s sellers option pages are clearly a result of decades of thinking through business models.
But what’s right for you at this stage?
If you are just starting you will probably either begin with a (lower than your competitors’) commission model if the transaction’s payment is done via you or with a pack of actions. Adding to this we would suggest you add a smart suite of incremental exposure features to allow merchants to purchase visibility — for instance allowing them to outbid each other to the top of the list while producing more sales for them and for you.
Once you’ve figured this out you can move on to establishing your CPA and LTV.
CPA — Cost Per Acquisition
This is the cost of acquiring a paying user who will over his / her lifetime, purchase products from your platform. Initially you will be attempting 5 or possibly even 10 different means of achieving users for less than they will generate for you over time. The CPA will be a specific per means (i.e. email campaigns) and blended (all digital campaigns) and hopefully will be a number that is lower than the LTV figure.
LTV — LifeTime Value
This is what an acquired paying user will generate for you over time. For example you can estimate that in a specialist audiobook marketplace over five years a customer will purchase two books per year for $15 each on a 20% commission, generating 5 years * 2 books * $15 * 20% = $30 in commissions.
The inequality CPA + LTV > 0 from your chosen business model is crucial to understand the viability of your business.
Other metrics to keep in mind will be GMV and take rate:
GMV — Global Merchandise Value of what’s been sold by all sellers in the platform minus returns.
Take Rate — commissions charged by your service in percentage of GMV.
For more marketplace relevant metrics check out this template from Version One Ventures here.
6. Make a 10X Better Product
You should thrive because you offer the best products or services from the best suppliers, with unique prices or perks. You have the best solutions for your supplier’s businesses to thrive, gain insights and exposure and also because you have a very well thought out marketplace that disrupts its niche and offers end customers an amazing experience.
To do that you need a savvy mix of experience and wisdom in the particular niche you are exploring, web product and UX UI expertise, a cutting edge technology team and the right sales / onboarding / pricing strategy to delight vendors and buyers alike and hold their attention the way Amazon, Etsy, or Airbnb were able to do.
An example of a 10x better product would be the all-inclusive car renting app Fair. Several vendors — a unified experience — great value for the end customer.
7. Build Trust on both sides
Does your product comply with modern trust-building mechanisms and does it convey an overwhelming feeling of trust?
There are a few rules of thumb about this, depending on the marketplace’s industry.
Lots of pictures/videos
For the products or services that you may be selling (or indeed being the middleman via owning a marketplace) you should show as much as possible.
For shoes that means pictures of a person who relates to me, furniture looks good pictured in a stylish home and for cars … so why not have a video explaining about each model’s capabilities?
Over explain, over document
Long form is good. For instance in this page we helped our clientCiaoandiamo.com jump from 0.7 to 3.5% conversion rate by doing just that: https://ciaoandiamo.com/trips/amalfi-coast-puglia/.
Documenting thoroughly helps the customer get inside the experience they are going to have.
Show ratings, relatability or even more
The coveted five stars are not enough anymore. Use videos, pictures and words to attract your audience, explaining the pros and cons they felt while using the product, the value it brought to them and so forth.
The bare minimum here are the comment boxes for proven past buyers.
Go the extra mile — if your marketplace trades high value items like high end furniture, boats, cars and homes, then why not rely on video testimonials, augmented reality or even an own coveted seal of approval or in depth analysis from your own platform? Would sure come in handy to see marketplaces provide actual and independent in depth reviews and seals of approval (or even guarantees) when purchasing a home, car, boat, or whatever costs more than x salaries..
Allow room and promote the presence of the makers, the factory worker, the construction worker, the designer, the tour guide, the raw materials and the process to be showcased on your marketplace. How can you be more trusted even more if you make a full disclosure?
Payments can’t be an issue
If transactions take place through your platform simply assure your customer that a trusted and well known third party like Stripe or Paypal handles the transactions safely — not your startup.
8. Safeguard and Grow Your Realm
Once you’ve launched, your vendors and buyers will look up to you to settle disputes, ensure that all abide by high standards and will expect loyalty (and frequency) to be somehow rewarded. This will attract more buyers and suppliers virally and word of mouth. A marketplace really is an ecosystem that needs an active management and nurturing to make it grow and prevent leakage to your competitors.
Organically you will keep buyers coming in via the trust building initiatives outlined on point six. These allow for great SEO (Google’s way of ranking you).
But to actively safeguard the business in your ecosystem, you should think about making the process of buying and selling more dynamic to allow for increased frequency. For vendors this frequently comes in the form of management dashboard solutions (i.e. in restaurant seating insights and management by restaurant booking apps). But most importantly this means using tried and tested possibilities to drive sales such as price alerts, flash promos, exclusive discounts for frequent buyers and other initiatives that primarily focus on repeat purchases by buyers. This should prevent vendors from leaving even if they’ve pay lower commissions elsewhere!
PS: A great marketplace of our own dissected here and more soon to come: https://altar.io/blog/venga-product-bible-ux-ui/