Your Two-Sided Marketplace Startup Has Customers, Now What?
Digital marketplaces have been a popular startup trend for a while, and there doesn’t appear to be an end in sight.
I still get a couple questions a week from founders of two-sided marketplaces (2SMs), the digital middleware between customer and vendor that takes a cut of every product or service transaction conducted within its digital walls. In return, said marketplace purports to make each transaction frictionless and cost-beneficial to both the customer and the vendor.
2SMs seem like a no-brainer of a business model that can be applied to any field or industry. Put psychiatrists or plumbers or dog-sitters on one side, and time-strapped customers on the other. Let them find each other and transact, then sit back and watch the money roll in a few bucks at a time.
None of that is true, however. A two-sided marketplace is difficult to get started. Then it’s even more complicated to attract the critical mass of customers and vendors needed to make transacting timely.
Then, once you have that launch mass, it’s even harder to grow.
I’ve written a lot about the mechanics of building 2SMs, but this post is about that elusive growth phase. A lot of 2SM startups tend to stall out soon after they get a handful of customers and vendors transacting. There is promise in their platform, there is potential, but promise and potential don’t generate revenue.
I’ve been building 2SMs for a long time now. One thing I’ve learned is that revenue growth in 2SMs all comes down to customer demand, so let’s answer two important questions:
- How do you get more customers to transact quickly, confidently, and repeatedly?
- How do you onboard and keep enough vendors to not only meet that customer demand, but consistently handle more demand?
Offer the customer something unique they can’t get anywhere else
Most 2SMs fail because they’re nothing more than a directory of products or services — a classic “middleman” instead of middleware. But a middleman can easily be cut out.
To truly be middleware instead of a middleman, the 2SM needs to provide additional value as a unique experience that can’t be transacted through traditional means. The platform must exploit its digital nature to achieve a balance between the convenience of a generalized offering and the quality of a personalized offering.
To do this, the 2SM needs to break down the service into components, and offer something unique between generalized low end and personalized high end. The goal is to offer far more value than the low end at far less cost than the high end. Or as I like to say: “80% of the value at 20% of the cost.” The more you can push the limits on those numbers, the more customers you can attract and serve.
Give the customer reasons to keep coming back
Marketing is a good place to start, but in addition to good marketing, future engagement must be built into the platform. In other words, it should be part of the 2SMs DNA.
Teaching Startup isn’t a 2SM per se, but it does provide expert (vendor) answers to entrepreneur (customer) questions. Making those implicit connections and answering those questions is a 2SM kind of goal, but the more critical offering is the web app — an easily searchable database of questions that have already been answered.
Customers don’t just come to the platform to ask a question, they also return to the web app often to find answers to previously asked questions, giving the platform an “on-demand” experience they can’t get from traditional 2SMs.
Be the enthusiast’s version of the experience. For example, don’t just offer a marketplace of artisan foods, be an artisan foodie experience with a marketplace attached.
Reward customers for their loyalty
Your platform should be more useful for the customer every time they use it (and for the vendor too, but I’ll get into that in a minute).
Every time a customer uses the 2SM, the platform should track their usage and record their preferences, implicitly if possible, so that transacting becomes easier for them with each subsequent transaction.
A great example — although non-2SM-related — comes from online ordering apps for restaurants. It’s becoming the norm these days for online ordering platforms to remember my previous orders and allow me to reorder or modify those orders. When I’m strapped for time, this can be the difference in whether I order from one restaurant over another. Apply that kind of logic to your 2SM. Never make the customer state the same preference twice.
Make it easy for vendors to get business
This is the same strategy as making it easy for your customers to transact, but the execution is different.
Once you’ve vetted a vendor (critically important) and onboarded that vendor (critically important), the next thing that vendor should see from the platform is one or more customer needs waiting to be fulfilled. Even better, they should see a list of customer needs tailored to what that vendor does best. Now, this is an ideal state, and may not be possible, especially right away, but it should be the goal.
One thing you can and should do right away is eliminate a mistake I see with a lot of 2SMs. Never put a customer in front of a vendor that the vendor is not equipped to serve, and especially don’t make the vendor answer questions about their offering until you can eliminate them as a vendor for that customer.
If you have to do that, it means you haven’t done either your vendor vetting or your vendor onboarding properly. Remember, it’s not only the platform’s job to weed out bad vendors, it’s the platform’s job to weed out business the good vendors can’t or shouldn’t take. Especially if that business might result in a poor customer experience.
Keep the vendors on the platform
Seeing how many 2SMs have come online recently, it’s a good bet that your platform is probably not the only 2SM the vendor can be associated with, so yours needs to be the best platform for them.
A good way to avoid “vendor leak” is to tailor your 2SM so that your vendors will want to do ALL their business on your platform, not just extra business that they may or may not pick up. Your platform shouldn’t just be an alternative, but a superior alternative.
Ultimately, this comes down to how well you’ve tailored the unique experience your 2SM offers.
As an example, a common first step in offering a benefit to vendors is handling the billing through the platform. When the vendor generates an invoice for a customer, it takes time, and vendor time is worth more than platform time. When the platform generates that same invoice, it’s cheaper and easier, so the value rises more towards 80% and the costs fall more towards 20%.
Now that’s just Step 1. What are Steps 2 and beyond?
Serve each vendor’s individual goals
When most vendors join a 2SM, it’s not just about money, it’s about the growth of their own business. Just as your platform is deeply involved with customer satisfaction, it should be just as deeply involved with vendor growth.
While you might not be able to help each individual vendor grow their own individual businesses, you can do a lot for most. You can ask them what they need, survey them, and offer programs that are tailored to the widest array of individual vendor needs.
All vendors spend a large chunk of their time and profits growing their business. If you can provide vendors with 80% of the value of growth-building initiatives at 20% of the cost, you can grow your 2SM on the vendor side as well as the customer side.
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