How To Build A Successful Online Marketplace Business
Online marketplaces aren't just huge ones like Etsy or Craigslist; smaller platforms for bike sales, equipment sharing and more are gaining huge popularity. If you're thinking of launching your own peer-to-peer marketplace platform, you should learn from the best. Here's Sharetribe with a guestpost on lessons for starting up:
Startup expert Paul Graham once gave a noteworthy piece of advice to Airbnb founder Brian Chesky:
As the marketplace model/"sharing economy" takes over the world, the competition for users increases. To succeed as a marketplace entrepreneur, your best strategy is to build a platform that users love. From the very first day on.
But that does not mean you should spend months and thousands of dollars developing the platform. Instead, you should find a way to build the minimum solution needed to get the maximum amount of learnings and love you can.
This article will help you find the fastest and cheapest way to test your idea, and build a marketplace people fall in love with—or pivot quickly if you come up with something even better. Each of our recommendations is based on real-life evidence: lessons I have learned building marketplaces of my own and helping hundreds of other entrepreneurs build their businesses with Sharetribe's marketplace software.
First, let’s take a look at why marketplaces are so easy to love, yet so difficult to build.
Why marketplaces are easy to love...
Online marketplaces can become extremely powerful businesses that change the world for good.
A part of their power is in their ability to solve problems by tapping into resources that already exist.
According to a study by VisionCritical, there are many reasons why people favor sharing economy platforms
Marketplaces can make product or services better, cheaper, easier to find, and quicker to obtain. In other words, they can offer a superior purchasing experience without any initial inventory or manufacturing resources.
If an entrepreneur identifies such an opportunity and manages to build a successful marketplace business around it, there are no limits to where the business can grow.
...and why marketplaces are tough to build
A typical mistake early-stage marketplace entrepreneurs make is that they immediately start building the best, most advanced, stunningly-designed marketplace platform out there. The process takes several months and tens of thousands of dollars.
But more often than not, the result is a desert platform that is beautiful to look at but fails to gain traction.
Instead, these founders would be much better off launching the first version of their platform with less time and a lot less money. This is the core principle behind the concept of Minimum Viable Product (MVP).
In short, a Minimum Viable Product (or, in the context of marketplaces, Minimum Viable Platform) is a minimal solution that solves the core problem of your target audience better than any other existing solution. The term was popularized by startup gurus Eric Ries and Steve Blank.
The core principle of the MVP-approach is to encourage entrepreneurs to bring a working prototype of their product to the market as quickly as they possibly can. This will give them the opportunity to learn how real users will interact with it and develop the product in the right direction.
However, marketplaces are becoming an extremely competitive field. It’s not enough to build a platform that just barely does the job. It should be something the first users will fall in love with from day one—a Minimum Lovable Marketplace.
The concept of Minimum Viable Product is convincing and easy to understand. However, it can be difficult to implement in practice. How do you know what the words minimum and viable mean for your specific idea, target market, and audience? And how on earth do you combine that with lovable?
Here are five lessons on how to build a minimum lovable marketplace.
Lesson 1: Validate your idea before you launch — Kinspiring
Many beginning marketplace entrepreneurs say they want to build the best, smoothest, feature-richest and the most elegant-looking platform out there.
That’s a great end goal, but almost never the right place to start. Instead, the first focus of a new entrepreneur should be on validating their idea and their product/market fit.
A great example is the famous story of Airbnb.
The founders Brian Chesky and Joe Gebbia noticed that hotels in their home town were getting crowded just before a big design conference in 2007. They set up a simple website to rent a few air mattresses in their living room. This very first, crude MVP version began a long journey of learning and iteration. In fact, it took almost two years before the marketplace truly began to see traction.
Image credit: Anna Vital / Adioma
Kinspiring took a similar route. After successfully renting out her own brand-new pram on Facebook, founder Krista Pohjanlehto created a Facebook group for other parents to do the same with their idle baby gear.
The Facebook group became hugely popular. It proved Krista that her idea had traction.
