People often get excited about marketplaces because they are extremely profitable and “hot disruptors” if done right. UBER just raised $1,200,000,000 (that’s 1.2 billion) at nearly 16B post money. It’s huge when it works.
What are marketplaces?
Some are for-profit transaction marketplaces, some are product marketplaces like iPhone’s app store. There’s freemium marketplaces, EBAY or basic marketplaces like Gun Brokers that simply connect buyers & sellers.
Is it a marketplace?
An advertising site or a marketplace? Does the transaction happen on the platform, if so it’s a marketplace.
In my career, I have worked and consulted on many marketplaces and attempted marketplaces. One Radio Spot marketplace burned through $40m in VC cash and resulted in absolutely no return on those investments. Luckily, my involvement was trying to save things in the end instead of supplying the startup funding!
Let me share a few thoughts.
- Marketplaces are always very, very, very expensive to build unless there is an amazing demand being unmet connecting the buyer to the seller. Almost all marketplaces have the “chicken” and “egg” problem. You don’t deliver value until you deliver value to both sides.
- You must police your “sandbox” with rules. If you brought the buyer and seller in together without policing or rules, they will ruin your marketplace every single time; which will manifest itself in very expensive, high churn.
- You must build technology that allows them to quickly and/or proactively be notified if something they are interested in enters the marketplace.
- You must have an amazing search. And I mean amazing!
- You must have an automated and well designed transaction engine that facilitates transactions (good and bad), powering a very well defined business process.
- You must be willing to cancel the membership of participants who break the rules.
- Successful marketplaces pre-stock items that the “buyer” wants, then layer in additional new seller items, and put them to the top of search results.
- Money won’t buy you success. You can spend tens of millions building your marketplace, but without the right technology and rules your churn rate will always ruin you.
- *LAST BUT NOT LEAST* If market participants can’t give feedback on the quality of the transaction they will likely blame anything that goes wrong on the marketplace. Long term or short term, no feedback=churn.
What about Freemium markets?
Freemium markets often get you hooked on one free feature knowing this will lead to other premium feature usage. The more the customer interacts with the product suite the greater the chance those interactions will drive more conversions. Google Apps is a great example.
I have a marketplace, but I don’t have the right rules in place. Is there anything I can do reduce churn?
Yes. Whether free or premium, bundling is one of the most effective anti-churn tools you have. When I was in the hosting business, just adding email to our service offering dropped our churn by 1.5% monthly. Similar additions of bundling have had comparable results elsewhere.
Additional questions? Email me at firstname.lastname@example.org. I will respond as long as it doesn’t break one of my many confidentiality agreements.