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6 Things You Need to Know Before Building a Marketplace Startup

by Anna Klimenko
6 Things You Need to Know Before Building a Marketplace Startup

63% of marketplaces are generating more than $50 million annually and the other 37% are generating $100 million or more across 100 surveyed marketplaces in the US.

Marketplaces turned conventional eCommerce upside down by involving other industries into their whirlpool.

If you are already fueled enough by your idea for a marketplace and just need to research more details on how to start building it, read the following considerations with many vivid examples that will give you a deeper understanding. Who can become a new Airbnb, Uber, or eBay? Let’s find out!

What is a Marketplace?

An online marketplace is a type of eCommerce website that connects three parties: the sellers who want to sell their products or services, buyers who want to buy them, and a platform owner who regulates relationships between them and manages all the processes and transactions.

According to statistics, 52% of overall global retail sales belong to marketplaces. With 11% as an average commission taken from each purchase, it is not difficult to imagine the profits received by the platforms.

The majority of marketplaces greatly impacted the economy through the job market, employing 500 to 5000 people each.

At the same time, the entry risks are minimal as you do not need any inventory spending to build an online marketplace – so you do not need to produce or buy the products. What you do is connect people and play the role of the middleman. In spite of the seemingly simple structure, marketplaces have passed through many transformations and this is not the end. Let’s take a brief look at the whole chain of evolution.

evolution of marketplaces

The first wave (listings): 1990
Marketplaces emerged as a logical next step from Yellow PagesYelp and Craigslist were the pioneers that gave further inspiration to newer projects. These ‘listings platforms’ were limited in their functionality: just listings, search, and some reviews or payments to make the service more comfortable and trustworthy. These were mostly free of charge.

 

The second wave (transactions): 2007
Gradually there appeared more sophisticated services, like Angie’s List, TaskRabbit, or Thumbtack, which focused on customer experience and process automation. The features included better data structures for improved matching, reviews, and sometimes training to providers or monetization (taking fees for listing, transactions).

The third wave (delivery): 2009
An overwhelming mobile adoption, implementation of logistics processes, and an increase of interest to on-demand services gave us full-stack solutions like Uber and Glovo, which were available with a single click of a button. Here we had such features as matching customers and providers algorithms, dynamic pricing, processing secure transactions, and reputation creation.

The fourth wave (trust): 2015
The next level was to create an even more reliable and hassle-free service. Trust-building is a key concern, so platform owners were preoccupied with vetting and background checking users. The complex management of all these steps of services involved practices like hiring candidates for corporations at TopTal with a thorough background check, multi-step interviewing, and support. The representatives of this wave are Honor, Trusted, and Wonderschool.

What’s next?
In the 2020s, it is anticipated that marketplaces will make even more use of AI and ML to automate routine tasks and increase data security. Still, the competition for customer acquisition will only continue to grow.

Contemporary marketplaces strive for reaching the following goals:
marketplaces business objectives
As we can see, the most popular objective the businesses are focused on is a new product creation to provide customers with new experiences and convenience from using the services to stand out among others.

Now is the right time to enter this market with brand-new ideas corresponding to today’s audience’s needs. We are going to formulate the most indispensable tips to consider when you are only at the beginning of developing your way marketplace startup.

Tips for Starting a Marketplace

1. Create the value proposition as one of the most important success factors

The first reason for startup failure is that nobody cares for the idea you present to the market. In the great variety of existing platforms, why should anyone select your marketplace? What unique value can you offer them that others can’t?

To understand this, your first task is to thoroughly study the market and the competitive landscape to identify all the existing gaps in your current niche.

The true value of a marketplace is to make transactions possible where they normally wouldn’t occur without the experiences you deliver.

The first thing that makes a marketplace great is the ability not only to aggregate the market but also enhance it, bringing the customer experience to a never-seen-before level. Bill Gurley, a general partner at Benchmark, a Silicon Valley venture capital firm that funded many startups like Instagram, Snapchat, Uber, Twitter, and more, names ten factors of the marketplace success.

