What do eBay, Etsy, Uber, Airbnb, and TaskRabbit have in common? They’re all well-known examples of online marketplaces, platforms that connect people who provide a product or service (sellers) with those looking to buy that product or service (buyers).
But what does it take for a marketplace to thrive? We caught up with Angela Tran Kingyens of Version One Ventures – an early-stage fund with a particular focus on marketplaces, social platforms, SaaS, and mobile – to get her take on what a marketplace needs to be successful, and to successfully earn users’ trust.
What factors are critical for building a successful marketplace?
High fragmentation is key. The most value is created in a market where both buyers and sellers need help connecting with one another. The higher the fragmentation, the higher the take rate as participants have less negotiation power.
Also, think about the buyer/seller relationship. When buyers are loyal to their suppliers, the value of the marketplace reduces. Buyers should prefer discovery and playing the field over monogamy.
Purchase frequency is a really important factor for a successful marketplace. Infrequent buying makes it difficult to build brand awareness and you essentially have to re-acquire customers each time.
And recently, we’ve been thinking a lot more about a marketplace’s total available market (TAM) and the ability to expand it by creating new value. While most marketplaces increase efficiency, not all of them also create new supply and demand. I wrote a blog post on this topic that explains our thinking a bit more.
Finally, marketplaces should consider how they can be part of the payment flow. The potential take rate is much higher when money is exchanged on the marketplace instead of offline.
How has the public perception of marketplaces changed over the past 5 years?
The marketplace concept has been around for centuries. But nowadays, geography is no longer a barrier and search costs associated with connecting supply and demand are low. This empowers everyone to be a buyer and a seller. The sharing economy allows us to leverage and monetize our underutilized assets, and the gig economy allows us to earn new income where we sell our time on our own time.
What tactics should a marketplace use to instill trust in its users (both buyers and sellers)?
Establish trust and credibility with transparency. For example, use a rating system, collect user reviews and testimonials, build a community around the experience.
You should also consider some level of guarantee like service quality, delivery time, or payment (i.e. manage more of the transaction, if necessary, by taking on more risk like buying inventory).
And if the terms of a transaction are broken, you should always follow up personally.
Are there certain types of marketplaces that should be more concerned about trust?
For product-focused marketplaces, trust is more of a concern when the value of the good is of high value – for example, when you’re selling a car or house.
For service-focused marketplaces, trust is very important. People care about who they let in their homes (to clean, to stay) or who they outsource their work to. The concern is slightly lessened when the service becomes more commoditized (ridesharing, food delivery).
For decentralized marketplaces, by definition everything – from trust and rules to identity and payment – operates at the peer level. Control is decentralized.
Are there any marketplaces out there who are handling trust and safety particularly well?
Airbnb is probably the prime example. And Uber is good (though their offering is much more commoditized, ratings were probably much more important very early on to get the flywheel going).
What is your #1 piece of advice for a new marketplace getting ready to launch?
Be patient. Marketplaces take time to build but just as difficult as it is to build a successful one, it is as hard to kill once scaled. Make sure you go after a market that is highly fragmented with a frequent use case. And be laser focused on achieving the holy grail of the marketplace – the virtuous cycle that starts with making sure your sellers are happy.
Want more tips on building a successful marketplace? Version One’s marketplace handbook is chock full of tips and insights. And check out Sift Science’s offerings to prevent marketplace fraud and keep scammers off the platform.