Getting a marketplace to scale is often just as difficult as building one. The challenge is not only demand, but also supply. And it takes the right balance between the two to improve — or maintain, for that matter — sales volume and profit margins. Because without enough buyers and sellers, what’s the real incentive for either to hang around?
Uber tackled the problem with cash. In its early stages, the company paid drivers by the hour, regardless of the number of passengers. Its founders knew that no one wanted to wait 30 to 45 minutes for a ride, and the hourly wage ensured there’d be a constant flow of cars.
The hourly wage also provided a stopgap for drivers. As with any marketplace, they entered into the arrangement with the expectation of a steady flow of “jobs.” If demand lags too far behind, the chance of making any money gets mighty slim. Goodbye, supply.
Of course, artificially propping up supply isn’t always economical, especially in the long run. It’s a great strategy to improve customer satisfaction for scalability, but it’s not sustainable — nor is it an option for everyone. So how exactly do you scale a marketplace?
Rule 1: Focus on the quality of supply
Obviously, you’ll need sufficient supply to meet demand. But sufficiency isn’t enough. You must also find a way — and an efficient way, at that — to offer high-quality, thoroughly vetted supply.
For an example, let’s use Uber again. The company put quality control in its customers’ hands, asking them to rate their experiences on a scale of 1 to 5. Once “sellers” dip below 4.5, Uber will suspend them. Whether that’s the right standard is debatable, but the principle behind the policy is on target.
EBay had great success by using a somewhat similar tactic. It made no qualms about getting rid of sellers who misrepresented items or failed to fulfill contractual obligations. Buyers were held to comparable standards. You should never be afraid to do the same. Bad suppliers and buyers are like weeds that will quickly infest your entire marketplace.
Rule 2: Simplify supply options
In tandem with quality standards is simplification. If you simplify and narrow supply, you can more easily maintain its quality. You can also make it much easier for buyers to buy and sellers to sell. They both enter the marketplace knowing exactly what to expect.
Take Groupon, for instance. It provided buyers with one deal per day, and consumers visiting found a clear call to action — without being distracted by multiple promotions. Sellers, on the other hand, knew that they wouldn’t be competing with other offers, increasing the likelihood of building a customer base. No noise is an enticing proposition for any business.
The ultimate goal for a marketplace, at least for the first few years, is proving your fundamental value proposition — not confusing buyers with too many options. This better ensures this proposition is well received.
Rule 3: Build an infrastructure to cope with scale
Building the right infrastructure to handle growth requires a lot of foresight from leadership. The basic stuff is easy to identify, such as finding a payment-processing partner or dealing with the delivery of goods. But you’ll also need to plan for growth.
The best thing to do is map out where your marketplace will be in the next six to 12 months; then, look ahead three years, five years, 10 years, and so on. For each milestone, detail where the platform would be in terms of buyers, sellers, transactions, etc. Then, build a foundation to support the infrastructure for that vision to scale.
TaskRabbit, a marketplace for outsourcing small local jobs, took a slow-growth approach. Its leadership team knew how important an extremely satisfied customer base would be to success, so it took the time to establish this before venturing into new cities. It also had the infrastructure in place to learn from any mistakes made during the rollout in each new area. You can now find TaskRabbit in 19 cities across the nation.
Rule 4: Invest in consumer trust
A marketplace by its very definition is a platform where consumers can engage in business, and a certain level of trust is required for any type of monetary transaction to take place. For younger marketplaces, trust can come from transparency.
Transparency is one of the easiest ways to establish and maintain credibility. This can be done with a rating system, a review platform, a testimonial page, a leaderboard, or even a blanket quality guarantee — be it for product or service.
It’s also important to make good on your promises. Many companies and marketplaces lure users with taglines claiming to “deliver to your doorstep in 15 minutes” or “provide access to fully licensed professionals at half the price.” But this causes you to overpromise and underdeliver when the reverse should be true.
Balancing demand with supply is tricky — there’s no denying that. But when you have quality and users on your side and the infrastructure to handle growth, you can more easily gain the traction necessary to reach scale. And once that happens, you’re in a position for sustainable success.
