‘chicken and egg' problem of marketplace startups 6 tips for building your own

‘Chicken-and-egg' problem of marketplace startups- 6 tips for building your own

Marketplace is one of the most profit generating business in the contemporary eCommerce market.

Businesses are flourishing with the new approach where they do not have to invest in inventory of products, but still make huge profit from commissions earned from the sales made by sellers on the site. It’s all butter, isn’t it?

Undoubtedly, marketplace is a treasure of revenue generation, but like every precious treasure, it is also not so easy to acquire. Otherwise, we would be seeing every other site becoming a marketplace to hunt the treasure. From supply chain management, customer support, product quality, marketplace reputation to bringing the sellers and customers on the site, a marketplace is a challenging business.

A marketplace business cannot acquire customers if there are no or only a few sellers on it, and would not be able to convince a seller to sign up if there are no customers on the site. That’s the chicken and egg problem of a marketplace where you get stuck between whom to bring first- sellers or the customers. Luckily, despite these challenges, successful marketplaces do exist.

In this post I have focused on how you can deal with the chicken and egg problem of the marketplace and understand why it’s not only about developing a marketplace site but developing a marketplace business on the whole.

What is the chicken-and-egg problem?

Caption: Which came first? Same can be said for seller and customers on marketplace sites Description: The chicken and egg problem applies well on the marketplace startups If there are buyers, but only a few sellers to fulfill the orders, stock won’t be enough to fulfill all the orders. So, the buyers will leave unhappy out of the product scarcity and probably not return back.

Yet, if there are no buyers on the site, how would you convince a seller to sign-up?

With no buyers for their products, seller’s won’t find your site beneficial for them. Even if they sign up, list their products, and wait for the buyers to come, there is no guarantee that a sale would be made soon enough. In case if they receive an order after months of listing, you can’t say if the product is still available in the stock with the seller, or it is fresh enough to maintain the quality. So, ultimately customers won’t get a quality service from the site, ruining the site’s name.

Supply is the biggest challenge behind a marketplace business. With this chicken-and-egg problem, it takes a while to build a marketplace business. A new platform generally lags in creating enough value for attracting new users. Whether, it is the customers or the sellers, they won't join you until you have something valuable for them.

Certainly, this is a huge issue for your startup, but as I said, despite these blockages, successful marketplaces do exist. So, stay tuned because we are going to discuss how can you survive this tough time while getting traction and building your supply and consumer base in the long run. Here are the six tips:

1. It’s all about patience and a plan-

Caption: Have patience till you establish the both sides-seller and customer community Description: Rushing out with impatience behavior won’t let you go far in marketplace startup It's a probable case that you might not see the signs of traction even after months of the startup. In this case, you should comprehensively reassess your business model and market. The nature of this time period is somewhat opposite to an inventory based eCommerce startup. There you build your own supply chain by stocking products by yourself. In marketplace, you need to build both the customer and seller communities; you will need more time to prove your value to both the sides.

It might take a few months for a marketplace to finally get and prove that value. However, in the meantime, you need to identify a niche for your business and start focusing on that very specific target. Used by most of the successful marketplaces, with niche market targeting your main investment would be the time spent in canvassing sellers. Etsy and Amazon are the two such examples, which started from a niche market (Vintage, handmade products, and books respectively) and later expanded to the broader section.

So, until you get to that level, you need to stay focused, steady and patient.

2. Take a close look on your initial investment-

Caption: Experts have different opinions on level of initial investment in marketplace promotion Description: know where you need to invest less and where you need to invest more The level of initial investment in a marketplace business is a matter of debate. Some experts say making big up front investment signals the entities that you are serious about the business and would stay focused in the long run. So there would be stability. It would also make your suppliers and producers comfortable about your intentions to keep the business running. Experts support this view by giving the examples of big upfront investments by several businesses like Microsoft's launch of Xbox. They made a huge commitment by spending around $500 million for promoting the platform.

However, my views are inclined with the other side of the experts who believe in regulating the burn rate during the initial periods. You need to give yourself some time to build the value for your business first. The reason is, not everyone is Microsoft, who has no scarcity of dollars, plus an already build business value. While some businesses might score huge success with early big deals, you cannot buy the speed when it comes to building a marketplace. Regulating your investments in the initial period would save the fuel and take you furthermore on the runway.

