7 Keys to Successfully Scaling Your Marketplace Business

A common view among digital marketplace start-ups is that once they’ve achieved product/market fit, growing the business will be relatively straightforward, if not easier. From my experience working with marketplaces navigating growth, this phase brings on a whole new set of challenges and complexity that are distinct from the earlier phases of marketplace maturity. Many marketplace companies consider it even harder to master the growth phase, given that marketplaces have to grapple with a broader set of both internal and external factors and acquire a new set of skills and capabilities to be successful.

Examples of “growing pains” marketplaces face during the growth phase include:

• With legacy manual processes, such as customer vetting or transaction support, the marketplace struggles to keep pace with the soaring demands of its growing customer base, resulting in bottlenecks and missed growth opportunities.
• Following successful initial seller acquisition efforts, the marketplace struggles to keep sellers engaged in the marketplace and experiences high churn. This requires dedicating resources to acquiring more sellers just to maintain current revenues, which crowds out resources to fund broader expansion opportunities.
• Although the marketplace’s founding vision is still strong, as headcount grows, increasingly inconsistent messaging, such as one group of sales reps leading with a “value” message and another leading with a “low cost” message, causes customer confusion and reduces sales.
• After the marketplace gains traction in one city and starts to expand nationally, it starts getting the attention of incumbent players, who mount a competitive response. Now it needs to figure out how to best compete with these larger, more well-funded players.

This article identifies the critical success factors that marketplaces poised for growth should consider to ensure that their internal structure, processes, and growth engine can accommodate and successfully drive growth and avoid these and other marketplace growing pains.

Important Consideration Before Scaling a Marketplace

Before I discuss these success factors specifically, I have a general point of view on when to begin the growth/scaling phase for a marketplace business. In my experience, it’s difficult for a marketplace business to formally begin scaling until it has achieved product/market fit. In some unique situations (what Reid Hoffman and Chris Ye coined as Blitzscaling), certain conditions exist where it could make sense for a marketplace to figure out the elements of product/market fit as it grows — e.g. it has significant financial resources available while operating in a competitive market with high stakes on becoming the market leader.

However, as I outlined in a previous blog, achieving product/market fit is significantly more complex for marketplaces (or any multi-sided business) than it is for one-sided businesses. For example, marketplaces need to solve the product requirements of two or more customer groups, craft a business model to generate revenue without stifling demand, and identify the formula for maintaining sufficient supply and demand that ensures a good customer experience.

For most marketplaces, pursuing and addressing a growth strategy before achieving product/market fit is risky. It’s important for the marketplace to generate a solid revenue stream that supports its investments in growth and scaling to prove to the market that its business model works at higher transaction volumes, rather than relying primarily on investment capital to fund this stage of marketplace maturity.

Success Factors For Scaling a Marketplace

1. Build your growth engine around programs with multiplier impact — When a marketplace seeks to scale, it is important to have an efficient growth engine. The managers tasked with planning for growth have a wide range of channels to choose from: traditional media, digital marketing, partnerships, etc. Given the multi-sided nature of marketplaces, they have an additional growth tool that has a multiplier effect on customer acquisition and revenue growth efforts: programs that take advantage of the mutual attraction among buyers and sellers.

The forces behind this increased value acceleration for marketplace businesses can be summarized in two key effects: network effects and flywheel effects. Successful marketplaces have a keen understanding of how the two operate in their ecosystem to increase value to participants and execute programs that drive accelerated growth.

Network effects — Network effects, similar to gravity, is a force that attracts buyers and sellers to a marketplace due to the geometric increase in value they receive as more participants join. In practice, I see network effects informing marketplace operators of the importance of driving increased numbers of participants and corresponding connections among buyers, sellers, and other parties operating on the marketplace. The connections become the enabler to generate additional value through interactions among marketplace participants. This effect can play a critical role in accelerating customer acquisition efforts on both buyer and supplier sides by creating an increasingly compelling value proposition as the marketplace grows. Growth programs that target buyers and sellers who find ongoing value interacting with other participants on the marketplace is key to harnessing this effect.

Flywheel effect — This concept, popularized by Jim Collins in his business classic Good to Great uses the analogy of a very large spinning disc: it may take some effort to get it in motion due to its weight, but once it’s set in motion, it has increasing momentum as its spin increases. For marketplaces, the analogy suggests that it will take some effort to acquire the initial participants and get them to interact with each other, but once it does, then growth efforts have a baked-in multiplier impact: more buyers drive more transactions, which attract more sellers, which attracts more buyers, and so on. This growth framework also considers additional sources of value, such as an improved cost structure (e.g., economies of scale) and increased learning about how the business works (e.g. data analysis).

Although both effects are similar to each other, I have often found the flywheel effect analogy to be more practical in operating situations, particularly in communicating an overall growth strategy across an organization. Understanding how to get your marketplace’s flywheel started and spinning is particularly useful in thinking beyond simply getting more connections — to highlighting the value of increased selection and inventory, exploiting an efficient cost structure or capitalizing on the increased learnings about what makes the marketplace successful.

