Whether we realize it, we interact with some marketplaces on a daily basis. Any environment that connects two people or entities and allows them to complete a transaction is a marketplace. But in this day and age, we often think of the term synonymously with digital marketplaces. Everything from Groupon to Amazon to Airbnb. This trend extends throughout our online experiences, with a great rule of thumb being…if you’re not buying a store’s in-house brand, you’re probably shopping in a marketplace.
So, if many of our favorite e-commerce websites are just digital marketplaces, then this means that it should be easy to create one. After all, the marketplace model is extremely popular, which should mean that it is always in demand, right? Unfortunately, this is not typically the case, and numerous entrepreneurs have tried and failed to create a successful digital marketplace. There can be many different reasons for new business failure. However, the most common reason why marketplaces fail is due to lack of scale on both sides of the market.
One major issue faced by marketplaces is an imbalance of buyers and sellers. This issue can be a serious one to overcome. If your platform doesn’t have buyers than sellers have no reason to list their products or services, and vice versa. There needs to be a value proposition to create harmony on both sides of the supply and demand transaction. Amazon.com is the easiest example to consider. They have millions upon millions of buyers, and numerous different, unique sellers offering everything from furniture to books. This ensures that everyone on both sides of the buy/sell equation is satisfied. While this may seem obvious, growing scale from scratch is not an easy task.
Another related contributor to the failings of many marketplace startups is the selection of a target niche that is already being served by many different competitors attempting to do the same thing. This situation is related to the scale problem above, but slightly different, in that, the scale may be achievable if one can promote consolidation amongst the landscape of alternatives. For example, say you want to create an online marketplace for fresh and local produce grown in and around your hometown. This is an exciting idea, but you may struggle to gain traction with both buyers and sellers, as often this niche is already serviced by a bevy of local farmers markets or produce co-ops. The job of the entrepreneur is to develop a compelling reason for them to pool resources. And that decision must provide a value greater than the added (sometimes perceived) competition. Not an easy objection to overcome.
These examples are just a couple of the numerous different issues that entrepreneurs face when looking to create an innovative and new marketplace. Just because developing a marketplace is challenging doesn’t mean that it should not be given a try, as the pursuit of such development can be extremely rewarding.
There are a few strategies that can help entrepreneurs build up both sides of their marketplace’s ledger, simultaneously boosting the number of interested buyers and sellers to using your service. However, in my experience with entrepreneurs, their business plans often claim a grassroots approach will create traction. Only with quite a bit of luck, does this approach work. This is typically the hardest way to achieve success. Spending time tabling at community events, conducting digital marketing, and sending targeted emails offering sign-up discounts may be a fine way to promote your new product. But because you need to develop both buyers and sellers, you have to do it twice, with different messages, and at the same time so as not to create that imbalance. These are strategies that are much easier after you have gained some scale, but very hard to create scale.
If you understand the risks and are willing to put in the work, creating a marketplace-based startup can be a fascinating and rewarding experience; I’ve learned this first-hand, and have had some success with some of these strategies. While I must say that the challenges are numerous, the rewards are worth it if you understand the work that needs to be put in. With this in mind, I strongly encourage anyone interested in starting their marketplace to give it a shot. I invite questions about the topic and would be happy to share my insights with you to help give you the best chances of success in your endeavors.