The success of marketplaces (like Airbnb, Etsy, Uber) is booming so rapidly that it’s tempting to forget how difficult it is to get one off the ground. For every successful marketplace, there are a dozen that didn’t make it. Most business owners build one, at best two, marketplaces in their lives.
As a team member who builds marketplaces for others, we roll out 5-10 platforms every year. B2B, B2C, peer-to-peer - you name it. Not all of them end up taking off, as everyone expected. At first, the burn of failure was intense.
Over time, however, we noticed that there are patterns common for all failed marketplaces. So we decided to put together a list of challenges that cause most teams - and their marketplaces - to fail. This list can help business owners and web developers understand the specifics of dealing with online marketplaces and grasp the responsibilities.
Error 1: Ignoring The Entry Barrier
Why do buyers and sellers choose marketplaces instead of tread-of-the-mill online stores? They want credibility. Vendors expect the platform to attract interested buyers, while customers want to know that sellers were verified. Both expect that a platform’s team will take precautions and embrace responsibility.
This is why you need to define the level of openness of your marketplace. Openness defines the degree of access that customers and clients have to the platform. For instance, Etsy is an open marketplace - you can register for a small fee, submit your products, and start selling immediately. iTalki, a marketplace for language learning, requires teachers to verify their skills in an interview with a moderator.
The failure to define the right level of openness for your marketplace will break your target audience’s trust. The right way depends entirely on your niche. In some fields, the entry barrier is a must - healthcare, education, fintech. In others, having little to no verification is a better option - handmade products, accessories, art.
Often, teams want to make the user experience as smooth as possible. They prefer having little to no barrier and get, as expected, a quick influx of users. But, the quality keeps dropping, and customers are disappointed. In the worst case, you’ll deal with legal problems and expensive mediation.
Solution
In our experience, most marketplaces benefit from introducing some entry barrier. It’s a way to determine the quality of the offer, decide what users you want on the platform, and give the feeling of exclusivity.
There’s a hidden opportunity there as well. If you allow users to join platforms by recommendations, referral programs get going much faster. We’ve seen this with the Clubhouse app - the benefit of premium access helps to get a community rolling.
- Discuss the verification barrier early on at the discovery stage. It’s a defining point of the user flow, so knowing where to start certainly makes things easier.
- Automate as much as possible. Although there’s a handful of marketplaces that conduct interviews with moderators to verify a vendor's worth, such a system is hard to sustain for many niches. As developers, we think it’s best to consider automation in the long run - to avoid tearing down features later on.
- Help people to understand how to get through verification. Granted, an access barrier can turn off some users. Luckily, you are in control. The app or site itself should contain clear explanations, along with a way to contact support. We also recommend preparing video guides and help materials.
Exclusivity is the selling point of most marketplaces. Users like to know that basic vetting has been done for them, at least for vendors.
Error 2: Not Engaging Developers Enough
Every once in a while, our development team will have a chat with a ready-to-act team. They come to developers with all details laid out - they have wireframes, a full feature list, set-in-stone architecture. All they need is execution - building the codebase.
In an ideal world, this would be a perfect collaboration. With everything ready, developers should start working immediately, and the project will wrap up quickly, right? Well, this world is not ideal - so things usually don’t work as expected. If business owners don’t engage developers early on, business models, feature lists, and even positioning end up having fundamental flows.
The conversation might go this way.
A business owner: we want to build a powerful messenger into a marketplace with the support of audio and video messages. Since we want to help people employ a therapist, it’s a nice add-on.
A developer: this sounds great and makes sense. However, what you suggest sounds like a complex messenger, and it’ll take months to build and perfect. Are you sure we need this in the MVP?
The problem is, business owners analyze already mature competition and strive to replicate the best features. While it’s certainly possible, such ambitions will take a lot of time and budget - and might not be your priority at the MVP stage.
Sometimes, business owners don’t understand the complexity of the tech challenge that is building a marketplace. Even a simple one needs a platform for vendors, customers, and admins. Other essential features take care of logistics, shipping, and help build a community.
Since a marketplace team depends on the resources of vendors, your tech is your offer.
The marketplace is as good as the technology and community behind it. So, developers should be engaged early on, and development choices often need to be prioritized in the discussion.
Solution
As developers, we certainly have a solid grasp of this issue. You really do need a long-term partner, if you embark on the journey of marketplace development. Here are some must-know rules about letting developers join the table.
- You will need a team: Sometimes business owners think that a single capable developer might be alright. For a simple online shop, that’s often true. But with marketplaces, you are building three platforms. Plus, features for management and mediation, usually absent in regular stores. A single developer, even a senior one, won’t pull all that off.
- Count on the long-term partnership. Marketplaces aren’t a build-and-ship type of project. You will always fix and change things. Even after the product is released, you can’t just say farewell to the team. When our developers get a marketplace project coming in, it usually means we’ll be cooperating with a business for years.
- You can outsource, but be prepared to extend cooperation. Remote tools help assure enough commitment from the development team for years. Still, we recommend being open to inviting the team over once a year. When we built Hlprs, a marketplace for finding household help, our team visited the office - and the experience was worth months of remote onboarding.
Remember that if you are building an online marketplace, your technical decisions will be the most important ones. A lot of things can be handled by vendors, but your technology is what really sets the business apart.
