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.
Chicken and Egg Part 2
What happens when the number of undesirable providers in a marketplace trips over a very low bar?
You don’t have to look any further back in time than a couple of weeks. From content policing at Twitter to owner politics at AirBnB, the line between providing outsourced product for profit and the proliferation of dangerous tinder that lights a national dumpster fire — suddenly that’s an inexplicably thin damn line.
But this slippery slope isn’t a new one. And furthermore, a company’s exposure to that kind of danger is always self-inflicted. Because companies that sell other people’s product — whether it’s eyeballs to advertisers or homes to vacationers — those companies have payrolls to meet, boards to placate, and quarterly expectations to satisfy.
To grow, they need a constant supply to meet a constant demand.
And it isn’t just content or politics that can make a marketplace liable for someone else’s product. It’s violent Uber drivers or riders. It’s malware in the app stores. It’s faulty or knockoff products on Amazon.
And finally, it isn’t just the risk of the worst-case scenario that these companies need to mitigate. Any time the customer experience fails to meet what the company promises, that company has a potential mini-dumpster fire on its hands.
You can’t just open the doors to all vendors and customers and let the market police itself. Not today.
So how do you build a robust, quality offering of user-generated product?
In 1999, I started my first company, one that published user-generated content on the Internet for profit. Within six months, I stopped allowing unvetted content because I experienced firsthand the potential danger in letting anyone say whatever they wanted without facts to back it up.
In 2020, that kind of fear was taken to a whole new level on a national scale through social media.
I’ve written posts advising you to as to why and how you should thoroughly vet every provider on your marketplace. I’ve written posts advising you as to why and how you should set the expectations of your customer at every point in the customer funnel.
Those two concepts are extremely critical in building a marketplace that works. Now let’s get into what’s critical for building a marketplace that scales.
The Empty Stadium
What most marketplace startups do is build the scale version of their platform to launch on Day One. This is an enormous mistake.
Let’s say you’re starting a new sport, we’ll call it Speed Football. It looks a lot like American football, but without all the physical harm to the players, and it’s also more exciting and everybody will love it. How you accomplished this is immaterial, so let’s say it was your secret disruptive intellectual property.
You’ve done all the math, and you can put a quality product on the field at a $5 ticket price, far less than the cost of a traditional ticket. Again, you did this with science.
So you build a 200,000-seat stadium, giving you a nice fat, round number of $1 million in revenue per game. You pay the players 90% of that, so there’s plenty of money to go around for top talent, and you still make $100,000 per game. Not only that, games can theoretically run 24 hours a day, seven days a week.
Then on kickoff day, you open the stadium doors to anyone who wants to play and to anyone who wants to watch.
I don’t even have to finish the analogy. Your mind has already developed a dozen ways it will go poorly and play out in front of no paying spectators.
First, hire All-Stars
The first thing that has to happen is the startup needs to prove that the new model can replicate the value prop for the old market. In other words, will those customers who pay $100 and up for a ticket to an NFL game be willing to spend $100 to watch Speed Football.
How do you do this? You put together the best two Speed Football teams that ever played — not an easy task as the sport has never been played. You don’t solicit 20 teams, you solicit two, just enough to make a single game work. You make individual deals with the players because they’re getting in on the ground floor of something big, but it will take time to find value.
You host the first game in someone’s backyard, and you fill the “stands” with a handful of customers you may very well disappoint.
Then you do everything in your power to not disappoint them.
This will fail, probably over and over again. So what you do is you learn where and how it failed and how to keep it from failing the next time. If you’re a smart, worthy entrepreneur, you get assumptive about this, and you’ll make it work quickly.
What you should learn
As you do this, you’ll discover what aspects of your platform make it incredibly tempting for the best players to join your league.
You’ll also determine what you need to do to make it difficult to be a player in your league. You keep that bar high, and you shift your market expectations based on the number of providers who can deliver a quality product at the price point customers want.
Then you discover what aspects of your platform make it potentially worth the price of the incumbent’s ticket. You emphasize those components in your platform, your product, and your marketing. You eliminate everything else. You may not need cheerleaders, or fireworks, or any other unnecessary component of the incumbent experience that your customers won’t miss.
Then you start lowering the price. Then you scale.
A successful marketplace doesn’t offer shit product cheap. A successful marketplace offers the same experience as its incumbents in an efficient or novel way. The customers win. The providers win. The marketplace wins.
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