How To Build a Marketplace Startup That Scales
Marketplace rules have changed dramatically, and they’ll continue to change quickly
Make no mistake, running a business that monetizes someone else’s output will always be a slippery slope.
The idea seems simple. Let’s look at the website on which you’re reading this post. Medium is a marketplace that collects writers on one side, readers on the other. They charge only those readers who want to pay a reasonable amount for more of something they already want. Then they take a tiny cut from a massive number of transactions.
If you’re old enough to remember Superman 3, or any of the movies like Office Space that used the “fractions-of-pennies” plot device, the idea of a marketplace model is just like that.
There’s a reason that model is so tempting, but as those movies proved over and over again, it’s easy to do it wrong and end up in a lot of trouble.
Chicken and Egg Part 1
So which came first at Medium, the talented writers or the paying readers? How do you convince quality providers to offer their product when you have little active demand from customers to purchase that product? How do you attract cash-waving customers to your marketplace when you don’t have a high-value product to offer them?
This is where most marketplace startup ideas die. It’s not that there isn’t a market for the product or service, it’s that it’s incredibly difficult to build that market from scratch.
Most — not all — but most of these marketplace startups solve this problem by casting an incredibly wide net for providers, because that’s easier. It’s not a big deal keeping a provider on hold while you build a customer base to purchase their goods or services. It’s a lot more troublesome to keep paying customers on hold as their demand goes unfulfilled.
But building a deep provider base is a totally backwards solution to the problem, and it usually results in an even more serious problem: The influx of low-quality providers who turn off customers.