Error 3: Underestimating The Vendors
When we talk to successful marketplace teams, they always emphasize the importance of vendors. Too often, the focus is shifted to end-customers. You want to offer the best prices and service quality, and the terms of cooperation end up being unfavorable.
It’s not unheard of. Back in 2000, Covisint, an online marketplace for auto parts’ suppliers and customers, partnered with Ford, GM, Nissan, Daimler-Chrysler, and other acclaimed car manufacturers. Their names and reputation brought customers to the service, and the platform started taking off. However, the auto companies’ business model and functionality favored customers, leaving manufacturers with small profits and fierce competition. So, vendors pulled out, and the marketplace fell apart.
Still, even now, marketplace teams keep making the same mistakes. They have a weak or no onboarding program for vendors, little insurance, and irresponsible support. The conflicts are mediated in favor of a customer. Reputational damage from the vendor’s side is overlooked.
Solution
Caring for vendors starts with getting to know them. At your discovery stage, research thoroughly the needs of future users, prepare personas, and design user flows. Often, teams tend to allocate more time to analyzing customers, leaving vendor analysis as a last-minute task.
- Think through the functionality of a vendor platform. In our experience, allocating the same amount of time and effort for vendors and customers is the best practice. You know both segments well and have thought-out flows for each user on the platform.
- Prepare custom features. With marketplaces, neglecting personalization is the worst imaginable practice. Often, teams cut corners and build very similar platforms for buyers and sellers. Both get the stick’s short ends - but especially vendors since their needs are much more complex.
- Offer tools for inventory management and financial support. A marketplace should help vendors to sell more. This is why you need features that will save their time and allow focusing on promotion and order fulfillment. Accounting, time management features, order reports are necessary for an efficient multi-vendor store.
Vendors are your powerful partners. If you can bring acclaimed businesses on board, getting sellers will be much easier. Starting and maintaining relationships with vendors is a conscious effort that should be reflected on the platform’s features and design.
Error 4: Picking The Wrong Battlefield
Launching a marketplace can be compared to heading to a battle. You need the right place for events to unfold - good visibility, suitable climate, and safe conditions for your team. When you build a marketplace, you can choose your battlefield, and it’s important to find the right one.
Deciding whether to start launching by attracting vendors or sellers is an overlooked dilemma. Many teams only start considering the issue after the platform is fully built, if ever at all. This is what Google Health did when launching a service that connected doctors to patients. The strategy was oriented towards patients, with emails and colorful ads.
In this case, however, starting with doctors would be a better idea. Urging health professionals to cooperate would raise the trust of patients. Word of mouth alone would be a powerful promotion tool - as doctors would be the first ones to suggest the service to their patients. Failing to leverage the expertise of providers and insiders, the team tanked the launch.
Solution
The only way to avoid this failure is to consider all possible launch strategies early on. Focus groups and industry insiders can share their experience and help you decide. Discussing the issue with the team also helps - this is how you get multiple perspectives.
- Engage focus groups early on: test your concepts and marketing strategies on potential users.
- Examine the industry opinion. Usually, business owners of future marketplaces don’t experience being on both buyer and seller sides. In Google Health’s case, the team could’ve consulted both doctors and patients as early on as on the discovery stage.
- Learn from mistakes. Take a look at launch strategies used by your competitors. If your solution is one of a kind, take a look at similar business models in other niches.
Luckily, with this problem, the mere fact of considering it is already a win. Too many business owners just start from customers by default. So, just pausing and asking yourself about the best strategy is already the right place to start.
Error 5: Missing The Marketplace Potential
When our development team started specializing increasingly more on marketplaces, we realized that the niche is unoccupied. The user interest is peaking. The success of Facebook Marketplace and its 40 billion in sales show that people care about multi-vendor stores. Marketplaces are quickly pushing typical e-commerce stores away - and still, end up overlooked by business owners and developers.
Often business owners start planning their own online store. They need to invest in products, warehouses, offline infrastructure - even if the market is already full. Instead, they could take advantage of existing providers and build a marketplace for them. This way, there’s no need to establish physical inventories, staff, logistics. Your only focus is building a good platform.
Solution
Even if you have never built a marketplace, you might want to reevaluate your position. Sure, it’s a serious commitment, but the industry is growing. The number of ready tools for marketplace development that were released in recent years is astonishing. Established e-commerce platforms like Shopify and Magento release extensions for marketplaces, and new platforms like Sharetribe rise to the challenge.
According to Statista, marketplaces generated 47% of all sales in 2019. The number is predicted to grow to more than a half in 2020.
So, by the time you’ll refine your idea and business model, marketplace development and design will likely become much cheaper. For developers, this niche is a fun challenge and a decent specialization. In our experience, marketplaces have a lot to offer to web and mobile developers - possibly more than traditional e-commerce.
Final thoughts
The biggest challenge of becoming a player in the marketplace industry is being unaware of the game rules. Marketplaces are not SaaS or e-commerce stores, but they have similarities with both. The focus on users and a clear understanding of business logic are the business model’s defining features.
For those who can keep up, marketplace development is rewarding. It’s a way to make the most out of the industry for business owners - and choose to partner with the competition instead of facing it.
For development teams, it’s a multi-dimensional challenge and a promising field. Personally, we think marketplaces are awesome because they are built on meaningful teamwork, focused on understanding and responsibility.