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How to Create a Marketplace [The Ultimate Guide for Startups]

by Anna Klimenko
 

52% of overall global retail sales belong to online marketplaces. With an average commission of 11% being taken from each transaction, it is not difficult to imagine the magnitude of the profit from such platforms.

In fact, out of 100 online marketplaces that were surveyed in the US, 63% generate $50 million annually and the other 37% generate more than $100 million. At the same time, there are almost no expenses for manufacturing, warehouses, and equipment. eCommerce gives anyone the chance to start a profitable business with minimal investment.

On this page, you’ll find all you need to know about building a marketplace — from idea to project launch. Let’s get it started!

SECTION 1Defining the Type of Your Future Marketplace

First of all, let's begin with a definition. What is a marketplace website? An online marketplace is a type of eCommerce website that connects three parties:

  • Sellers or service providers
  • Buyers
  • Admins

Before starting a new platform, you should thoroughly study the market. Let’s see what aspects are important to research in advance to build a marketplace.

1. Monitor Trends

It will be useful to look at the general market trends as well as emerging ones (e.g. trends related to COVID-19).

For example, in recent years, usually, people in Europe have spent money in the following proportion:

Statistics of expendutures

As we can see, most spendings relate to Housing, Food, and Transport. In 2020, the Covid-19 pandemic has shifted priorities, and no one knows how long these figures will be accurate. Niches that were standing in the back of the market suddenly have moved forward, leaving the top-performers behind. Healthcare, food delivery, and products for babies showed a 300% increase in revenue, while businesses selling clothes and luxury goods have closed many of their stores and suffered losses.

 

Trends are only the tip of the iceberg when it comes to customers’ future behavior, but they may point you in the right direction and ease your worries.

2. Choose the Marketplace Type

Amazon started as an online bookstore. Then, Jeff Besos thought it was not enough to sell just books, so he started adding categories until Amazon became an “everything shop.” It transformed itself from a vertical marketplace (online book store) into a horizontal marketplace (general goods store).

Does it mean that all marketplaces should start as a one-category marketplace and then expand to more products? Not necessarily. But this is a common scenario.

Today, the market has both horizontal and vertical marketplaces. Let’s review their peculiarities.

Horizontal

Amazon, Walmart, Taobao, eBay, JD.com, Alibaba are all examples of horizontal marketplaces. They offer goods and services in various categories.

Diversification allows them to cater to a larger audience, which leads to bigger sales and profit.

The reverse side of ‘no specialization’ is fierce competition because almost all horizontal marketplaces sell the same goods. Competition forces them to decrease prices and employ aggressive marketing campaigns targeted at different groups of customers to ensure large volumes and bigger profits.

If you plan to create a horizontal marketplace, you may want to read one of these articles:

 

Vertical

Etsy, Airbnb, Uber, EdEx represent vertical marketplaces. These are niche-oriented platforms that work with smaller audiences, but their profits are definitely not small.

Their advantage is that they can create more targeted marketing campaigns. They can set higher prices because the competition in narrow niches is not so great. To effectively manage this type of marketplace, you need to understand the specifics of the niche and learn the needs of the target audience.

From a technical and marketing point of view, starting a vertical marketplace is easier. Later, you can widen it horizontally and expand into other categories.

If you are going to build a marketplace website of this type, you may like to read one of these articles:

Next, choose the niche for your marketplace.

3. Choose the niche

What areas are worth attention for building an online marketplace?