2. Manage your marketplace by a core set of metrics that drive economic value — Once a marketplace enters growth mode, managing the business by the numbers becomes increasingly important. As marketplaces grow, they can quickly become inundated with business metrics. This is often driven by the technical nature of the business that can generate lots of data, that serves as a magnet for those eager to look for business trends, assess company performance, find data to justify projects, etc.

What metrics are most important for a growing marketplace business? I like to find one or two that demonstrate the highest correlation to increased economic value to the business and are actionable for the operating team to execute against.

Key question to ask: “If we monitor this metric and achieve this benchmark, then will we achieve the core objectives for the business, such as revenue goals, profitability goals, etc?”

There are three key points to identifying and managing the tight set of core metrics that are good indicators of economic value:

• To find your core metric(s), look for metrics around the primary interaction of your marketplace that correlate strongly to profitable revenue growth (e.g revenue yield rate, unit cost, utilization rate, etc.).
• Once you’ve found your core metric(s), find a way to communicate it broadly, such as simple, uncluttered dashboards, both internally (e.g. to senior leaders, operating teams, etc.), and externally (e.g., to investors).
• It’s easy to get excited about certain metrics, such as registered users, social media followers, or company valuation, but they don’t directly drive economic value. These overly general metrics, sometimes referred to as “vanity metrics,” should be used with caution as to whether they drive economic value for the businesses.

3. Improve your marketplace product efficiency and productivity — As a marketplace looks to scale, there are some obvious product investment areas to consider. For example, if you’ve focused initially on the U.S. market and are looking to expand internationally, investments in localization, multiple currencies, etc. will be required. If you’re looking to expand into adjacent product categories, you’ll need to support additional product types, providers, and/or unique collaboration/transaction capabilities. However, there are other, less obvious product development opportunities that can deliver outsized impact when a marketplace is scaling.

When building your initial marketplace product, you often must cut corners to get the product out the door. Some processes may be manual, and some may be poorly designed. There may be hidden drop-off points in the customer conversion process. This is OK since, with limited time and resources, it’s not practical to build the perfect product before you’ve proven that it’s the right solution for the market. The goal in developing your initial marketplace offering is to prove that your approach to solving a commercial problem works using the marketplace model with a small subset of customers relative to the overall market.

However, when you begin scaling your marketplace, it becomes more costly not to address these product inefficiency issues. For example, the lost revenue due to having high customer drop-off rates during the check-out process can be greater than the cost of development resources to fix the issue. Such product productivity enhancements can often have attractive ROIs in terms of reducing costs, increasing revenues, or both. For example, Jonathan Golden, former product lead at Airbnb, mentioned that a project focused on “streamlining the user experience” uncovered an opportunity to improve its booking process, which resulted in increasing overall booking conversion rates by more than 60%.

To address these product improvement initiatives, marketplaces generally have three options:

• Build a custom software solution.
• Rent or buy capabilities from outside vendors.
• Implement a better manual process internally.

Depending on the costs, benefits, and time-to-market factors, marketplaces can then determine the product delivery strategy that yields the greatest impact.

4. Invest in a “smarter” marketplace — As marketplaces scale, they will need more staff to support common business functions such as finance, HR, legal, etc. But given the unique complexities of managing a multi-sided marketplace business, special attention should be paid to hiring people with specialized skills. Marketplaces are unique business structures, often requiring a deft mastery of issues, such as:

• Balancing supply and demand (where an economist would be valuable)
• Monetizing the service without negatively affecting demand (where a pricing expert, ideally one who understands multi-sided businesses, would be valuable)
• Determining optimal product or service category architecture (where a taxonomy expert would be valuable)

Hiring people with these types of specialized skills can help unlock value and increase the effectiveness of various business functions as the marketplace scales. If you’re unable to hire specialists in skilled areas, sending folks to targeted training programs can be a good option.

Dedicating time and resources to uncover insights into the drivers of growth for marketplace businesses can also yield breakthrough results. For example, investing in market research or targeted customer outreach can uncover sources of customer dissatisfaction or drivers of revenue growth. For example, at Ariba, I oversaw market research efforts that provided unique insights into customers’ perceptions of value that drove offering changes that resulted in a several-fold revenue increase. Uber’s CEO, Dara Khosrowshahi, spent a few days as a driver to fully appreciate the issues drivers have with their Uber interface, which resulted in increased driver acquisition rates and satisfaction.

5. Manage the stakeholders within your marketplace ecosystem — One thing that makes marketplaces unique is their central position within their market as an intermediary and their relationships with a broad array of stakeholders. These stakeholder groups include multiple customer groups (buyers, sellers and possibly others), business partners, shareholders, governments, communities in which they operate, environmental constituencies, etc. While all businesses have stakeholder groups like these, what distinguishes marketplaces is that being a central player in the markets in which they operate brings an extra level of scrutiny to their business practices and that they can impact these stakeholder groups in unique ways.

