#12 - Digital Marketplaces
Driving traffic for products and services is hard. Customers find it difficult to trust an online store they have never used before.
Digital marketplaces lower the friction for transactions. Sellers gain more traffic and get set up quicker. Buyers gain increased trust and lower prices through competition. Marketplace builders gain fees for facilitating transactions.
Sell more on digital marketplaces.
Choose the right marketplace.
Horizontal or vertical? Amazon sells everything to everyone. AirBnB sells accommodation only for people who prefer affordable urban lodging.
Show testimonials and reviews: people trust each other more than they trust the marketing copy. 93% look at other people's reviews before buying. Getting over 3 stars is crucial.
Reduce friction. Offer free shipping. Provide 100% money-back guarantee. Enable buying with 1-Click. Make it fast, low-risk and low-friction to select you, not the competitor.
Buy new assets and invest with less friction in niche marketplaces:
Build your own marketplace.
Understand the basic 4 dynamics: network effects, heterogeneous vs. homogeneous supply, 2-side incentives and unit economics.
Build a bare bones version first. Minimum viability doesn't necessarily mean ugly and buggy. The goal should be to delight the early adopters. See Minimum Lovable Products.
Build your own marketplace
Existing demand drives up sales.
Faster comparison of products for customers.
Network effects: each new buyer and seller drives up the utility value of the marketplace.
Large variance of fees.
The chicken-egg problem of getting buyers and sellers to join can be tough to crack.
Afraid of late-to-market? Chempoint (an online chemicals marketplace) has existed since 1999. That didn't stop Ali Amin-Javaheri founding Knowde in 2017. Knowde closed a $14 million Series A funding round in 2020.
The basic building blocks of a marketplace will remain the same. There will always be a need to build up buyer trust, foster an active community and offer support services. Lessons learnt from a 1000-year-old marketplace.
Service-based marketplaces with regulated and licensed suppliers will become more common. Honor provides quality elder care. Houzz lists licensed contractors, architects and interior designers. Wonderschool provides child care and microschools.
Online marketplaces 101 - How to Sell Effectively - Buy your competitor's products, react fast to arising problems and be patient when testing pricing.
How to Kickstart and Scale a Marketplace Business - Lenny Rachitsky (ex-AirBnB) argues that what worked in the past in the marketplace space won't necessarily work again.
Vertical and vetted marketplaces are on the rise. Starting a marketplace has never been easier due to purpose-built tools and no-code platforms.
Each marketplace will inevitably face its unique challenges. Understanding the core principles is key. Technical issues are probably not the hardest part; getting the flywheel rotating is.
The underlying fundamentals of marketplaces will not change: trust, community and eliminating friction for transactions.
Thanks for reading. See you next week!