Real Estate

Real estate is a multi-billion dollar market. Like most everything else these days, people are searching for property online. A huge majority of Americans, 90%, use agents when they want to buy or sell a home. But to find an agent, people use the Internet. Real-estate platforms can help them speed up their search using exact parameters. The platforms can subdivide into smaller niches like residential, commercial, or industrial listings. Pay attention to the areas that are still untapped. Read these articles for more inspiration:

 

Errand-runners and tradesmen marketplaces

In the past, if people needed a plumber, builder, or nanny, they could ask for a recommendation from a neighbor or look up the ads in the newspaper. Today, it is much simpler with online marketplaces for on-demand services. The popularity of such platforms is growing every year as more and more people feel comfortable hiring a specialist after studying his or her profile and online reviews. Learn how to build such a platform here:

 

Healthcare marketplaces

Finding a doctor or a caregiver is easier with online platforms for on-demand care services where you can choose from hundreds of nurses in your neighborhood. Even previously illegal medicine like cannabis now can be found on specialized portals that help find the nearest pharmacy. Read our articles on healthcare platforms to get more information:

 

Financial marketplaces

Borrowing money from friends is often impossible. Especially if you need a large amount. Banks demand high credit scores and charge high interest. Peer-to-peer lending and crowdfunding platforms can help. Every year around $18 billion is crowd-funded in North America alone! If you wonder how a startup can compete with Kickstarter in crowdfunding and with Lending Club for loans, then you should dig deeper to find narrower niches in these areas. Get crowdfunding and loan startup ideas here:

 

Education marketplaces

Life-long education is a must in today’s business environment. Foreign languages, Harvard courses, MBA, mindfulness, yoga, nutrition, you name it. Anything under the sun can be studied online. And while self-paced courses are just a part of the education system, millions of students worldwide are looking for an online tutor. If you also believe in the power of eLearning read these guides:

 

Jobs recruitment marketplaces

Today, hardly anyone looks for a job in the newspaper. The chances are much higher to find a job via the Internet. Job marketplaces like Glassdoor and Indeed are incredible when one wants to find career options. Upwork and Fiverr are the leaders of the freelance market. But the demands of the audience rapidly change and you may be able to find an unexploited opportunity!

 

SECTION 2Determining Your Marketplace Value Proposition

The most common reason for a startup to fail is that it does not solve a market problem. With the great variety of existing platforms, how can you build a marketplace website that will be competitive in the market? What unique value can you offer customers that others can not?

The first thing that makes a marketplace great is the ability to not only consolidate the market offerings in one place but also to enhance the service, bringing the customer experience to a never-seen-before level.

Bill Gurley, a general partner at venture capital firm Benchmark which funded many startups like Instagram, Snapchat, Uber, Twitter, and more, names ten factors of marketplace success:

  1. New experience. The Uber application made it comfortable for travelers to search for a taxi in an unknown place by simply booking it through the app.
  2. Economic advantage. The marketplace should help people save their resources, time, and money. Upwork allows companies and individuals to quickly find quality specialists in any part of the globe while still saving money.
  3. Technological breakthrough. Technologies simplify many routine processes. Uber created the ability for users to book a taxi from a mobile phone, track the driver’s location, send the location to friends, rate the driver, and share payments. For one of our clients, Arcbazar, an architectural contests marketplace, we created an AI-based price recommendation system that suggests an optimal award sum for project winners. This feature saves clients time and eliminates stress when they have to make a decision.
  4. High buyer and supplier fragmentation. Catering to different audience segments, you attract more people to your platform. For example, Airbnb provides accommodation options for different types of travelers — from economy to luxury. That increases the marketplace value and revenue.
  5. Ease of supplier registration. A difficult sign-up process may de-motivate the businesses from registration. For example, to start selling goods at Alibaba, vendors need to endure a legitimacy and verification procedure. On the contrary, at Etsy, you can just create a profile and start selling right away. However, verification is important for trust-building so in many cases it cannot be omitted. Just think of facilitating the process with the help of special services.
  6. Demand size. Make research on if the market is ready and big enough to have an online alternative. Some industries, like Healthcare, are huge but the offline players are very strong and hinder the new online platforms so it may take a lot of persistence to break through the hurdles.
  7. Market expansion. Uber’s concept expanded to other countries outside 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 made the trips cheaper than it was by traditional taxi.
  8. Liquidity. Uber, Airbnb, and Amazon satisfy the popular needs of the masses, and that increases their popularity. Vertical marketplaces with rare goods and services run the risk of low traffic.
  9. Payment Flow. The marketplace should charge the commission when the customer pays to the seller. Such ‘invisible’ cutting of the fee during the transaction is better than billing the supplier a large sum at the end of the period. Psychologically, such charge is not perceived by the sellers as an expense and, thus, brings less frustration.
  10. Networking. Uber attracted many drivers, creating a diversity of choice and the ability to provide instant service. With a system of ratings, passengers can view the credibility, reliability, and safety of the driver.

