How Do You Align The Overall Product Offering To Its Markets For Marketplaces?
During the dot-com days of the early 2000s, marketplaces sprouted up in a variety of markets, particularly B2B markets, and most of them failed. Why? There’s a longer story that can wait for a future article, but the short version is that these early marketplace operators thought that by simply inserting themselves into a functioning market, buyers and sellers would naturally gravitate to them because of the inherently superior economics of a marketplace.
In this article, we’ll talk about why, to create a thriving marketplace, operators need to look beyond the marketplace’s UI/product design, to the overall marketplace product offering.
There are six elements of a overall marketplace product offering. Below, I’ll outline how each element meets marketplace participants’ needs. As you’ll see, it’s way more complex than what a traditional software product needs to do to address product/market fit, and way more complex than the original dot-com marketplace operators ever anticipated. I would argue that you need to satisfy all six to achieve product/market fit for marketplaces.
1. Marketplace design that solves real problems — This follows from the discussion in the previous article of what makes an attractive market: a “real” problem that represents some market inefficiency or missed opportunity between two participant groups who ultimately want to conduct a commercial transaction with each other that is substantial enough to support a marketplace business. If the market problem is an “access” issue, then the full marketplace design needs to support solving that specific problem, from how participation is determined, to what’s the core interaction (e.g., search-based, matching-based, scheduling-based, etc.), to how trust between the two parties is determined, to what behavior is acceptable, etc. Marketplaces that miss key design elements, such as failing to address trust issues between buyers and sellers, or failing to maintain satisfactory buyer or seller quality, will fail to gain the commitment of its participants. SeedInvest is a good example of a marketplace that uses it marketplace design to encourage as many high-quality interactions as possible by imposing stringent qualifications on its participants (investors and companies looking for funding).
2. Product functionality that supports streamlined core interactions — The marketplace needs to have minimal friction for participants to complete their core interactions. If the goal of a marketplace is to solve an asset utilization problem, then the product needs to support buyers in finding inventory that meets their needs as easily as possible. Similarly, asset providers need to have an easy way to manage their inventory. Some early-stage marketplaces distract users with unnecessary content, cluttered home pages, or insufficiently tested interaction flows which work against providing a consistent customer experience for their most important functionality.
3. Pricing that minimizes friction — Ultimately, every marketplace needs a business model that supports ongoing operations and investments needed to sustain and, hopefully, grow the business. A poorly designed business model devastates the healthy growth of a marketplace. Some marketplaces set up pricing structures that create perverse incentives, e.g., excessive costs on the buy-side, forcing the buyer to make an economic decision each time before participating. Others may fail to charge enough or fail to put a business model in place until a later stage, making the change to new pricing structures unsettling for the marketplace participants. The structure of the marketplace business model needs to align with the goals of marketplace participants and exist within their willingness-to-pay range.
4. Appropriate policies and governance structure — One of the unique attributes of marketplaces is that they’re dynamic systems, controlled by a policy and governance structure to ensure that its participants act appropriately. A key area that marketplaces need to manage closely is their policies for bad actors. Too many bad buying situations can harm a marketplace’s reputation and impact participation. For example, a marketplace that has lax enforcement policies for suppliers that allow fraudulent vendors to offer substandard and/or counterfeit goods can ultimately hinder the full participation of buyers (for fear of receiving a sub-par product) and sellers (trustworthy ones who may lose legitimate business).
5. Sufficient selection of supply — Good experiences for buyers in a marketplace requires adequate supply to ensure that they find what they need. “Adequate supply” varies by marketplace and is impacted by suppliers’ selection, availability, and quality, but over time, marketplace operators will find the magic number of suppliers to ensure a good customer experience for buyers and encourage repeat usage. This speaks to the need for early-stage marketplaces to have a certain degree of focus in acquiring and retaining the right type of suppliers (e.g., by geography, product or service type, etc.) such that a good buyer experience is maintained.
6. Sufficient buyer demand — Potential sellers in a marketplace have choices to get their offerings to market. They can work with traditional retailers/eRetailers or distributors. They can go direct to the market with their own websites or sales forces. A well-functioning marketplace supports a business channel for sellers that drives enough business (and ultimately profit margin) to justify investing in that marketplace. For early-stage marketplaces, they’ll need to employ a range of strategies to get sellers to participate as buyer demand grows, i.e., the “chicken and egg” problem. At some point, if buyer demand is lacking, suppliers will go elsewhere, or at least not invest in the marketplace. Inactive suppliers can ultimately harm the perceived quality of sellers to buyers if too many have out-of-date catalogs, poor customer service, etc.
As we can see, marketplace operators have an extremely complex task in addressing these six elements simultaneously. Marketplaces are often sensitive enough that getting even one of these elements wrong can stifle growth of the marketplace and, I would argue, inhibit the ability for it to achieve product/market fit.
[NEXT: How Do You Measure Product/Market Fit For Marketplaces?]
[PREVIOUS: What Makes For Attractive Markets For Marketplaces?]
