The Ingredients for a Successful Marketplace

Lots of entrepreneurs aim to build a marketplace.  It’s a popular type of startup.  People look at the success of an oDesk or and Uber and think, “I’m going to build the Uber of _______” and they fill in the blank with any category from construction rentals to lactation consultants.  But, not all marketplaces will work.  You need certain ingredients in an industry to have the potential for a successful marketplace.  Bill Gurley did an exceptional job mapping out 10 key factors for marketplaces.  I have my own framework for thinking about different verticals. The following is based on a conversation I had with Semil Shah.  It’s my take on 5 key ingredients.  I left out market size discussion, since I believe you can build a successful marketplace without  shooting for venture size returns.  

Ingredient #1 – Recurring Usage

Much easier to acquire a repeat customer than to acquire a customer for the first time. 

Everyone knows that there is a huge drop-off throughout the customer on-boarding funnel.  Maybe 90% of visitors never sign up, and then a further 60% of those signups may never actually make a transaction.  So, when you do finally convert a visitor to an active participant in a marketplace, you better do everything you can to keep them engaged and making further transactions.  Of course, this is nearly impossible if you’re building a marketplace for wedding photographers since people (theoretically) only get married once.  Therefore, ingredient #1 is Recurring Usage. It is fundamental to a marketplace.  The best marketplaces have high-frequency and highly recurring transactions.  Example: Uber – most of us city-dwellers use taxis all the time, maybe several times every single week. If you’re considering a marketplace, look at the standard buying behavior in that industry: how often do people buy? 

Ingredient #2 – Irregular Usage

This ingredient is less obvious.  Credit goes to Vidur Apparao for articulating this ingredient’s key role in a marketplace.  Irregular usage is important because it: 

1) Increases the need for on-demand resources, and

2) Reduces the likelihood of getting a dedicated resource.

If you don’t know in advance when you’re going to need resources, it’s hard to plan and people would like an instant, on-demand service instead.  Additionally, if you don’t know when the need will occur, you cannot hire a dedicated resource to be available whenever you need it.  

For example, my buying habits for massages are highly irregular.  I get massages from time to time, but it is usually after some sort of strenuous workout or when my body just happens to be sore.  (Of course that seems to be happening more frequently as I get older).  Therefore, I rarely plan appointments massages weeks in advance.  I strongly prefer to get on-demand resources within a couple hours of when I feel the need. Additionally, since my usage is irregular, I do not have a single go-to therapist that I can expect will be available when and where I happen to want a massage. 

Ingredient #3 – Standardized Work

Standardizing the work means you can guarantee the quality. 

Horizontal markets can thrive in custom environments, eg Craigslist and eBay.  But for a vertical marketplace to work well, the work or items must be standardized.  The more standardized the work, the more a company can control the quality and reduce the effort required by the customer.  If custom work is required, the buyer needs to spec out the work, select an appropriate provider, and carefully manage the process to make sure the requirements are met.  The onus falls on the buyer to manage quality. There is no way that the middleman can guarantee quality since it is subjective for any custom work requirements. In contrast,  if the work is standardized, you can typically measure the quality of the output. If you can measure it, you can improve it. 

As an example, look at Rev — they provide audio transcription and translation.    The inputs and outputs of an audio transcription are consistent – audio files go in, transcriptions come out, and we can score the results.  Rev can manage the entire process since they know what needs to be done at each step and they know the best available transcriptionist to do the job.  The result is a dead simple process for buyers that will have continuously improving quality. 

Ingredient #4 – Little Trust Required

Trust is a barrier to transacting online.  Every time you enter a transaction with a new individual or company, there is some part of everyone that worries about  getting screwed.  If the dollar amounts are small, people worry less.  If they are large, people worry more.  If the transaction involves additional potential loss, such as having your house robbed by giving away a key, the stakes are higher.  If your kids safety is involved, the stakes are at an all-time high.  This last one is why an Uber for babysitters is going to be exceptionally difficult.  Marketplaces work best when there are relatively low stakes involved in the transaction, it gives people the willingness to transact online with an unknown entity.  

There is good news on this front though… Facebook.  Facebook (and to a lesser extent LinkedIn and Twitter), do an incredibly good job at instilling trust in each other.  Airbnb has been masterful at using Facebook connect to instill trust in renters and owners.  I know as an Airbnb user, I feel 10x more comfortable renting to someone who has a well established Facebook presence and is a 2nd degree connection.  These networks increase the amount of trust we will place in an unknown entity, thus enabling more marketplaces to flourish. 

Ingredient #5 – Non-monogamous Relationships

This ingredient is a result of little required trust and highly standardized work.  The result is that the buyer doesn’t care if they have the same provider every time.  This is true for movers, for example.  It is not the case for housecleaners — and I don’t believe the marketplace for housecleaners is a good one even though it is highly recurring.  It also makes a marketplace for something like dog walkers a bit problematic.  My wife and I have a lovely dog named Isabella and we like using the same dog walker every time we need the service.  This is because we’ve given him a key to our house and he takes good care of our dog — we’re not willing to change up service provider every time we need a dog walker.  This is less of an issue for dog-sitters though, because I don’t need to handover a key to my house.

These 5 ingredients aren’t everything that you need, but they’ve always been a helpful framework for me to evaluate whether a marketplace should exist in each vertical.  

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So, I wanted to run a little analysis.  I spent a few hours going through Craigslist service categories and thought through 30+ based on the 5 ingredients above.  I didn’t take market size into account.

A few interesting results as I went through the categories. 

Some of the best: taxi drivers (Uber) and dog sitters (DogVacay).  Some where I haven’t seen success yet: massage therapists and travel agents. 

Some of the worst: wedding planners, interior decorators, and landscapers.