The most impactful companies of the past decade have been platforms. These companies facilitated the emergence of other businesses on their platform, typically without owning any inventory or taking on any risk. The earliest example was eBay, which enabled all sorts of individual sellers to reach many customers. Airbnb connects individuals who want to rent their homes with people who need places to stay. Alibaba enables small merchants in China to reach consumers across the world. Alphabet (Google) connects advertisers with searchers and Amazon enables everyone from authors to hardware makers to sell things in its marketplace without owning a single thing.
Most unicorns are platforms, and they're winning because of their ability to capture economies of scale and reach. They thrive by attracting a network effect, which is when the value increases as more people join the network. This creates a virtuous cycle that can lead to explosive growth. Because of this, platforms tend to dominate their respective industries and often become monopolies.
And, marketplaces are a type of platform business that enables transactions between parties. A marketplace not only connects buyers and sellers but also provides a platform for them to interact with each other. They do not produce inventory themselves and in most cases, they charge a commission fee on the transaction; they may also take a percentage of the value of the transaction.
Marketplaces are great businesses because;
- They create network effects. It means that the more people use the platform, the more valuable it becomes for each user. When a new person joins the network, they don't just increase its size or usefulness by one person, they actually improve its utility for everyone else as well. For example, On eBay, the more items that are listed for sale on the marketplace, the easier it is to find what you're looking for and vice versa.
- They're efficient: Inventory is one of the largest costs to any company. It's not just the cost of materials but also the labor, storage costs, and overhead expenses associated with an item. So, one of the most fascinating things about marketplaces is that there's no inventory. (ie; Uber, the world’s largest taxi company, owns no vehicles. Facebook creates no content. Airbnb owns no real estate)
- They're flexible: One of the most important things to consider when starting or growing your business is how responsive it can be in order to capitalize on changes in industry trends or customer needs. So, having the ability to pivot when needed is super important. The thing about inventory is that it ties up a lot of money and time. For this reason, not having any inventory can make pivoting easier if necessary.
- They're scalable: A company that doesn't need to keep inventory is more easily able to scale. Scalability is the ability of a business to start small and grow as needed, without having to invest disproportionately in infrastructure as it expands. If the company has no inventory, then it doesn't need as many warehouses and storage space for products. It also doesn't need as much labor to manage inventory and price items according to demand.
- They're defensible: A marketplace is defensible when it has strong network effects. When the network effects kick in, growth follows an exponential, rather than linear, trajectory and it makes it hard or impossible for a rival to lure customers away.
- They're lucrative: Marketplaces have substantial low-cost and very high gross margin advantages over retailers (pipe businesses) because they don't create the products and services they sell. They don't carry inventory and they don't take on any of the risks.
Because marketplaces often take on the role of a matchmaker and need to make sure that buyers find what they want and sellers can meet demand. That means there needs to be enough supply and enough demand and those things need to happen simultaneously for marketplaces to work. So, It's like starting two companies at the same time and getting them to speak to each other.
I'll give you a few pointers on how to solve the chicken-and-egg problem including the lessons I've learned from my own experiences building a horizontal C2C marketplace (zebramo.com).
Disclaimer: I'm the founder of Zebramo - a C2C horizontal marketplace that makes buying, and selling quick, easy, and trusted. Founded in 2014 in Istanbul.
Solving the chicken-and-egg problem 🐣
The value of a marketplace is determined by the number of people on it and how engaged they are. And there needs to be an initial set of users on both sides, and those users need to find value in the marketplace. But when these platforms start out, they do not have enough intrinsic value to attract an initial set of users. So, there's almost no value in the very early days. Its value is created through the presence and activity of users. Sellers will not come on board unless there are buyers, and buyers will not find the platform useful without any sellers. There is a chicken-and-egg dilemma in which expanding one part of the equation depends on the other, and vice versa.
So, the question is;
- How can you create demand for your platform when there is no supply or vice versa?
- And which side do you create first? Supply-side? or demand side?
It heavily depends on the business model, so I'll focus on the C2C model where consumers can directly buy and sell goods and services with one another.
In this model, with a single profile, a user can be a buyer and a seller at the same time. This makes it relatively easier to solve the chicken-and-egg problem. You can convert a buyer to a seller or vice versa once you onboarded one side.
In order to bootstrap our C2C marketplace, the initial phase of our strategy was to build demand first. And instead of going horizontal from day one, we started only with a niche vertical primarily targeting the women's fashion category to make a dense community first. This was intentional to reduce the challenges associated with initial low liquidity. It's always better to narrow the scope of the offering significantly until sufficient scale allows you to expand to build a broader marketplace. Eventually, we launched into other verticals (category expansion), like electronics, books, and collectibles and it became a multi-category marketplace later on.
Practically, we applied the following strategy;
- As the saying goes, "fake it until you make it". We first created hundreds of fake seller accounts with real listings of popular fashion brands (we actually purchased hundreds of various fashion items and listed them with huge discounts to lure buyers. (Going vertical helps here too because we only had to buy and list a single genre of products)
- Then we added fake reviews to create an initial reputation for those seller accounts. Reviews were all positive with high rankings (5 stars). Ratings can be considered legitimate because we were the ones who managed these seller accounts, so no doubt about the high quality :) At that point, there were already hundreds of listings. We were ready to take off 🛫
- Next, we created an aggressive and effective marketing campaign on Facebook. There were no Instagram, Twitter, or Apple Search Ads at that time. The most efficient channel was Facebook Ads and CAC was insanely low compared to other developed and competitive markets. We used images of famous fashion brands in our Ad creatives with huge discounts like "Up to 70% discounts on 🐊 Lacoste shirts". This was extremely attractive for consumers but so offensive for those famous brands :). We were able to run these Ads for a few months until we got a written warning from one of the biggest fashion brands in the world to suspend these ads. Meanwhile, we acquired a few thousand customers that helped us to establish a healthy and vibrant community on the buyer side of the equation.
- Then, we started converting those buyers into sellers by displaying educative content not only in the app but also in the emails we sent whenever a customer buys a product. We showed them how to increase their income by selling items on the platform. Also, sellers discovered unique items and started buying from other people. Eventually, this created a virtuous circle of liquidity.
- While we kept iterating steps (3) and (4), we tried to attract sellers on other non-marketplace platforms such as Instagram by providing tools to import Instagram posts converting them to products in the marketplace. Instagram had become one of the most popular platforms for selling products online but it was not designed for doing it. One of the challenges many sellers face on Instagram is getting their product in front of relevant customers, who are also seeing thousands of new posts every day. It also lacks functionalities to make the selling & buying experience efficient, and easy. Most importantly, it doesn't have the trust-building features required for successful online sales. Since Instagram doesn't have a payment and escrow mechanism to ensure that the buyer received what they were promised. Buyers have to pay before the product is shipped. This is a huge problem because it is easy to engage in fraudulent activities.
There're tons of other things we did until we reach a critical inflection point, but for the sake of brevity, I'll keep it for another post 🎉