TX Zhuo is a managing partner of Karlin Ventures, an L.A.-based venture capital firm that focuses on early-stage enterprise software, e-commerce, and marketplaces. Follow the company on Twitter.
Uber tackled the problem with cash. In its early stages, the company paid drivers by the hour, regardless of the number of passengers. Its founders knew that no one wanted to wait 30 to 45 minutes for a ride, and the hourly wage ensured there’d be a constant flow of cars.
The hourly wage also provided a stopgap for drivers. As with any marketplace, they entered into the arrangement with the expectation of a steady flow of “jobs.” If demand lags too far behind, the chance of making any money gets mighty slim. Goodbye, supply.
Of course, artificially propping up supply isn’t always economical, especially in the long run. It’s a great strategy to improve customer satisfaction for scalability, but it’s not sustainable — nor is it an option for everyone. So how exactly do you scale a marketplace?
Rule 1: Focus on the quality of supply
Obviously, you’ll need sufficient supply to meet demand. But sufficiency isn’t enough. You must also find a way — and an efficient way, at that — to offer high-quality, thoroughly vetted supply.
For an example, let’s use Uber again. The company put quality control in its customers’ hands, asking them to rate their experiences on a scale of 1 to 5. Once “sellers” dip below 4.5, Uber will suspend them. Whether that’s the right standard is debatable, but the principle behind the policy is on target.
EBay had great success by using a somewhat similar tactic. It made no qualms about getting rid of sellers who misrepresented items or failed to fulfill contractual obligations. Buyers were held to comparable standards. You should never be afraid to do the same. Bad suppliers and buyers are like weeds that will quickly infest your entire marketplace.
Rule 2: Simplify supply options
In tandem with quality standards is simplification. If you simplify and narrow supply, you can more easily maintain its quality. You can also make it much easier for buyers to buy and sellers to sell. They both enter the marketplace knowing exactly what to expect.
Take Groupon, for instance. It provided buyers with one deal per day, and consumers visiting found a clear call to action — without being distracted by multiple promotions. Sellers, on the other hand, knew that they wouldn’t be competing with other offers, increasing the likelihood of building a customer base. No noise is an enticing proposition for any business.
The ultimate goal for a marketplace, at least for the first few years, is proving your fundamental value proposition — not confusing buyers with too many options. This better ensures this proposition is well received.
Rule 3: Build an infrastructure to cope with scale
Building the right infrastructure to handle growth requires a lot of foresight from leadership. The basic stuff is easy to identify, such as finding a payment-processing partner or dealing with the delivery of goods. But you’ll also need to plan for growth.
The best thing to do is map out where your marketplace will be in the next six to 12 months; then, look ahead three years, five years, 10 years, and so on. For each milestone, detail where the platform would be in terms of buyers, sellers, transactions, etc. Then, build a foundation to support the infrastructure for that vision to scale.
TaskRabbit, a marketplace for outsourcing small local jobs, took a slow-growth approach. Its leadership team knew how important an extremely satisfied customer base would be to success, so it took the time to establish this before venturing into new cities. It also had the infrastructure in place to learn from any mistakes made during the rollout in each new area. You can now find TaskRabbit in 19 cities across the nation.
Rule 4: Invest in consumer trust
A marketplace by its very definition is a platform where consumers can engage in business, and a certain level of trust is required for any type of monetary transaction to take place. For younger marketplaces, trust can come from transparency.
Transparency is one of the easiest ways to establish and maintain credibility. This can be done with a rating system, a review platform, a testimonial page, a leaderboard, or even a blanket quality guarantee — be it for product or service.
It’s also important to make good on your promises. Many companies and marketplaces lure users with taglines claiming to “deliver to your doorstep in 15 minutes” or “provide access to fully licensed professionals at half the price.” But this causes you to overpromise and underdeliver when the reverse should be true.
Balancing demand with supply is tricky — there’s no denying that. But when you have quality and users on your side and the infrastructure to handle growth, you can more easily gain the traction necessary to reach scale. And once that happens, you’re in a position for sustainable success.
TX Zhuo is a managing partner of Karlin Ventures, an L.A.-based venture capital firm that focuses on early-stage enterprise software, e-commerce, and marketplaces. Follow the company on Twitter.