Let’s review how some of these factors combine in success formula taking Uber as an example.

Factor Example
New experience The application is comfortable for travelers who do not need to search for a taxi in an unknown place if they can simply use their app.
Technological breakthrough They created the ability for users to book a taxi from a mobile phone, track the driver’s location, send the location to friends, rate a driver, and share payments, among others.
Market extension Uber’s concept expanded to other countries out of the US, allowing travelers to use their service all over the globe while increasing the revenue of the platform. They created workplaces for millions of people around the world, and the cost is much lower.
Networking Uber accumulated drivers, creating a diversity of choice and the ability to provide instant service. Due to a system of ratings, passengers can view the credibility of the driver and contribute to the security with their reviews as well.

Lots of values for both sides of the platform! And with marketplaces, it is always a challenge to provide two-fold value – to providers and customers.

Other examples of value brought by famous marketplaces:

  • Using advanced technologies enhances the user experience by saving time and money and thus increasing loyalty to your platform. For example, Uber, Zillow, and Airbnb use AI-based technologies to analyze historical data. This allows them to predict prices, give tailored recommendations, and prevent frauds. Thus, for one of our clients, Arcbazar, the world-renowned architectural contests marketplace, we created an ML-based price recommendation system that suggests an optimal prize amount for design projects. This feature saves people time and nerve when they have to take a serious decision.
  • Upwork provided people an opportunity to find a job or employee from all around the globe with just a few clicks. It made it easier to find the necessary talent at an affordable price than ever before.
  • Booking.com would not be so popular if it did not cover almost all existing hotels in the world, giving people convenience that they do not need to search anywhere else. Suppliers also gain profit from networking as their customers, who are attracted by the variety of the providers, are more likely to find them on the platform rather than searching on global search engines.

Consideration #1: Find how you can make your service more valuable to people than those that already exist. Be different from others by using unique approaches, innovative technology, and expanding the market to other areas, especially those that are still underutilized by your competitors.

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2. Choose your type of the marketplace to plan a development strategy

There are three aspects we need to consider when choosing a type of eCommerce platform:

  1. Marketplace structure
  2. Specialization
  3. Trends

1. By structure
Depending on the type, you will be able to create a further roadmap of platform development and promotion.

There are two types of marketplaces which you can select from: vertical and horizontal.

  • Horizontal

Horizontal marketplaces are multi-category platforms that offer goods and services of a wide range. Amazon, Walmart, Taobao, eBay, JD.com, Alibaba are horizontal marketplaces.

They serve a larger audience, which means bigger sales and profits. However, these platforms experience fierce competition, as almost all marketplaces of this kind sell the same goods (i.e. nothing unique). That’s why they have to decrease the prices and thoroughly consider marketing campaigns for different groups of customers to get profits due to the volume of sold products.

  • Vertical

Vertical marketplaces are on the contrary focused on one or several narrow niches. These platforms work with smaller audiences but they can create more targeted campaigns. Sometimes they can even set higher prices as the competition in narrow niches is not so fierce. To effectively manage this type of marketplace, you need to understand the specifics of the niche and the target audience. Vertical marketplaces can take up such niches as automotive, banking, insurance, healthcare, real estate, education. Examples are Airbnb, Uber, EdEx.

Starting a vertical marketplace you can then widen it into horizontal when you feel the necessity to spread for more industries. For example, Amazon was launched first as an online bookstore and now they sell everything.

