So You Want to Make a Marketplace

May 8, 2023

When you think of a marketplace, you might think of Amazon or Ebay right away – gigantic ecommerce juggernauts. But when you boil it down, a marketplace is simply a site where users are there to buy, sell, or manage the use of goods and services.

Much as the mail-order catalog once revolutionized the way we bought things in the nineteenth century, desktop and laptop computers moved marketplaces from the brick-and-mortar (and catalog) world to the digital realm.

In recent years, hastened by COVID quarantines and lockdowns, digital marketplaces have become the primary place for people to buy things, while many users have flocked online to sell their products and services.

So as a business, how do you get in on the action and create your own marketplace?

First, let’s define what a marketplace app does.

As smart phones and tablets began to outnumber desktop and laptop computers, a new way to reach consumers opened up. Marketplace apps began to make inroads by moving digital marketplaces from unwieldy and outnumbered computers into the palms of users’ hands. Now, any visit to your app store can be enlightening as to the range and depth of goods and services accessible quite literally at your fingertips.

Need a ride? Uber. Hungry? Uber Eats. Looking for a little getaway? Airbnb. Thirsty for an adult beverage? Drizly. Shopping for some local and unique crafts? Etsy. And that’s still not mentioning the big players like Amazon, portals to traditional brick-and-mortar retail stores like Wal-Mart’s marketplace, and even your app store itself.

But examples aside, at its most basic an online marketplace is a site where two or more different users interact with each other to exchange something. As you can see, and as you also most likely know firsthand, these are increasingly commonplace. Out-of-the-box tools to build marketplaces continue to proliferate, while firms specialized in this type of development continue to grow as well. Both of these options make it easier than ever for you to launch your own marketplace.

So why build a marketplace instead of a regular service?

A lot of founders, and even existing businesses, are embracing the marketplace model for a few key reasons. First of all, marketplaces allow businesses to enter and then scale within new markets relatively quickly. Given the network effect that’s inherently part of every marketplace, those who are listing goods will promote the platform on their own in the hopes of selling more. As for the consumers, they’ll have a wider breadth of options from one particular site upon landing, making it more likely that they convert on something. This gives both the sellers and buyers new opportunities to connect that aren’t there in a site that uses a more traditional ecommerce model, where there’s a brand acting as the middleman between the producer and the customer.

This direct line of communication is another reason marketplaces are increasingly popular. Not only is this more efficient, but it also cuts down on a lot of liability brands usually have to assume. For example, if you’re buying something on Etsy and the maker needs extra time or has to change the shipping timeline, they can coordinate that directly with their end-customer, removing the headache that a customer service team may have to deal with while communicating updates with both of those users separately.

Another big reason companies use this model is also tied to that point about customer service. Without directly fulfilling orders, the staffing needs are different and typically much more lean. A customer service team, for example, may be more focused on handling disputes between buyers and sellers instead of hunting tracking codes, handling orders, or dealing with questions around product inventory.

In theory, a well-built marketplace really only needs an engineering team to support its functionality and a lean customer service team to ensure all user roles are supported.

What are the different marketplace types and how do they monetize?

For starters, there are four main types of marketplaces. Those that:

●  Sell physical goods, like Amazon, eBay, and Etsy;

●  Leverage the sharing economy, like Airbnb and Uber;

●  Provide services (think tutoring, housecleaning, Fiverr);

●  Provide staffing, like Upwork and The Mom Project;

●  Are a hybrid – something along the lines of Craigslist.

Once you have the type of marketplace you want to build in mind, you’ll want to dig into how users will interact with it, and how you as the owner will need to support it.

●  On demand marketplaces are those where the marketplace provides users with goods and services such as grocery ordering and delivery (think Instacart or Uber).

●  Managed marketplaces are those where the marketplace owner provides support, analysis, and maintenance and otherwise works to ensure the ongoing proper functioning of the marketplace. The Mom Project is a great example here.

●  Community driven marketplaces are those that gather independent retailers and brands on its platform (think Etsy and also Airbnb again).

●  SaaS (Software as a Service) marketplaces are a bit different in that usually they’re tied to a tool, and then offer add-ons to their customers. For example, HubSpot is a SaaS platform that also has a marketplace for user exclusive (and user supplied, in some instances) templates.

●  Decentralized marketplaces are those where all the power is in the hands of the sellers. There is no operator to control the platform, anyone can buy and sell, and it is a true peer-to-peer (P2P) system.

Now for the interesting part – monetization. Usually, most marketplace founders struggle with how to best monetize, but there are luckily some (relatively) tried and true methods that have worked out so far.

The most ubiquitous would be the transaction commission. Things like those platform fees you pay on Uber Eats. One of the earlier models, though, that’s still around, is the simple “pay per listing.” Sites like eBay and Craigslist have pioneered this model, which is basically a digital adaptation of traditional classifieds listings.

Related to that analog model is also monetization via ad revenue. No longer just ads in the sidebar, many sites allow users to pay to promote or sponsor their pages.

There are also platforms that charge based on usage. For example, Salehoo, a wholesale directory and marketplace, just charges users a monthly fee to access the information they make available.

Lastly, and perhaps obviously, is a model that combines any of these pieces. For example, within Amazon a retailer may pay for platform usage as well as the ability to advertise to certain users looking for certain things.

Four things to keep in mind when thinking about your marketplace

Just when you think you’ve gotten all the info you need to get started, there are just a few more key pieces of info you’ll want to take to heart before kicking off your project.