 

SECTION 3Choosing a Business Model

The next question you’ll probably ask is how to start a marketplace website that will make money? There are several business models that you can select from: Let’s examine how to build a marketplace website of each type:

Commission

A commission (aka ‘rake’ or ‘vig’) is a fee charged by the marketplace on each completed transaction between the seller and buyer. This is one of the most common ways of getting revenue from the marketplace.

Most platforms use the 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 to the seller’s account after subtracting the amount of the platform’s commission.

Vertical marketplaces, as a rule, can charge more because there is little competition in a narrow niche. As you can see below, the commission amount can vary widely.

For example, compare fees of Etsy (a platform that sells a wide variety of goods) to Shutterstock (a narrow-niched platform that sells creative content).

Marketplaces business models

Membership/subscription fee

In many cases, a subscription is the only viable business model. For example, for marketplaces like Home Exchange, Workaway, etc. where it is hard to define the value of the services.

The platform can require users to pay at the moment of registration. On the one hand, by paying for a subscription, users confirm the seriousness of their intentions. On the other hand, sellers who are not sure that the platform fits their needs may be discouraged from registration. For such users, you can give a free trial period. Nevertheless, even a small subscription fee will provide a regular profit whether subscribers use the platform or not.

OpenTable not only takes a monthly fee of $199 but also requires its subscribers (restaurants) to install and use reservation software for $1,295. Such requirements make some small restaurants switch to other, cheaper reservation services. But many stay with OpenTable because of its popularity.

Opentable API

Listing fee

The seller pays for each listing created on the platform. The value proposition is based on the number of listings and the potential value they bring. This 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 that matches the seller’s services. The seller is required to pay a fee for all leads, even those who did not convert. On the flip side, they do not pay a commission for each transaction and can serve the same lead for a lifetime without involving the platform again. The fee-for-lead model makes sense only if the platform attracts high-value leads.

For example, Thumbtack takes a 20% fee for a lead that matches the errand runner’s skills and schedule. When the task-poster (lead) submits a request for some task on the platform, the system looks for the most suitable taskers and sends them the leads’ contact information. However, Thumbtack taskers often complain of low lead conversion because the platform sends them inappropriate leads.

Freemium

This business model means that the basic functionalities are free. If users want to upgrade for more 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 membership. So there should be a range of options for different businesses. Again, this model works best in combination with others.

Etsy provides paid options in addition to commission and listing fees. Etsy Plus allows advanced shop customization, custom web address, notifications that goods are in stock, and discounts from partners.

Featured listings and ads

In certain platforms, listings and transactions can be free, but clients can pay for better visibility through featured listings and ads.

For example, OpenTable takes $99 a month for including a restaurant among the Featured Ads in OpenTable's dining guide.

This method is appropriate when the platform has a large database of similar listings competing with each other. The downside is that people are suspicious of sponsored ads and consider these businesses expensive.

Narrow niche platforms with free listings can also get profit from affiliates placing ads of partners related to the niche. For Arcbazar, the interior design contests marketplace, we created a feature that allows contestants to tag the decor and furniture shops right on their design projects. The customer is able to see where to buy all the project items without additional searching.

Arcbazar

 

 

SECTION 4Online Marketplace Challenges and Solutions

Though each niche will definitely have its own peculiarities, there are three common challenges for all marketplaces. They are appropriate pricing, efficient search, and building trust.