Take for example customer stakeholders. As marketplaces grow, the customer count on the buyer and/or seller side can get into the thousands or even millions. Many sellers are individuals or small businesses, and, if they are successful, can receive a significant amount of income from selling on marketplaces. This places an additional layer of consideration on the marketplace, as changes they make (such as in sales policies) can impact the livelihoods of their seller stakeholders. When Airbnb made some unexpected changes to their cancellation policies during the height of Covid, it created a significant backlash from their hosts.

To address the array of stakeholder management situations that a marketplace can face, there are several strategies to consider:

• Marketplaces can establish policy statements or points-of-view as to how they interact with and support their various stakeholder groups
• Marketplaces may fund dedicated resources to manage various stakeholder groups, such as a community affairs or government affairs lead.
• In cases where marketplaces financially support a significant number of individuals or businesses, maintaining a good customer management function and outreach programs can also be beneficial to increase their understanding of important issues with their supply-base and/or partner community over the longer term.

6. Exploit advantages of your marketplace model over the competition — As a marketplace gains broader market adoption, competitors across the board will start to notice. In many markets where digital marketplaces operate, there are three primary competitor types:

• Large providers that sell to customers directly (through direct sales, sales on company websites, etc.)
• Traditional intermediaries (such as brick-and-mortar retailers or distributors, to their digital counterparts)
• Other marketplaces

It’s important for marketplaces, at this stage, to identify their sources of competitive advantage relative to these players to inform their go-to-market strategies, competitive messaging, product development efforts, etc. to reinforce their unique positioning in the market.

Relative to the first two competitor types — traditional intermediaries and direct sales — marketplaces, by their very business model, generally have clear areas of competitive advantage that cannot be replicated by these players. For example, marketplaces often are “asset light,” i.e., they don’t own the assets that are used in providing the service (e.g., Uber doesn’t own cars, Airbnb doesn’t own rental properties), so they have inherent capital cost advantages . Marketplaces also can aggregate a broader range of supply than traditional intermediaries, which have more curated lists of vendors, or individual providers who only sell their own offerings.

Competition from other marketplaces presents a whole different dynamic. Marketplaces can sometimes compete on the basis of different business models. For example, one marketplace may have a buyer-pay model and another might have a seller commission model. Marketplaces may also compete based on their ability to deliver a superior customer experience or levels of trust. Marketplaces often need to compete for commitment and mindshare among their sellers, as they have other options to go to market. It is important for marketplaces to define their bases of competitive differentiation that gives them an advantage over other marketplaces as well.

7. Operationalize the “fundamental purpose” of the marketplace to excite customers and align employee behavior — Marketplace start-ups are usually formed when the founders identify a market problem and then develop a vision for how they can solve that problem. As marketplaces grow into larger organizations, with more employees, customers, and partners who are often spread across many geographies, this original vision can become diffused.

Why is this a concern for marketplaces? First, for customer-facing employees, inconsistent messaging can negatively impact the effectiveness of sales and customer success activities. Moreover, organizational incentive structures (such as MBOs) can align employee behavior only so much, as there are many situations that occur within an organization that are not addressed by such incentive structures (for example, how to approach a conflict or address an unexpected situation). These issues are particularly acute for marketplaces, given the wide array and potential size of their stakeholder groups discussed above.

To address these problems, a marketplace needs to operationalize what I call its “fundamental purpose.” This fundamental purpose of a marketplace (or any business) is an articulation of why the marketplace business exists in the first place. Fundamental purpose addresses core questions about the business such as, “What are we here for?” “What gets us up every day?” “How are we making the world a better place?” The fundamental purpose of a marketplace often combines its unique insight into specific market inefficiencies with a broader emotional appeal as to why addressing the inefficiencies matters. A marketplace for used goods could have a fundamental purpose of reducing waste to reduce the need to find more landfills. A marketplace for caregivers could have a fundamental purpose of making caregiving accessible to the broader society to allow people to maintain their income during their child-raising years.

The marketplace’s fundamental purpose, once defined, can then form the basis for a host of company artifacts that can serve as the cultural glue that further aligns employee behavior and improves its impression to customers and business partners as to “why should I do business with you?” For example, the fundamental purpose can inform the selection of key company stories that can be used to provide examples of customer success; these stories can also be shared with customers to get them excited about partnering with a company that shares their values. It can also serve as the basis for your company values, which can be helpful in providing employees with a framework for expected behaviors and norms. These and other artifacts, derived from the marketplace’s fundamental purpose, can help ensure that the company and its stakeholders scale in the same direction around a common set principles, messages, and expected behaviors.

Navigating both the internal and external challenges of scaling a marketplace business requires the careful balance of many factors, while striving for business growth. Taking time for thoughtful planning around these seven factors can help drive the success of the marketplace business during its growth phase.

A special thanks to Rishi Bhalarao, Niraj Dattani, Geo Catano and Sabrina Dammholz for their support on this article.