8 Steps to Follow to Build a Successful Marketplace

Looking to build a marketplace that brings real disruption to the sector you want to tackle?

From personal experience building marketplaces, with Altar.io, I have compiled a list of best practices.  If you want to break into and disrupt your sector simply follow these steps. To bring effective value to buyers and sellers within your business you should:

  1. Choose a viable Industry
  2. Define your UVP
  3. Assess your Market Size
  4. Design your Distribution Model
  5. Choose the right business model and assess the economics
  6. Make a 10X better product
  7. Build trust on both sides
  8. Safeguard and grow your realm
8 steps to follow to build a marketplace - Niche Markerplaces

A small (& outdated) sample of Vertical/Niche marketplaces

Related: The Future of Marketplaces is Here – The 2020s & The Passion Economy

1. Choose a viable Industry 

Buyer and supplier critical mass

If your sector has many suppliers and buyers it is easier to provide value – and be relevant – as opposed to when there are fewer suppliers/buyers. 

Why? When the sector is small (or too “niche”) it is unlikely that a lot of suppliers will sign up for your marketplace – because all the buyers know the suppliers personally and, therefore, will not need you. 

On top of this, those suppliers have probably already approached the buyers in their niche. Meaning they don’t need to – or simply don’t want to – deal with a middleman.

Frequency

How many times is a buyer likely to purchase a product or service from your platform? 

    • If it is 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. However, if your business is high-frequency, you can tolerate a lower value per sale.

Available market

I will talk about this in more detail later in this article, but I would like 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 disruption you may change the market entirely. For example, when Uber came to market they 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? 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.’ Customers expect a price reduction due to a brick and mortar structure (and its associated costs) not being a necessity.

8 steps to follow to build a successful marketplace - UVP Chart

There are 3 drivers which can be used either separately or together:

    • Market access focus — dramatically offering access to more suppliers and products to the consumer.
    • Price focus — providing a dramatically better price than found locally.
    • 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 )  use Google or another trusted source such as statista.com.

Besides establishing the current market size, it’s useful to know the current immediate digital marketplace potential. You can use Google Adword/keyword planner.

Through assessing the market and establishing the digital marketplace potential you could learn, as an example, that currently within the hotel furniture industry there is:

    • A national turnover of X 
    • Global turnover of Y
    • That xx% (say 90% for instance) of it is still offline 
    • In which the retail space has xx% (say 50%) of sales and professional B2B suppliers another xx% (say the other 50%), and, talking to some of these, you’ve found out that the margins are typically 40%. 

Meaning? Using your marketplace, you could be shaving off 20% in commission for buyers thus adding value to the chain. This makes the sales process more efficient – and your marketplace the go-to.

4. Design your Distribution models

Digital distribution — Users mostly

Google Adwords allows not just for market sizing. It also allows you 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 X, Y or Z product when you complain about your symptoms. And it does work.

The same goes for YouTube videos, particularly ‘how to’ videos. 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.

8 steps to follow to build a successful marketplace - Distribution Models Chart

There is no right or wrong answer – and what works now digitally tends to phase out over time. Other platforms copy and consumers get tired of seeing specific ad types. A remarkable example is 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.

As with all things, nothing beats the continuous effort of experimenting patiently. Test different methods on your chosen digital channels to try to find the ideal mix of mean and message and novelty.

Referrals

Referrals are a key growth lever to bring along more users by rewarding current users for “digital word of mouth”. The earlier on, the better for the users involved. For a marketplace, it makes sense to use a referral program.

Having, personally, been a Dropbox early adopter (which is not a marketplace, by the way) I accumulated some 20gb of free space. Initially, I acquired 250mb and then 500mb for each new user. I achieved 20gb by inviting my mailing list and having over a dozen people joining with my referral links. Dropbox in turn famously got 4 million new members this way.

Airbnb also interestingly had a scheme that gave you $75 initially for each new host and $25 for each new traveller. This way I accumulated around $300 for free travels (while spending a couple of thousand).

You should try out referral programs in marketplaces. They help you grow your number of buyers/users exponentially. This 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 we’ll go into later) 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 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 and current user (100$ total) at the moment of their first 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:
    • 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.
    • 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$, 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 need to resort to a good old sales pitch. Through 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 every day, how many would you NOT ignore if those vendors reached you over a friendly, well-crafted letter – or phone call?

8 steps to follow to build a successful marketplace - Conversion/Cost/Reach Chart

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 speciality 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 model, the vendor is purchasing visibility and potential business – the main transaction happens outside the marketplace.

Highlight model (leads)

This is possibly the oldest model. Craigslist, back in the 1990s, was unable to charge online for offline transactions. It, therefore, 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 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. They progress to complex models allowing vendors to make the most of the marketplace’s capabilities – while producing novel revenue sources for the marketplaces themselves. As an example, Amazon’s seller’s 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 commission model (that is set lower than your competitors’) – if the transaction’s payment is done via you or with a pack of actions. Adding to this I 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 for 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 — Life Time 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. This generates the following equation:

5 years * 2 books at $15 * 20% = $30 in commissions.

The LTV – CPA > 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 by a percentage of GMV.

For more marketplace-relevant metrics download this Marketplace Spreadsheet template. It will give you an easy way to track your marketplace’s KPIs.

Related: 60 Active Marketplace Investors

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. 
    • Have the best solutions for your supplier’s businesses to thrive, gain insights and exposure. 
  • Own 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 – as well as web product and UX UI expertise. You will need a cutting edge technology team and the right sales/onboarding/pricing strategy to delight vendors and buyers alike. The above will go a long way to help you 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.

Brilliant right?

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 when it comes to building trust, 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 for 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 when pictured in a stylish home.
  • As for cars people tend to buy based on features – such as leather seats, trunk space or reversing cameras – so why not have a video explaining each model’s features?

Over explain, over document

The coveted five stars are not enough anymore. Use videos, pictures and words to attract your audience. Explain the pros and cons they felt while using the product, the value it brought to them and so forth.

The bare minimum here is using 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, for example. You could also create an augmented reality feature 

Even better, a coveted seal of approval or in-depth analysis from your platform. It 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 other big-ticket items. You can also use augmented reality to promote these items the way Ferrari has done here.

Show Authenticity

Allow room and promote the presence of the makers, the factory worker, the construction worker, the designer, the tour guide, the raw materials. Showcase all of this on your marketplace. How can you be trusted even more? If you give full disclosure and are completely transparent.

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 parties abide by high standards and can expect loyalty (and frequency) to be somehow rewarded. This will attract more buyers and suppliers virally and through word of mouth. A marketplace really is an ecosystem that needs active management and nurturing. Doing this will lead to growth and prevent vendors/buyers from going 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. for a restaurant the ability to gain 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 will pay lower commissions elsewhere!

Thanks for reading, I hope this article has helped you understand what it takes to create a successful marketplace. If you would like some more information and tips here is a dissection of one of our own marketplaces – I really recommend reading it to give you a tangible, real-world example of how to make your marketplace great.