However, the Facebook group didn’t allow Krista much control over the booking flow or payment security. Krista and her co-founder Heta Kärki didn’t have technical skills, but they still needed a way to test their idea with a more advanced set of marketplace features. Setting up a marketplace platform with Sharetribe Go offered them an affordable way to take their idea to the next level and confirm they had found their product/market fit.
Today, Kinspiring is the biggest baby gear rentals marketplace in Finland.
The takeaway from these examples is to find the minimal way to solve a problem you have identified. It could be a social media group, a simple website, or a marketplace built with a plug-and-play software product.
The point is to find the fastest, simplest possible way to test your idea with real users and see if you can already inspire some love and referrals for your solution.
Lesson 2: Launch as quickly as you can — StudioTime
Studiotime grew into the world’s largest “Airbnb for record studios” in less than a year.
The founder, Mike Williams, is a serial entrepreneur who has a fine-tuned process for starting a company. His principle is that getting from idea to launch shouldn’t last more than one evening.
That is exactly how Studiotime started. Mike canceled his dinner plans, built an MVP on a Thursday night, and launched. The following Sunday evening, he submitted his new business to ProductHunt.
On Monday evening, Studiotime had over 1,000 users.
Here’s a video where Mike explains more about the process of building and launching Studiotime.
After a successful launch, Mike started emailing users. He asked about the problems they were having and what could be improved on the site. He also started iterating on the business model.
Initially, Mike’s idea had been to charge a commission of each booking, similarly to Airbnb. It soon became clear that the complex invoicing process of record studios didn’t support this. What is more, the launch had proved there was a high demand for a platform like Studiotime.
So, Mike quickly decided to lower his commission, and instead, went with a subscription-based model. Most studios were more than happy to pay a monthly fee for the visibility they got on Studiotime.
Mike’s inspiring example proves that building a successful marketplace is a process, not a project. You won’t know what will and won’t work until you have tried it in the real world.
Customer research, competitor analysis, and crowdfunding campaigns are all great ways to get some clarity about your idea. But what people say and what they do can be very different things, and praise and positive buzz alone won’t keep your marketplace afloat. Actual transactions will, so launch as quickly as you can.
Lesson 3: Build a user base before a big-bang launch — Kyoyu
Speaking about the importance of launching early, it’s important to distinguish between the types of launches.
Namely, you should do your product launch as quickly as you can. But, by all means, postpone your big marketing launch until the time is right. Furthermore, we recommend that you limit your product launch to a selected, small audience.
This approach has many benefits.
The first one is psychological: it’s much easier to convince yourself to put an imperfect prototype out there when you have deliberately decided that the whole world doesn’t need to see it yet.
The second benefit is that limiting your audience helps you build a high-quality supply, foster a deep relationship with them, and turn them into a community. Your supply will compose the product you are selling to your customers, so the better they are, the easier it will be for you to acquire and retain the customer side.
The third and biggest benefit is that it’s much easier for you to interact with your early users if they are a small, committed group. You’re much better able to track how they interact with your platform, ask them questions (and get useful answers), and improve your platform based on the feedback you get.
The model case for this approach is Kyōyū—a platform for sharing photography gear, built by Canon Australia.
Screenshot from kyoyu.com.au
Canon Australia launched Kyōyū with a bang in March 2019, followed by promotion through online advertising, community channels, and retail partners. However, a lot of work and testing had gone into the platform before launch. They started with a prototype they put in front of customers at a very early stage. They then completed a pilot phase, building a user base in major cities in Australia.
Remember the quote about finding the first 100 people that love your platform?
By focusing your product launch on a limited set of people, you’re not only building a dedicated community of early adopters and strong word-of-mouth. You’re also concentrating on making your marketplace lovable from day one. If you can find 100 people who absolutely love your platform, the next 100 or 10,000 users who feel the same way won’t be far behind.
Lesson 4: Bootstrap to find your business model — Cycle.land
Marketplaces can be exceptionally lucrative businesses, but they take time, learning, and iteration to succeed. The best way to optimize for learning is to retain as much of your freedom in the early days as possible. That means thinking carefully before you invite investors into your business.
Bootstrapping will limit what you can do in the early days. And that is exactly what you want!
Starting with a limited budget will force you to launch your prototype early, focus on building your first audience, and make sure your business model truly works before taking on new markets.