Let’s see how to create a marketplace app with those challenges in mind.

1. Choosing the right pricing strategy

Starting a new marketplace, you will have to attract as many people as possible and platform service pricing plays a major role in this.

For example, to enter a travel market that was already ruled by Expedia and some other large platforms, Booking had to attract as many hosts as possible, and the low fees were the best possible way. So, they took 10% while others required up to 30%. With this strategy, they managed to collect a huge database of listings, including the smaller hotels that could not afford big commissions. When Booking got enough accommodation offerings in their database and increased the number of travelers, they could charge as much as they wanted. But increasing the prices at once was risky, because in the same way as they attracted suppliers, they could quickly lose. That’s why Booking introduced a bidding system that allowed providers to compete for higher ranking in the search. Thus, without increasing the commission, they motivated people to pay more for a better position.

So, if your strategy is to broaden your database of suppliers/sellers, it makes sense to charge a lower commission than your competitors and propose an extra change for some marketing options.

expedia vs booking

Who should pay?

One more question for platform owners is, who to charge — seller or customer?

Platforms usually take payments from the providers, but you can also build a marketplace app that will charge only buyers, or you can split the commission between both sides to lower the pressure on the suppliers. Or you can divide the fee between brothers, like Airbnb does, charging both hosts (3%) and guests (6-12%), maximizing the profit.

How is the price built?

Marketplaces usually charge small commissions 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 quantities because production is lengthy and materials are costly. Therefore, the platform should try to keep the commission low so the items will be attractive to customers.

On the other side, if the price of the goods or services is opaque as nobody can define the real value, the fees can be higher. For example, stock photography platforms can sell a photo for $1 while giving the photographer only $0.10, making a 90% profit. The same photos can be resold an unlimited number of times giving the author constant revenue without additional production costs.

2. Searching and matching

Any peer-to-peer marketplace tries to help buyers and sellers find each other quickly and easily. There are two ways to optimize search: Centralization and Decentralization.

The centralized approach is used when goods or services are homogeneous, i.e. taxi-hailing or food delivery. Users of such services need to be serviced quickly and easily. They do not need a variety of options just to get a taxi. So, the optimal search for such a marketplace has few filters ‒ often only zip code (like at Instacart) or geolocation (like at Uber).

The decentralized approach is used on the platform where the options are important. Airbnb is an example of such a platform. Each detail is important: location, number of rooms, check-in hours, commodities, breakfast, interior, rating, and price. Etsy is another great example of a peer-to-peer marketplace with a decentralized search that helps to find the exact match among more than 35 million unique products. The decentralized approach often requires more sophisticated tools like Personalization and Recommendations based on Machine Learning.

3. Trust

In today’s climate, when lists are hijacked, counterfeit products are common, and fake reviews abound, the trust of customers means everything to a marketplace.

How to start an online marketplace that customers will trust? Here is what you can do:

1. Give users services and tools they are familiar with and already use.

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 think of it as a reliable and comfortable way to transfer money.

Alibaba learned from this lesson and implemented Alipay that supported the most common payment methods of the country. What’s more, by using escrow, they guaranteed the safety of the deals. In this way, the platform conquered the market and beat its main competitor.

So, investigate the reasons for marketplace failures in your niche and you will see what to avoid.

2. Create a safe environment

You should pay special attention to user verification. In recent years, hijacking listings has become common. This is when a user registers in the system, quickly sells goods (often more cheaply than competitors), collects payments, and then disappears without sending counterfeit products or anything at all.

To detect fraudsters, you should verify accounts with email or IP verification, or the help of third-party services specialized in and user background checking. As your service is growing, you can solidify trust by contracting with an insurance company to cover all the deals taking place on your website.

