The Lean Marketplace: A Practical Guide to Building a Successful Online Marketplace Business

The main reason online marketplace businesses scale so well is that you don’t need to have your own inventory to run one (View Highlight)

Airbnb’s CEO Brian Chesky are a perfect illustration of what it took:

Marketplaces are rarely overnight successes—most of them require patience to reach critical mass. (View Highlight)

While software development is relevant to the success of your marketplace, it is not enough to make it successful. We have seen many cases of entrepreneurs putting all their initial resources in the development of their platform, and then realizing that nobody is interested in using it. We call marketplaces that are technologically well built but fail at attracting users “desert platforms”. (View Highlight)

you should focus on finding 10 people who are really passionate about your concept. (View Highlight)

What I’ve learned from [the Airbnb founders] is to listen to your users early on and engage them in the process at every step of the way. Don’t just meet them; engage them, converse with them, and prod them to find out what their problems and needs are. People often start companies to solve their own problems, but, over time, all entrepreneurs recognize that, to be successful, the product has to be built for a wider array of end users.

In the report Sharing is the New Buying: How to Win in the Collaborative Economy, marketplace expert Jeremiah Owyang shows that most people use peer-to-peer marketplaces for the same reasons they consume products in general: to get a cheaper price, better quality, or for convenience. People may claim that sustainability and a sense of community are important values to them, but these values do not necessarily guide their actions. If the thing they need is expensive, or the quality is bad, or it’s not accessible, then that’s a real problem (View Highlight)

Not solving a real problem is one of the most common reasons for marketplace failure. Make sure your marketplace does not fall into this trap. (View Highlight)

How can you be sure you have found a problem that is worth solving? Marketplaces are particularly tricky since you need to solve a problem for both sides: the customer and the provider. In other words, solving one big problem might not be enough—typically you will need to solve two. (View Highlight)

The experience with Airbnb is totally different. You can see apartment reviews, the hosts have verifications, and even our mutual Facebook friends are displayed. Airbnb has brought trust to a market where there previously was none, and because of that, they’re making the experience a lot more pleasant for everyone. (View Highlight)

Ironically, Craigslist, the king of liquidity, doesn’t have a reliable method of determining a user’s reputation. While this may be acceptable for certain categories (e.g. selling low-value goods), it can be an important decision criterion for categories with high risk (e.g. babysitters, dating, apartment sharing) or high ticket investment (e.g. trading used high-end goods). (View Highlight)

smoothly.

Along with not solving the right problem, another common reason why marketplaces fail is having too broad a focus. A narrow focus is especially important during the early days of your business, when your resources are limited. (View Highlight)

Marketplace businesses are long-term initiatives. To build a sustainable and successful marketplace, you need to find a revenue stream that will finance its operations. (View Highlight)

The biggest challenge in getting the commission model to work is to provide enough value for both the customer and the provider. If your users do not get enough value from your platform, they will find a way to circumvent your payment system, and you will not get paid. How do you prevent this phenomenon (often called disintermediation (View Highlight)

One way to get around this is to offer heavy discounts for early adopters, or even lift the fee completely to build the initial user base. (View Highlight)

Vayable started as a pure peer-to-peer marketplace where individual people offer unique experiences to others, but after failing to get enough traction, decided to pivot to build a concierge service for custom vacations (View Highlight)

If you fail to provide enough value, users will find ways to circumvent your payment system to avoid your fees. This is called disintermediation or platform leakage, and it’s a challenge faced by many marketplace founders—even sometimes causing marketplaces to go out of business. (View Highlight)

The best strategy depends a lot on your particular concept. Does your marketplace deal with high-value or low-value items? Is it about selling products, renting them out, or providing services? Is the marketplace consumer-to-consumer (C2C), business-to-consumer (B2C), or business-to-business (B2B) (View Highlight)

If the payment is made in advance, the customer takes on the risk that the provider is a no-show or that they do not get the product they ordered. Again, the marketplace can help by becoming a middleman. An “escrow” service (sometimes also called “delayed payout”) is one way to do this; the marketplace captures the payment and notifies the provider about it, but doesn’t move the money to the provider before they have completed the service in question. (View Highlight)

You could also consider making it harder for people to exchange contact information before a transaction takes place. This approach is currently in use on a number of big platforms. Airbnb removes contact details (like email addresses and phone numbers) from private messages between users. It is, however, always possible to circumvent this limitation—by writing a phone number with letters, for instance. Airbnb says they do this to protect their users, but it is quite clear the underlying motive is to prevent users from bypassing their payment system (View Highlight)

Thinking about your providers as partners is often a good strategy. Your goals and their goals should be aligned: if they win, you win. If you try to extract too much value without providing enough for them, this reciprocal relationship is shattered, and your business will ultimately fail (View Highlight)

High profit margins do not equal maximum profits. Total profit is profit margin multiplied by turnover. Maximum profit is thus obtained by the profit margin that yields the largest total profit flow (View Highlight)

An important factor is whether your marketplace is supply-constrained or demand-constrained (View Highlight)

High rakes are a form of friction precisely because your rake becomes part of the landed price for the consumer. If you charge an excessive rake, the pricing of items in your marketplace are now unnaturally high (relative to anything outside your marketplace). In order for your platform to be the ‘definitive’ place to transact, you want industry-leading pricing—which is impossible if your rake is the de facto cause of excessive pricing. High rakes also create a natural impetus for suppliers to look elsewhere, which endangers sustainability. (View Highlight)

it’s always difficult to raise prices, so starting off with a higher price and then reducing it if needed is probably the better strategy. If you wish to get more supply in the beginning by offering cheaper pricing—which is often a good idea—you should consider offering time-based discounts (“First 6 months with 50% discount on fees!”). It is important to clearly communicate that pricing will return to normal levels after the initial discount period. (View Highlight)

instead of maximizing output, you should maximize value (View Highlight)

• What problem(s) are you trying to solve?

Jonathan Goulden, former director of product at Airbnb, says that of the most important questions that define every marketplace is understanding whether you have homogenous or heterogenous supply (View Highlight)

Delivery marketplaces like Uber and Instacart are examples of matching marketplaces. (View Highlight)

Most marketplaces fall under the heterogenous supply category, or what Goulden calls “search marketplaces”. All product marketplaces are like this: the user always needs to compare different products and their prices. Most service marketplaces also fall into this category. If you’re looking for someone to write you a piece of software, renovate your home or babysit your children, there are so many criteria that apply only to you that automatic matching (usually) becomes impossible (View Highlight)

If search engines were perfect, search alone would suffice: by describing your exact needs in your own words, the search engine would always understand what you are looking for. (View Highlight)

The vertical platforms have an advantage. Since they focus on only one thing, they are often able to do it extremely well. They can build their platform solely around the one problem their users have, and thus provide a great experience. (View Highlight)