 

2. By specialty
Independent of the structural type of the marketplace, you can select the general direction of the goods and services you are going to accommodate on your platform:

Type Description Example
Goods Pre-owned goods, bespoke goods Etsy, eBay, Amazon
Food Food delivery, food suppliers, shared food EatWith, CaterNation
Services Errands, cleaning, childcare TaskRabbit, Thumbtack, Handy, Abcor
Transportation Transportation services, carsharing Uber, Lyft, Grab
Finances Cryptocurrencies, money lenders, crowdfunding Ourcrowd, KikStarter
Real Estate Apartments, offices, parking lots, venue spaces Airbnb, Cowodo
Healthcare Healthcare, wellness Helparound, Eaze
Education eLearning courses, higher education Coursera, Udacity, KHAN Academy, SkillShare
Corporate Supply chain, employee services, private label Twogo, Cargomatic
Utilities Telecommunications, energy OpenGarden, Fon, Mosaic
Logistics Shipping, delivery, storage Deliv, Shipster
Municipal Equipment, safety Munirent
Jobs On-demand workforce Upwork, Toptal, Fiverr

When building a marketplace startup, rely on your knowledge of the niche as you’ll have to get through to your audience and appeal to their unique psychology, and there is no better way as when you understand the products sold in your marketplace or use them by yourself.

3. By trends
If you look at the statistics of how people in Europe spend money, it is easy to identify the most popular areas your marketplace may succeed in:

Statistics of expendutures

  • 30% Housing
  • 23% Food
  • 11% Transportation
  • 9% Services
  • 7% Recreation and hobbies
  • 6% Healthcare and insurance
  • 5% Clothing
  • 3% Communication
  • 1% Education

You may use similar stats if you are hesitant about which niche to choose. However, the same research says that the market size is not always the key driver of marketplace success. Selecting a smaller niche but being able to satisfy the needs of both supply and demand is much more effective (e.g. Shutterstock: visual content stock, Airbnb: apartment rentals).

Consideration #2: Start with the vertical marketplace and then expand. Choose the niche that you understand and are interested in. Do not forget to check for the trends and local specifics to make your marketplace more targeted.

3. Choose the Right Business Model for Growing Your Profits

Did you know that the second most common reason for startup failure after the “no market need” reason is running out of money?

Did you also know that Amazon has not received any revenues for 6 years?

That’s why choosing the right business model is critical.

There are several fitting models to build a marketplace that you can select from:

marketplace business models

Which one to choose? Let’s review each of them:

  • Commission

A commission (aka ‘rake’ or ‘vig’) is a fee charged by the marketplace and calculated as a percentage of gross merchandise sales. This is one of the most common ways of getting net revenues for the marketplace. On each completed transaction between the seller and buyer, the platform takes a fee from the paid sum.

Commission only works when the fee amount allows users to get profit using the platform in spite of rakes they have to pay.

Usually, the biggest benefit for the clients is that the platform performs the role of a mediator in relationships between the seller and buyers to guarantee the fair deals and payments security.

Most platforms now use escrow method to support trust between the seller and buyer. This is a special bank account where the money is sent when the buyer purchases the goods or services and they are kept there until the buyer confirms that they obtained the goods or services. Only after that does the bank transfer the money further to the seller’s account after cutting the amount of the platform’s commission from that sum. This is used by Airbnb, Etsy, eBay, Fiverr, TaskRabbit, Uber, Upwork, and many other companies.

 

  • Membership/subscription fee

In this case, the platform can oblige users to pay at the moment of registration. On the one hand, it works as a filter for fraudsters as paying for subscription users at once confirms the seriousness of their intentions. But on the other hand, this monetization method can restrict many sellers from trying the platform as they need to pay in advance without assurance that their investments will pay off. To lessen the pressure and not to discourage hesitating users from registration, you can give them a trial period for free before to charge them.

Which platforms need this type of monetization? In many cases, a subscription is the only viable business model. For example, for marketplaces where it is hard to define the value of the services like Home Exchange, Workaway, etc. To define the price of a subscription, use this rule: the platform should give them more value than the sum they pay for the subscription.

