Building an online marketplace that will become a legend in your niche is a real challenge.

You need to get your hands dirty.

However, if you follow the main strategies and think three steps ahead, things become easier.

In this article, you will find useful tips on how to build a marketplace website from customer development and market segmentation to MVP creation and scaling your product.

Ready to jump in?

How to determine a demand for your marketplace app

  • Comprehend the problems your customers face

Before pushing your product into the market, ensure that this is exactly what your audience needs. It may sound obvious, but most of the startups ignore this stage and shoot in the dark instead.

According to CBInsights, the number one reason for startup failure is not having a market need for their solution.

Let's review an example of real-life marketplace failure, that proves the fact above.

Hello Parking is one of the marketplaces that has suffered the most from donning the rose-tinted glasses towards a target market.

Its intention was to be the marketplace for sharing parking spaces with people in need. The main reason for their shutdown was building the product the audience doesn't need.

The co-founders of Hello Parking said:

“The truth is that we huddled together to decide on ideas that sounded nice, built prototypes, put on our salesman hats, and didn’t understand why we weren’t closing deals. We have never defined clear hypotheses, developed experiments, and we’ve rarely had meaningful conversations with our target end-users. And while we’ve had some wonderful advisors in the parking industry, we should have met with everyone we could get our hands on.”

Another problem they’ve faced was the inability to scale up. As it turns out, a number of people who have looked for parking places exceeded those who actually wanted to share them.

  • Conduct a customer development

When it comes to marketplaces, customer development gains even more importance. You have to concentrate on both sides of supply and demand. This means you have to conduct customer development for each of them.

The basic rules of the customer development are:

  • Make assumptions related to your product
  • Build hypothesis about the problem
  • Validate hypothesis
  • Generate or validate your ideas

Let's imagine that you are building a marketplace app for HR managers and employees. Here are some examples of questions you can ask while doing customer development for your marketplace.

  • What are the problems you face when looking for employees/job?
  • What could be done to improve your experience with recruitment/application for a job?
  • What kind of product would simplify your hiring/job application process?
  • What do you like/dislike about the current solutions on the market?
  • What do you think about [your solution/startup]? (This is the most revealing one.)
  • How does this solution solve your problems and does it actually solve them?
  • How would you improve this product?

Many startup founders assume that the aim of customer development is to ensure that people will buy your product. However, this isn’t necessarily true. First of all, customer development has to give you the confidence that your product solves the problems of your target audience.

The lesson from Dinnr—a same day ingredient delivery service. The survey before product launch has shown that 70 percent of 250 target market respondents would buy the product.

This is what Michal Bohanes, the founder of Dinnr, said:

“So on the first day, we stacked the veggies and herbs, bought from wholesalers (not from supermarkets, pah! We were taking advantage of economies of scale!). We expected a torrent of orders. The torrent ended up being a trickle and we got knocked out of La-La land back into reality. On the first day, we had exactly… three orders. 12 orders in the first week.”

Let's get back to our example, but with a job board marketplace. What is the main takeaway from the customer development? In this case, it is to ensure that frustration with inconvenient solutions (ie. going to the grocery store) for your pain point is strong enough to make people buy your product (ie. delivering groceries instead).

Your aim is to learn as much as possible about your customers’ past experiences and find their pain points. The next step is to learn whether they don’t mind suffering with the frustration, or if they really do need another solution (the golden ticket).

  • Analyze your competitors

You have to know your competitors' strengths and weaknesses even better than yours. Stay tuned in to their progress and updates. When analyzing your competitors, be aware of the following data:

  • Competitor positioning
  • Market share
  • Geolocation
  • Target audience
  • Number of customers
  • Сustomer acquisition approach
  • Pricing and business model
  • Key features

This data is a valuable tool in helping to keep your startup on the cutting edge of your market. If you lag behind the competition, your business will lag behind too.

  • Create a strong value proposition

Define your unique value proposition, that will separate your e-commerce app from competitors. Find your own blue ocean strategy, pioneered by W. Chan Kim:

“Blue ocean strategy challenges companies to break out of the red ocean of bloody competition by creating uncontested market space that makes the competition irrelevant.”

During this stage of customer development, ask your potential clients how they would like to improve the current products on the market. This can give you an idea of what your unique value proposition should cover.

Remember, a value proposition is not about increasing the number of features or decreasing the price. The goal is to find the core of your customers' problems, something that impedes their efficiency at work or leisure. Ask your audience how they would try to solve this problem. If they haven't tried anything yet, it means that this is not a serious problem and they can easily ignore it. And if they can ignore it, your marketplace will not thrive.

Your product should stand out among competitors and divide your customers’ life into “before buying your product” and “after buying your product”.

  • Define your product goals

Planning is everything. Set measurable and real goals that your product aims to achieve within a particular timeframe. Make sure that you are scaling gradually.

Why does this matter?

According to the Startup Genome Project, 74 percent of high-growth internet startups fail due to premature scaling. This means that companies spend too many resources on customer acquisition, hiring sales team, marketing campaigns, adding new features, and building offices before even reaching a product/market fit.

When choosing product goals, don't overdo it. Grow your startup only when you have reached KPIs (Key Performance Indicators) that indicate the market fit.

