What Makes For Attractive Markets For Marketplaces?
Let’s now look at the first area to consider for product/market fit for marketplaces: the markets.
There are certain conditions under which marketplaces are uniquely positioned to solve problems between prospective buyers and sellers. The following are common conditions ripe for a new marketplace, and in many cases, more than one factor may exist.
Highly fragmented markets — Markets with many buyers and sellers are generally attractive for marketplaces. Marketplaces can play a role in organizing disparate buyers and sellers and helping participants find each other more efficiently. Markets with a high degree of concentration, particularly on the seller side, are often less attractive for marketplaces, as there’s less need for an open intermediary to help in the matching process. Moreover, large incumbent sellers can opt out of participating in the marketplace, given that they likely have other paths to their markets (such as with retailers/eRetailers). As an example, before eBay, the collectibles market was generally very local (such as the local antique shop or comic bookstore) or catered to a small audience (such as those willing to travel to a map collector convention).
Access problems — Marketplaces can solve matching problems when it’s difficult for buyers and sellers to find each other at the moment of truth: when buyer and seller are ready to make a deal. Marketplaces can help when large geographical distances separate buyers and sellers. They also can help when timing is critical (StubHub for concert tickets), or an item is unique or scarce (Etsy for crafts), used or out-of-date (Carvana for used cars). These examples represent purchasing situations where, absent a well-situated intermediary, buyer and seller may never find each other to complete a transaction.
Market inefficiencies — Marketplaces can solve problems in markets in which existing ways of doing things with incumbent players are inefficient. Local taxi markets are a good example; prior to Uber and Lyft, you would have to call an individual taxi company or hail a passing cab if one happened to drive by when you needed it. Ride-sharing services made the process of moving reliably from point A to point B much easier.
Low asset utilization — There are situations in which under-utilized assets could be made more productive if users could be found who are interested in utilizing those assets for specific periods of time. Airbnb is a great example of a marketplace increasing productive (i.e., money-making) utilization of unused or underused assets (spare bedrooms and empty apartments, condominiums, and homes). Marketplaces such as Airbnb and Vrbo make it easy for travelers to locate accommodations and gives property owners the flexibility to earn incremental revenue on their underutilized assets. Similarly, DoorDash makes its delivery drivers more productive and reduces the cost of home food delivery.
High transaction complexity — There are certain markets, especially B2B, in which the complexity of completing transactions for both buyer and seller makes the process inherently difficult. Think about a situation in which a product is purchased by one organization (procurement), used by another organization (a business unit) and paid for by a third organization (account payable). Marketplaces, also referred to as “market networks” in this case, such as SAP Ariba, solve the multi-party transaction completion problem by coordinating document flow, collaborations, and payments between its buyers and sellers, making the overall process efficient for both sides. Just ask a small seller how to figure out when they will get an invoice paid by large multinational company, or who to follow up with if it’s late. Before B2B marketplaces, this was much more difficult.
If you can meet one or more of the above conditions, you may have a good marketplace opportunity. However, the market validation process doesn’t stop here. Marketplace operators also need to look at the current set of alternatives existing participants have in meeting their needs (e.g. traditional retail or distribution offerings, eCommerce providers, etc.) and how large the pain is with existing solutions and/or missed opportunities between market participants in not finding and ultimately completing a commercial transaction with each other. In other words, is the market problem real and substantial enough to support a new marketplace solution?
If so, then the next step on the journey to product/market fit for marketplaces is to design the overall product offering to address the market problem.
[NEXT: How Do You Align The Overall Product Offering To Its Markets for Marketplaces?]