Home Exchange allows unlimited access to their service for a year. The concept of the site is to give travelers an alternative to traditional commercial accommodation among 400,000 homes in 187 countries. The user pays a subscription fee which is either $15 per night or $150 per year. The services include a search of the homes around the world, host and guest data verification, 24/7 support in case of emergency, and other perks. As the platform in its essence is a network of non-commercial home rental services, there are no transactions to take a fee from as well as no listing fee as the market is not dynamic enough to add more and more listings.

HomeExchange
HomeExchange

 

Such famous companies as OpenTable went further and obliged their subscribers (restaurants) to install and use their reservation software which costs $1,295 in addition to a monthly fee of $199. That made some small restaurants switch to other, smaller reservation services, but many still stay with OpenTable because of its popularity.

Opentable API
OpenTable

 

  • Listing fee

In this type, you charge the seller for each listing created on the platform. The value proposition is based on the number of listings and the potential value they bring. Craigslist is an example of a platform that charges certain categories for their listings. This type of model is quite challenging as it is hard to attract people to post new listings again and again. That’s why it is better to mix this model with others. For example, Etsy combines listing fees with commissions.

  • Lead generation fee

The platform takes a fee for each lead whose contact details are sent to the matched seller. The seller is obliged to pay a fee for all leads, even those who did not convert. On the flip side, they do not pay commission from transactions and may serve the same lead for a lifetime without platform participation. The lead fee model makes sense only if the platform brings the high-value leads.

For example, Thumbtack takes a 20% fee for the lead that matches to the errand runner’s skills and schedule. When the task poster (lead) enters a request for some task on the platform, the system finds who of the taskers is the most fitting and sends them the leads contacts. However, Thumbtack taskers often complain of low lead conversion and blame the platform for sending them mismatched leads too often.

 

  • Freemium

This business model means that the basic functionalities are free. If users need to upgrade for more value-adding features they have to pay for the Premium package. There is always a risk that most of your users will be satisfied with the core functionality and will never buy a Premium feature set ever. So there should be a good balance of values for different sizes of business. The core free features should be valuable and competitive enough to attract beginner users, i.e. give all necessary instruments, but only for the starting period. When they scale up and feel the necessity of more space and advanced features, they will have to buy them. Again, this model can best work in combination with others.

Thus, Etsy provides paid options in addition to commission and listing fees. Etsy Plus allows advanced shop customization, custom web address, restock requests to notify users of the availability of the goods in stock, and discounts from partners.

  • Featured listings and ads

In certain platforms, listings and transactions can be chargeless, but the marketplaces provide clients an opportunity to buy better visibility through featured listings and ads.

For example, OpenTable takes $99 a month for including a restaurant into featured ads in OpenTable’s dining guide.

This method is appropriate when the platform has a large database of listings to respond to a real interest in users to pay for being seen. The reverse side is that people perceive ads suspiciously and consider those who pay for ads to be expensive and irritating. So, this is an ethical question: will you show the paid ads as ‘sponsored listings’ or not?

Who can get value from this type of monetization are narrow niche platforms that allow their services for free and profit from ads placed by partners who also relate to the niche.

For example, Arcbazar, the interior design marketplace that we developed, connects designers from all over the world with customers who post their requirements on the platform in the form of a contest. The marketplace allows furniture and decor shops relevant to the interior design to advertise their goods. For Arcbazar we created a feature that allows contestants to tag the brands and shops right on their design projects so that the customer could at once see where to buy all the project elements.

Arcbazar
Arcbazar – brand tagging on the interior design project

 

Consideration #3: Not all business models equally fit all marketplaces. Give the clients several options to choose from. People love to have something for free. The value of using the platform should give customers the feeling that it is worth its money and even more.

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4. Calculating the price: How much should you charge to balance the interests of all parties?

The next big consideration in building a marketplace that tortures all startupers is how much you should charge your clients to make your business profitable and at the same time attractive to users. Let’s split this question into subquestions:

  • How much do other platforms take?

