3 strategies to improve the odds of success of your online marketplace

Almost every human on earth with access to the internet has interacted with an online marketplace of some sort. Every marketplace has a buyer and a seller. Before we provide you with the three strategies to become a booming online marketplace in 2020, let's review the evolution of online marketplaces quickly.

Online Marketplaces 1.0:

In the 1990s, the online marketplaces were digital yellow-pages with a listing of sellers and their service. An example of a 1.0 marketplace is Craigslist, which is still around. They provided value to buyers in the form of convenience because they contained filters that allowed buyers to find what they wanted faster. They were also usually free.

Online Marketplaces 2.0:

In the 2000s, buyers began demanding more trust from these platforms, creating startups like Angie's List, Care.com, Thumbtack, and Fiverr. Compared to 1.0 Marketplaces, 2.0 Marketplaces were more focused. They had advanced filtering, an improved matching service, and user reviews. They also provided communications (chat rooms, messages) and booking infrastructure to enable financial transactions, which allowed them to monetize through membership fees, per-lead pricing, or commissions.

Online Marketplaces 3.0:

By 2010, buyers began demanding more trust and location-based services, leading to the rise of startups such as Uber, Lyft, and Doordash. Compared to 2.0 Marketplaces, 3.0 Marketplaces began to offer more trust (through background checks and guarantees)

Online Marketplaces 4.0:

By 2020, buyers have begun to demand active supervision of the service through hands-on vetting, interviewing, and even training service providers, leading to the rise of startups such as Trusted, Wonderschool, and Honor.

Startups that have been able to evolve along with the growing demands of buyers have not only survived, but grown exponentially, thanks to strong cross-side network effects. These are the three strategies that we can learn from those startups that have survived.

Strategy 1: Start by building out the supply

In marketplace conversations, people inevitably talk about the chicken-or-the-egg problem, referring to the question of choosing whether to start building the marketplace from the supply side or the demand side. If you observe the evolution of marketplaces outlined above, you will notice a pattern.

The buyers (demand) are in control - demanding more from the market as their needs grow. As a budding marketplace then, it's smarter to build out a reliable and verifiable source of providers (supply) first and then focus on the demand side. More than 80% of successful online marketplaces first started by concentrating on building the supply side. Examples of these marketplaces include AirBNB, AngelList, DoorDash, Etsy, Eventbrite, GrubHub, Instacart, Lyft, OpenTable, Thumbtack, Uber. In contrast, very few successful marketplaces started by concentrating their efforts on building the demand (Rover, TaskRabbit, Zillow)

Strategy 2: For growing supply, use a direct sales approach.

Think back to the last time you decided to try out a new service as a buyer (demand). Most likely, you heard about the service from a friend or an online review. This is no surprise because WoM (word-of-mouth) is a useful online marketplace technique to grow its demand. However, it's still more effective to use a direct sales approach to attract sellers (supply) on the supply side.

For example, OpenTable hired sales staff that went around from restaurant to restaurant to demo their software to owners. Other companies that used a direct sales approach early in their marketplace growth include AirBNB, AngelList, DoorDash, Etsy, GrubHub, and OpenTable.

Strategy 3: Monetize the supply side before you start driving demand.

Start by building a product that serves your target supplier.

For example, Eventbrite started by offering ticketing software for organizers (supply) for over eight years before shifting their focus to demand. In another example, OpenTable built custom software to help restaurant owners manage their reservation process (previously, the process was manual using a pen and a notebook). OpenTable's sales pitch was 90% "use our software to manage your restaurant better" and 10% "we'll help customers find your restaurant and book a table online."

The above approach allows you to bootstrap your online marketplace by bringing in early revenue before you can focus on building the demand side.

Once your marketplace achieves sufficient supplier liquidity (i.e., an adequate number of suppliers that a buyer can find what they are looking for), you can begin to focus on driving demand until you achieve a robust cross-side network effect - i.e., when the growth of one side (sellers) affects the other side (buyers)