So take a careful look at your initial burn rate. There is no need for big teams, and big offices early on. Most of the initial marketplace investments are made only in two functions: Developing the marketplace site, and building the supply chain base with buyers and sellers community.

3. Tighten your target on the niche market-

Caption: Focus on a target market and apply efforts to win that niche Description: Establishing a reputation in niche market helps in expanding to the broader section Successful marketplaces may function as a repository for diversity of products and choices at the same place, but none of them has started in the same phase as they are there now. The example of Amazon and Etsy marketplace in the first point advocates this view. Etsy started as a destination for Vintage and handmade crafts and later expanded itself to other categories. Today, Etsy accepts integration even with stand-alone eCommerce sites and platforms. While Amazon started as an online bookstore and evolved as a huge marketplace of everything you can imagine buying. Even Amazon accepts integration with other eCommerce sites and eCommerce platforms.

Both of the entities tightened their focus in smaller vertical before they expanded into the bigger market. This narrow focus steadily became their largest USP and traction. Today, you won’t think of a better online place than Amazon to buy books , even if it is no more a mere bookstore and same goes to Etsy for handmade crafts.

The growth outside the niche would be an organic process that would develop in time. If the growth doesn't start organically, you can help yourself to speed it up by targeting on seller acquisition efforts.

You can prepare action plans targeting certain types of product categories and sellers, and then gradually expand outside the niche of the circle. You may use your geographical location as an advantage by first expanding the reach to local level before going for national and international level.

4. Focus on your niche users’ utilities-

Caption: Performance in the niche market decides the fate in the broader section Description: If you perform well in the niche market, it will carry on your legacy to the next level It is now an understood fact that successful marketplaces are built from a niche to the masses.

During the niche period, it is important to optimize the experiences of your early on-boarders before you can start appealing the masses. By focusing on user engagement for your early adopters (both sellers and customers) you will increase the likelihood of being discussed by them in their circle, and that discussion would contain something promotional for you.

For example, Etsy did a fantastic job as a marketplace for handmade crafts which led to carry on its legacy even after it expanded to other categories. Amazon did a fantastic job as an online bookseller in the US before it evolved into a marketplace giant with a reach across the globe. And, a bit different but relevant example, Mc Donald's did a fantastic job with its hamburgers in the US before expanding to other products and other countries.

All these entities, took a special care of their early adopters before the expansion, as a result, their legacy continued even with the new products and new audiences. So, before focusing on the broader section, make sure your marketplace performs excellently in the narrow section, ultimately taking you to the broader section organically and automatically.

5. Build the community with your Niche users-

A community of users can only be made if you focus on their utilities, and support them from time to time. Social media is the best platform to build a community. Utilize this platform to expand your reach to the users.

Meowingtons is a perfect example of how you can focus on your niche to take a leap to the broader section. It started with the thinking that out of the whole US population, there is a good share of women population. Out of the whole women population, there is a good share of women who like cats.

So, it focused on the women who like cats an started selling the cat accessories, cat utilities, and cat theme accessories for women. Today, it is a successful startup with more than 5 lacs followers on different social media platforms.

6. Trust your vision, but follow the stats-

Caption: You might find people not believing in your vision. Do you need to stop right there?

Description: Trust your vision and continue with the process even if you are alone The market is full of conceptions. Everybody have their way of doing things. You might get ridiculed by some of them regarding your vision. You will find people suggesting to back-off when your start doesn't happen with that pace.

Well, when building your marketplace business, or expanding it to newer boundaries, you have got to believe in your vision, but do not have a blind faith in your ideas. If you are going right, you would definitely find the positive signals at different phases of the business. Keep a track on your development and re-asses the steps you have taken and how they have worked for you. Have a survey from your early adopters about their experiences, audit the repeat customers and repeat sales, track the pace of seller sign-ups and their views about the user experience on the site.

If there are no positive signs of traction, and stats are not in favor of your ideas, rethink about continuing further. You cannot make a successful marketplace business with just visions, you have to stay tuned with the stats and facts.

Finally, The six tips we just discussed should allow you to give a correct start to your marketplace business.

Building both sides of the marketplace simultaneously is a hard job than a one-sided inventory model, but once you reach the scale, things would start kicking and would establish your roots well and firm. Till then have a little patience, and give your business enough runway to fly high with both sides being well established.