Understand your marketplace health
As with any other digital business, you should pay careful attention to buyer metrics. These include cost per acquisition (CPA), lifetime value (LTV), retention and your conversion funnels.
There are also a number of marketplace specific metrics you should pay close attention to.
Marketplace liquidity metrics are the most important for your business. It varies slightly by the type of marketplace, but the number should reflect the percentage of the marketplace transacting over a given time period. For example, for Airbnb, this might be the proportion of rooms booked each night. You should be able to break this data down to see revenues and transactions for each buyer and seller as a percentage of the total.
Gross merchandise volume (GMV)
GMV, meaning Gross Merchandise Volume, is a key value tracked by all marketplaces. Many marketplace valuations are based on GMV. It is the total value of goods or services sold over the platform in a given time period. You should look to report this once a month.
Although this doesn’t change often, it is important for a number of reasons. A higher percentage take (especially on the first transaction) means you can scale faster and spend more to acquire customers. Be careful, however, not to make this too high. Increasing your take may lead buyers and sellers to transact outside the platform. We have typically seen a take percentage of 10-30% for companies we have backed.
Trust is crucial to any marketplace and it is best to develop this through a number of different initiatives.
Make sure your site is well designed, has a strong consistent brand and is easy to use. This should be obvious, but I still see too many companies not giving enough attention to design.
Most marketplaces incorporate reviews and ratings for a good reason. They allow buyers (and sometimes sellers) to make choices on who to trust based on previous experiences while also encouraging good behaviour. Make sure you allow sellers to respond to bad reviews. And don’t allow historically bad reviews to negatively affect a seller if their behaviour has improved.
For example, Lexoo’s review system gives its lawyers a few weeks to respond to reviews before they are published. Lawyers are also reviewed across different dimensions to help customers understand the lawyer’s expertise for their own context.
Help sellers look professional
The more professional the seller comes across, the more likely the buyer will purchase from them. You might want to consider creating how-to guides to help sellers present themselves well. Well-known marketplaces like Airbnb provide professional photographers. Appear Here and Onefinestay take this one step further by writing product descriptions themselves to ensure even greater quality.
Consider providing tools that let customers talk to each other over the platform. This builds up trust with the parties while keeping them on the platform. However, you may want to block personal details being shared to stop transactions happening outside of the platform.
Balance buyers and sellers as you scale
Growing a marketplace startup means you have to scale while you keep your buyers and sellers happy. This makes it harder than other startup types and can often be a dampener to early growth. You might have a scalable way to acquire buyers but if you can’t scale sellers simultaneously, the marketplace will not take off. While focusing on your initial pocket of liquidity, you should run experiments to identify the right liquidity tactics for your business. Once you have a good understanding of how to build liquidity, start thinking about expanding outside your niche.
You will often find buyers or sellers already operating in an adjacent location or sector and request you to expand. This makes it easier to seed the expansion as you already have built-in trust, demand and supply. If you don’t have this, think about expanding into an area where you can get efficiencies with the initial niche. This will provide more insight and let you build a more robust model for the business at scale.
Some marketplaces grow faster than others
Some types of marketplaces can grow a lot quicker through leveraging their buyers and sellers. Always think about how to use your customers to help you grow faster.
Kickstarter is a marketplace that leverages its users’ networks effectively. Firstly, every campaigner on Kickstarter will promote their idea to their social network to find backers. Backers are also incentivised to do the same so the campaign reaches its goals. This acquires a huge number of new people to Kickstarter without paid acquisition. Kickstarter, Airbnb and eBay are all examples of marketplaces where buyers can become sellers and exhibit better unit economics.
Another way to leverage sellers is to allow them to create content on your platform to help promote themselves. This content is then indexed by search engines and drives new buyers to the platform with no additional cost.
Disintermediation is a big risk in a marketplace business. You should make sure you reduce this to a minimum otherwise it can affect long-term success.
Buyers and sellers are less likely to disintermediate if they believe the value they get from staying on the platform is greater than going outside. The only way to stop this is to take a smaller amount from each transaction or provide more value. I would advise you to focus on adding value.
Below are some examples of ways to avoid disintermediation:
Take the payment
Many people find it awkward handing over money and prefer paying online. By taking the payment through your platform, you remove this area of friction and guarantee you’ll be paid immediately, which helps with cash flow.
Help when things go wrong
Buyer and sellers transact without knowing each other. As a marketplace, you can provide value in giving security to the transactions. This might be through offering an insurance policy for when things go wrong and delivering amazing customer service.
Reward good behaviour
As long as sellers make money on the platform, they’ll stick around. You should consider reinforcing this behaviour by rewarding sellers with better promotion.
Increase their productivity
You can add immense value to sellers by providing them tools that help them run their business more productively. Appear Here handles payments, provides legal documents, offers concierge services and has landlord dashboards as value-added services to keep landlords transacting through them.
A good marketplace works hard to ensure buyers get good, consistent service from sellers. Depending on the marketplace, this might be deliveries arriving on time or goods delivered as described. Marketplaces like Uber have had to build this in from day one. Other marketplaces might want to introduce this once they have enough scale so they can encourage good behaviour in return for greater revenue potential.
Airbnb does this well with its Superhost programme. Hosts that respond quickly and keep getting great reviews will be treated favourably by the company.
A final thought
Each marketplace is unique and a tactic that worked for one company may not be the right one for yours. Try to work from first principles of understanding your customers and getting your business fundamentals right.