Different marketplaces set different pricing terms. As you can see below, the commission amount can vary incredibly from 3% at Etsy to 85% at Shutterstock, while the average commission is 10-20%. Instead of a percentage, the marketplace can set a fixed price, say $5 on each transaction. Also, some marketplaces range the fees depending on the categories of the products (like Amazon, which charges from 6% up to 20% for different product categories) or the price amount (like Airbnb, which takes less commission for more expensive transactions).

Here are some commission rates used by marketplaces as of 2019:

commissions

  • How is the price built?

Small rates are usually set when the supplier’s production costs are big and the margin is small.

For example, Etsy’s goods are mostly handmade items that are produced in limited quantity as it takes time and materials for production, so the price for the goods including the margin and the commission cannot be too high in order to be attractive to buyers.

On the other end, stock photography platforms can sell a photo for $1 while giving the photographer only $0.25 and getting 75% of the profit. Moreover, the price is opaque as nobody actually can define the real value. The same photos can be resold an unlimited number of times without additional effort in production, so the fee can be high.

  • What price should you start with?

To start a new marketplace, you will have to attract as many people as possible, and one of the strategies is making the price lower than your competitors while giving users more value. But keeping low prices on a constant basis is not profitable, so your aim is to create a sufficient database of users to provide variety to clients and then gradually increase the prices.

A good example is Booking.com. To enter a market that was already occupied by large players such as Expedia, Booking set the lowest possible commission of 10% from each transaction (compared to the other competitors’ 30%) and thus managed to collect a huge database of listings, including the smallest hotels that could now afford registration. The abundant supply draws customer attention after they had already migrated to the website and were hooked by loyalty programs to become lifetime clients.

However, Booking would not have become as rich and famous as it is if they continued taking their 10% only. But increasing the prices was risky, because in the same way as they attracted suppliers, they could quickly lose them if they started charging drastically more. Understanding the risks, Booking introduced a bidding system that allowed providers an opportunity to be displayed higher than their competitors in searches. Thus, without increasing the actual commission pricing for all customers that would lead to a massive sing-off, they motivated people to pay more and more for having a better placement and at the same time blame their competitors for bigger fees rather than the platform.

expedia vs booking
Expedia vs Booking vs Airbnb

 

  • Seller or buyer: Who should pay?

Platforms mostly take payments from the providers, but some marketplaces prefer to charge only buyers or split the commission between both sides to lower the pressure on the suppliers. For instance, Airbnb takes profits both from hosts (3%) and guests (6-12%), maximizing the margin of the accommodation providers and stimulating them to become super hosts who get extra perks.

Summing it up, you can make a consideration #4: that your price depends on:

  • The type of marketplace. Vertical marketpalces, as a rule, can change more as their suppliers can afford to set bigger prices because there is little competition in a narrow niche.
  • The margin of suppliers. If they produce something difficult to evaluate, the price can be bigger as nobody can estimate the real price. But the goods and services with low margins should be commissioned less.
  • Your current strategy. If your strategy is to broaden your supply base, it makes sense to make prices lower compared to your competitors. Or you can increase the price providing users additional value that will overlap the high price by the benefits it brings.

5. Building trust to build loyalty

In times of listing hijacking, counterfeit products, and fake reviews, it is a challenge for a marketplace to build trust in customer-platform relationships.

Building trust is providing customers with the services they are familiar with and already trust. Investigate the reasons for the marketplace failures in your niche or area and you will definitely find some hints on bad trust strategy. For example, at the beginning of the 2000s, eBay wanted to enter the Chinese market. However, their payment system, PayPal, was not common in the country and users just did not perceive it as a reliable and comfortable way to acquire. Alibaba learnt from this lesson and implemented Alipay that supported the most common payment methods of the country, and due to the escrow could guarantee the safety of deals. This way the platform conquered the market and beat their main competitor.