For NoCowboys, the largest tradesman services marketplace in New Zealand, we created special algorithms for review verification. They take into account many factors like registration, IP address, frequency of written reviews, and the ability to submit a photo of the bill to prove the review authenticity.

Reviews

 

The following checklist should help you make your marketplace bullet-proof:

trust and security of a marketplace

SECTION 5Steps of Marketplace Development

Now let’s move on to the technical part and plan how to build an online marketplace.

1. Discovery phase

During the discovery phase, you will identify business goals, and user roles, and collect all the requirements of the future software. Our Business Analyst, together with our Project Manager and Team Lead will analyze your project from different angles and create system requirements specifications (SRS). This document should describe the system functionality, its features, wireframes, measurable deliverables, timeline, and budget estimate. This will cut the development time, allow the team to get an overview of the scope of the tasks, and optimize the priorities. This phase may take from two weeks to a couple of months depending on how specific your plan is.

2. Design phase

Just as building a house is impossible without architectural drawings, software development must also start with web design. Programmers need to have a visual representation of the User Interface. There are many ways to get a design. You can buy a ready template; or you can order a custom design from a freelancer, from a web studio, or from our in-house designer. When the design is ready, we can start coding.

3. Content phase

Start creating content in parallel with the first steps because this phase takes a long time. You will need to fill the pages with text, images, SEO keywords, contact details, terms and conditions, links, and other content that will build a connection to the users. Just like in the design phase, you can order content from specialists or create it on your own.

4. MVP phase

Before jumping into long-term, costly development, you can create a minimum viable product and test it in the market. You will be able to get feedback from users before building the final version of the software or application.

An MVP allows a startup to launch faster with minimal investment. It is enough to build core functionality that represents the main idea to the customers. This approach allows the startup to be flexible and to change the product early without the serious time and money loss.

What is even more important is that you can create an MVP without coding on your own. Use one of these methods to create an MVP.

5. Enhancement and maintenance phase

Launch the product as soon as you get a functional product that fulfills its main purpose. Collect feedback and make valuable changes. It may turn out that people start using your product differently than you planned, and you will decide to change the functionality. The main goal is to test the product in the wild and make sure it is viable and worth further investment. During the next iterations, you can gradually enhance your app by adding new features and updating services.

SECTION 6How Much Does it Cost to Develop a Marketplace

How Much Does it Cost to Develop a Marketplace?

Each marketplace has its own peculiarities that influence development time and budget. Our team develops fully customized projects that cannot be created with off-the-shelf solutions like WordPress or Shopify — there is no fixed price for all solutions.

The total cost of the project depends on many factors:

  • The readiness of the software requirements specifications (SRS)
  • Stage of the project (some projects were started before us and need remodeling or enhancing)
  • The complexity of the functionality
  • Uniqueness of features
  • Integrations with other services
  • The urgency of the project

Many features are more or less similar from project to project. Registration, user profile creation, search, payment integration, and reports are the core features of any marketplace. A marketplace with basic features can be estimated in around 600 – 900 hours and the costs start from $21,000.

Then, depending on the marketplace type and specifics, the features will differ. For example, to build a website like Etsy, you will also need such features as Seller verification, Listing pages, Shopping cart, Order management, Shipping integration, Refunds, and Reviews. You will probably need an additional 450 – 700 hours and $16,000 – $24,500 to launch the final version.

Besides basic and typical features, you’ll need to add a touch of uniqueness — with features that add value to your marketplace startup:

The price for these features is calculated individually. It is impossible to estimate the volumes of processed data and the complexity of connections with other parts of the system without having a full understanding of the project.

Here we gave rough estimates of the typical marketplaces.

Wrapping Up

In this guide, we answered the most essential questions on how to launch a marketplace. In over 13 years of custom web development, we have completed more than 200 successful projects. The first priority for us is the security of data and transactions; therefore, 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 and profitably 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 understand the business logic and features you want to have. We can also offer our help in creating specifications for your startup. Let’s start working together today!


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