These are some good signs to look out for:

  • You understand the problems of your customers and know how to solve them
  • You have settled on the market and found your target audience
  • You have created a strong buzz for your product
  • You have already got a base of satisfied customers
  • Your product brings in consistent revenue
  • You have a stable business model
  • Your customers can readily see the benefits of your product and problems the product solves

Business model for your marketplace platform

Marketplace business model is the most important aspect that can scale or destroy your business. Most of the marketplaces fail because of the unclear business model, that attracts only one side of your platform or doesn't bring a desired profit.

A business model is a strategic plan that serves as a pillar for successful and profitable performance of an organization. The heart of any business model is your audience.

Usually business model covers one or several groups of customers. That's why for more effective customer service, divide your audience into separate segments.

Let's dig deeper into it.

  • Customer and market segmentation

You can divide your customers into segments in the following cases:

  • If they have different requests, and, as a result, providing different offers for each of them
  • You need different marketing channels to reach them
  • They need different kinds of business relationships
  • Their profitability significantly varies

Let's say you build on-demand ingredient delivery marketplace. In this case, you can divide your customers into following segments:

  • Individual buyers
  • Wholesalers
  • Supermarkets
  • Restaurant owners

Your task is to create a strong value proposition for each of these segments and choose the best marketing channels for reaching them.

Attracting users to both the supply and demand side of your marketplace should be your number one priority. If one of the channels fail, it will directly influence others.

  • Find the best distribution channels

Distribution channels are those strings that connect your value proposition with your customers. Usually, distribution channels are divided into direct, indirect, owned, and partnered.

Let's get back to the example with ingredients delivery marketplace. Here are some examples of distribution channels for this type of marketplace:

  • Sales via own website
  • Partner shops and restaurants
  • Small retailers
  • Websites managed by third parties

Try out different channels and find what works best for your e-marketplace. Keep a balance between different distribution channels and find the most effective combination that brings clients and revenue.

  • Create the list of revenue channels

Ask yourself what your clients are ready to pay for. The right answer will help you to create one or several revenue channels from each of the customer segments.

Here are some of the main revenue channels you can use:

  • Payment for use
  • Subscription
  • Pay for rent/leasing
  • Asset sales
  • Advertisement
  • Commission from the sales

Try to come up with as many revenue channels as possible. In case one of the channels quits, you can always turn to another one.

Building an MVP for your marketplace website

  • Choose features for your marketplace

MVP is all about building a product with basic functionality, that will allow you to test it on the market. Instead of stuffing your marketplace with ”nice to have” features, add only those ones your users consider relevant.

Prioritize your features and choose the most important among them. Don’t deviate from your strategy, and only scale your product after you're ensured to reach a market/product fit. Pay attention to the following KPIs and analytics:

Data for service providers

  • Number of buyers per day/month/year
  • Activity tracking per day/month/year
  • Customer liquidity (probability that a visit will lead to transaction)
  • Profit by countries/cities
  • Repeat purchase ratio
  • Revenue from buyers
  • Number of orders per buyer
  • Analysis of customer segments
  • Market conditions and trends

Data for marketplace owner

  • Number of listings on the marketplace
  • Listing growth rate
  • Provider liquidity (percentage of listings that lead to transactions)
  • Total sales value of the products or services sold via your marketplace
  • Tracking the steps a user takes before buying
  • Customer acquisition cost (how much money you spend on new customer e.g. customer support or paid ads)
  • Seller growth rate
  • Revenue by location, market, acquisition channel or time
  • Take rate (percentage of the Gross Merchandise Value retained by your marketplace)

Scaling your marketplace

After you have reached a market fit, created a word of mouth for your business and gathered a user base, it’s time to grow.

Here is how you can do it:

  • Go multiplatform

According to ComScore, more users go multiplatform in comparison with users that are mobile or desktop only.

Developing a mobile app for your marketplace will make your users’ experience more smooth and bring you more users.

  • Scale the functionality

Grow your marketplace with additional functionality and give your users more opportunities. Listen to feedback, communicate with your audience, and add features they need most. Always innovate and connect with your audience through regular updates.

  • Add third-party integrations

Here are some of the examples of third-party integrations you can add:

  • Marketing and statistics
  • Payment system integration
  • Email marketing software
  • GPS tracking
  • CRM
  • Chat/messaging software

All of these options help beef up your product and make it more appealing to new users.

  • Build a community around your idea

One of the ways to create a dedicated community around your marketplace is storytelling.

You can create a blog and engage your users to write about their experience on your platform. For example, if it is car rental marketplace, your users can write about their adventures and trips. If it's food ingredients delivery platform, engage them to share different recipes. Believe me, there is always a scope for imagination!

  • Partner with other businesses

Partnership with other businesses is a win-win solution that will help you to reach a wider audience. For example, if you have bike sharing marketplace, you can partner with bike shops allowing them to access the community of renters and make revenue from unsold bikes.

  • Organize events

Event organization is another nice way to unite people around the idea of your online marketplace. Contests, loyalty programs, and even themed parties will make your audience feel like a part of a large community.

Conclusion

Now, you’re all set and armed with the basic knowledge to build a successful marketplace website. Be meticulous about each detail and aspect of your platform. Build scalable marketplaces that have a space for improvement, and always keep your buyer persona in mind. Let these tips guide you a stronger product/market fit and a more engaged customer base!