Cycle.land became profitable in just a few months after launch, and with no outside investors. Their business focuses on bike sharing.
Cycle.land has since completed successful crowdfunding rounds, most recently closing at over £300,000 to go towards their geographic expansion. But since the start, their goal was to only enter a new market after they had reached profitability on each existing one.
One of the biggest mistakes a marketplace can make is trying to scale too fast. With external funding, you might be tempted to start expanding by spending a lot on customer acquisition or luring supply in with unsustainably low commission.
If you’re sure the users you get with these money-intensive tactics will love your platform and never want to leave, you should be fine.
But the risk we often see is that marketplace expand before they have found a real product/market fit, and before they have made sure their platform is truly lovable. They might get customers in through advertising, but since their user base is only there because the saw an ad or because it’s cheap for them, the next competitor with even more VC funding will steal them away.
It’s a lot better tactic to start with an extremely narrow focus—for Cycle.land, it was the student community in Oxford—and get profitable there. Build a user base that loves you, and use a referral marketing strategy to expand from there.
Invite external funders in only when you’re sure your entire business model doesn’t depend on them.
Lesson 5: Know when love is not enough — NextMover
Even when you have a brilliant business idea, there are so many things in the implementation, marketplace model, and target market that might get in the way. It’s important to get a realistic understanding of these challenges as quickly as possible.
NextMover was built as a peer-to-peer platform for finding moving help.
Their idea solved a great pain point fantastically well. After all, moving is stressful, moving companies are expensive, and finding and renting an affordable truck across various websites can be a hassle. But to simply go to a platform, find a reliable person with a truck, and book them exactly for the hours you need? Perfect!
However, the founders soon noticed the platform wasn’t gaining traction.
In most cases, retaining customers on a marketplace is much, much more effective than acquiring new ones. Repeat purchases are what sustain and scale businesses. Just look at Etsy’s stats from 2011 to 2014.
The NextMover team soon realized that though people loved their marketplace, they didn’t return often enough. Individuals tend to move quite rarely, so even if customers loved the NextMover experience and referred some of their friends to the platform, the business was low-margin and low-volume.
After two months on the market, the founders decided to call it quits—even though they had investors willing to back up the business. They had learned that though they had solved a problem in a way that early users loved, that love wasn’t enough to translate into meaningful revenue.
Without committing to the MVP approach, the founders might have spent months and thousands of dollars, just to arrive at the conclusion they now reached in a few weeks and significantly less cash.
Besides, testing an idea that doesn’t work might just lead you on to a new idea that does work. My company Sharetribe didn't always do marketplace software—we started as a platform where university students could share books, rides, tools, and the like. In fact, some of the most successful platform businesses are famous for the pivots they have made along the way—think Amazon, Groupon, or Yelp.
Succeeding fast is the goal, but failing fast is the next best thing.
Conclusion: Optimize for the 100 people who love you
A Minimum Viable Product is a solution that solves a core problem for your target audience better than any existing solution.
But in the era of increasing competition, a marketplace should aim at being both viable and lovable from day one.
To achieve this, think about your marketplace business as a process, not a project.
Find the simplest possible way to test your idea. Build a prototype, launch it as quickly as you can, and get in touch with your first users. Find out what they like and don’t like, and how you can make them obsessed about your platform.
Build a user base before you launch big. If you find 100 people that love your marketplace, chances are there are more out there that feel the same. Optimize for those 100 people first.
When you do find your devoted earlyvangelists, it’s tempting to put all efforts into expansion. But think carefully before you take external money to grow rapidly. Often, a better idea is to bootstrap first, take an extreme focus, and make sure your business model truly scales and generates meaningful revenue.
If it doesn’t, don’t be scared to iterate. We’ve seen great examples of successful pivots, so iterating is common.. The marketplace revolution is only getting started, so today is a great day to turn your idea into a reality.
Juho Makkonen has been building marketplace websites since 2008. He is a co-founder of Sharetribe and currently serves as the CEO of the company. Sharetribe helps entrepreneurs and organizations to easily create their own marketplace platforms. Juho is also a co-author of The Lean Marketplace, a practical guide for building a successful online marketplace business.