The next thing that you should pay special attention to is user verification. In recent years, eCommerce has suffered listings hijacking. This is when a user registers in the system, quickly sells goods – for example, cheaper than competitors – takes payments, and disappears without sending anything or sending counterfeit products.

To detect fraudsters, you should verify accounts and conduct user background checks with the help of a third party. Thus, when we created NoCowboys, the largest tradesman services marketplace in New Zealand, we paid special attention to the reviews verification with special algorithms that take into account many factors like registration, IP address, frequency of written reviews, ability to prove the visit of the tradesman.

ratings logic
NoCowboys – Reviews

As your service grows, you can solidify the trust by providing insurance for all the deals taking place on your website.

Consideration #5: Do not neglect the question of trust as once you lose the client’s faith, it is not easy to earn it back.

Here is a checklist of what you can do in terms of security and trust-building:

  • Require registration and confirmation by email or phone (paid registration can also prevent fraudsters from signing up)
  • Verify IPs
  • Fulfill background check
  • Track suspicious behavior and flag spam patterns
  • Blacklist bot-generated emails, phone numbers, and content
  • Ask buyers for reviews, including private reviews to help you check the real quality and get feedback on improvements
  • Implement a trustful and popular payment method
  • Support trust with insurance for violation of agreements between provider and customer.

6. Start with MVP and Minimize Costs

Is there any need for explaining the importance of being fast when you are launching a startup? In technology and business, any procrastination is akin to death. Somebody will always be faster.

Moreover, starting marketplace startup development with MVPs, the most essential features of your product, you will be able to launch to the market in the early stages to test your ideas, collect first feedback and quickly enhance your product. MVPs allow you to minimize the costs of your startup at least for the initial period while you are in a ‘testing mode’.

This is the concept of the Lean Startup that we recommend you follow to minimize the risks of startup failure. You should not waste time for the perfection of your product until you make sure that people will use it as you planned or use it at all.

Still, you should use common sense even when you are in a hurry to avoid pushing out a mediocre product. Listen to Rand Fishkin who said:

“My recommendation is to make your MVPs in-house, dogfood them with your teams and a few select customers, but don’t release them. Wait until those first users (internal & external) are saying “whoa, this thing is pretty amazing.” Then release. The extra time may feel frustrating, but if 30-90 days (or more if you can afford it) of extra effort produces a product that gets over the hump of extraordinary, it’s worth it.”

exceptional product
EVP vs MVP

From this first feedback, you can take lots of value. You may find how people perceive it, use it, and even break it. It may turn out that people are confused with some features or use them in a way you did not anticipate. That may give you extra scenarios of further development and bring you fresh ideas for improvements. Thus, when the ‘big day’ comes you will be much more confident that your product works for others, not only for you.

Consideration #6: Be quick by starting your project with MVPs and then collecting first feedback to gradually extend your functionalities. MVPs allow you to decrease the cost for eCommerce marketplace startup at the initial stages. Steps for MVP building are:

  1. Collect requirements
  2. Prioritize features and select the most valuable for the start
  3. Launch quickly
  4. Get feedback from the testing group and early adopters
  5. Make improvements and iterate

Airbnb, Shutterstock, Upwork, or… What will your project be?

Of course, this is by far not all that you’ll need to think over, so here are more in-depth articles on specific marketplaces that you may be interested in as well:

How to Apply This to Your Business

In this article, we wanted to clarify the most essential questions that you need to consider before building a marketplace in any niche you choose. In 10 years of work in custom web development, we have created many successful marketplaces. The first priority for us is the security of data and transactions for which we use only the most innovative and reliable technologies and partnerships.

We are proud to be a development partner for such large players as Arcbazar and NoCowboys, marketplaces that successfully provide services in their respective niches.

We will be glad to start working on your project. All that we need is to get acquainted with your idea and gain an understanding of the business logic and features you want to have. We can also offer our help in creating specifications for your startup. Let’s start our collaboration today!

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