  1. Define seller features (including your marketplace type AND monetization model). It’s easy to focus too much on how the site makes money, or on the flip side, how sellers experience and leverage the site. If there isn’t alignment between the two, it’ll be hard to convince sellers to join a new platform which will in-turn hurt your long term user acquisition efforts.
  1. Define consumer features. This really tries to answer the question “why your marketplace and not another?” A successful marketplace is reliant on the network effect, where the value is driven by the number of users. You’d have a hard time convincing sellers to join if no one is there to shop, and vice versa.
  1. Define your desired UI/UX. A tech partner will help you with this on a more granular level, but it’s important to at least have features outlined in advance. One of the best ways to attract users on both sides of the fence is to make sure your marketplace improves upon an existing option. Whether it’s more niche-focused than an alternative or just easier to use, the user’s experience is key.
  1. Launch MVP (minimum variable product) to help you identify friction points, fix errors, and avoid unnecessary headaches. This one is more a culmination of the three other points, but it is important to understand that what is first launched is not the be-all-end-all. It is an iterative, ever-evolving process. When launching anything that’s new, let alone something that’s as user centric as a marketplace, you can only work with what you know wasn’t working before with competitors. From here, once it’s in the wild, you’ll go back and most likely redefine the prior points and iterate again.

How to anticipate marketplace project costs

As you’ve already seen, there’s a lot to consider when building a marketplace. Although there are unavoidable basics, like controlling for multiple user-types and their varying experiences, things like your business model, competitors, and overall market will drive cost.

Let’s dive into the cost implications that stem from having multiple user-types first. Instead of just worrying about the UI/UX for a customer alone, like you would on a traditional ecommerce site, you also have to worry about the UI/UX for your sellers. Obviously with the additional types of experiences come additional research needs, additional testing, and additional iterations.

In addition to that, you have to remember that the staffing needed for a marketplace is different, and that the marketplace itself has to manage seller onboarding. While it’s relatively straightforward for a customer to use a marketplace, sellers need to know how to create and complete profiles, list products, enter payment information, check statements, deal with fulfillment, and more. If part of that process isn’t easy, they’ll stop using your tools and move on.

Additional costs associated with the bifurcated user-roles don’t stop there. Even when you have the experience for both sides of the app figured out, you have to draw both types of users to your marketplace. That means double the marketing campaigns, double the audience testing, and double the creative needs…and that’s all before getting into the intranational element many marketplaces have. What are the compliance questions for users and sellers in one region over another? How do those differences inform any user acquisition efforts? And, more importantly, how do those differences impact any UX needs?

One thing that can help you figure out rough answers to these questions early on is to play the middleman, or simulate one side of the interaction to validate the other. As a consumer, what issues do you have with the process of finding providers and buying through the app? As a seller, what problems do you encounter when trying to generate revenue?

It’s important to understand that users of any software, marketplace or otherwise, are very creative, and can find and exploit gaps wherever they pop-up. Is a seller in Country A not allowed to sell to a customer in Country B? Or are there issues when a user tries to buy multiple things from multiple sellers? All of these situations can lead to not only compliance issues for you, but also issues with how all types of users perceive your business. If people begin to think your platform is hard to use, they’ll happily hop over to another. That’s why constant testing is always key – another driver of project cost.

This all comes back to make the point that there is no easy way to anticipate project cost when starting to build a marketplace of any kind. That said, there are some ways to safely approach a marketplace project. For starters, there are a ton of out-of-the-box solutions popping up to help founders launch a simple marketplace. Tools like this help control for many of the questions we’ve asked above, but typically come at the cost of custom experiences that you may need to leverage for sellers and buyers.

The other way to safely explore a marketplace project is through a tech partner who will help you go through all the research, planning, testing, and ongoing support as you go. While this route may be a bit more costly than a SaaS product, the additional support and customization typically help the marketplaces they support launch and grow more efficiently.

How to find the right partner to help you build your marketplace

Great. You’ve made it this far and have decided to jump in and start to build your marketplace.

But the more you read about developing your marketplace, the more you will conclude that you need to find a partner to get you through the process. And not just any partner. Afterall, instead of just a B2B or B2C experience to plan around, you have to optimize for both. So how do you find the right partner to help you build your marketplace?

First, you need to take a step back and understand that there is no perfect marketplace app. The best you can hope for is excellent. So, it is crucial that you find a partner that you feel can work well with you on a project that will take some time, money, and detours.

Then, to help you define that partner, look for a firm with a proven track record, preferably one that has developed marketplace apps that leverage the same types of models and modalities that you want to use. Your uncle’s friend’s kid who is a computer science major is not likely to get you what you want or need, even if they can do it for only $1,000.

Once that initial MVP is out the door, you’ll need to keep making it better together. A static app will get quickly left behind by users, so you and your partner need to manage each other’s expectations at every stage with clearly defined goals, milestones, and plans to grow and evolve the app post-launch.

To help keep those plans, goals, and costs in line, you and your partner definitely need paperwork. Call it an SLA, an MOU, or a contract – just get it in writing.

But perhaps most importantly, at the outset, your partner should have far more questions than answers. So, when you’re ready to reach out, we’re ready to ask away. Since we’ve launched dozens of marketplaces, we understand a lot of the pain points founders and their users face and know what questions to ask. The team here at VAULT uses the Learn, Build, Grow model that has helped marketplaces like Leaf Trade launch and successfully scale. So when you’re ready to explore your project with a knowledgeable tech partner, reach out to us via email to schedule a free exploration call.

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