Starting a Marketplace Business? This article’s for you.
Thinking of starting a marketplace business? An extremely popular business model that exist today is the marketplace business, which facilitates the exchanges between buyer and seller. The success stories of Airbnb, Uber, and Fiverr has resulted in a massive growth in the marketplace space in the last couple of years. If this is the year you decide to start a marketplace business, then this is the article for you.
Although a marketplace business might seem easy to start, there are no shortcuts to running a successful business. Having a proper and validated business strategy is important. This article was written for you to understand some underlying factors that make or break a marketplace business, which are commonly overlooked by new entrepreneurs.
The Marketplace Leakage
A commonly overlooked challenge that you will end up facing when running a marketplace business is the marketplace leakage problem. A marketplace leakage is when users - buyers and sellers on your platform - decide to transact outside of your platform to avoid having to pay the transaction fee.
Marketplace leakage occurs less in certain online marketplaces where users place trust in the platform to perform a transaction and provide a sort of assurance to the user that the transaction will be successful. This initial trust established with the platform determines if the user will continue transacting through the platform or not. This brings us to the first point of consideration: what kind of value are you adding to users (service providers and consumers) on your marketplace platform?
Ensuring that subsequent transactions continue to happen through your marketplace platform is a matter of balancing values added to users on the platform - the service provider and consumer of the service. Some common ways marketplaces add value to users are:
- Providing a seamless booking and scheduling feature
- A trusted and secure payment system
- Analytics and analytics reports
- Engaging, efficient, and helpful customer service / support
- Insurance for consumer satisfaction
- Reputation and loyalty programs
Whether the value is in giving your users a peace of mind during the transaction process, increasing work efficiency through the provision of booking, scheduling, and management features, or providing exceptional customer service (for example, matching users to the right service providers), you want to ensure that your marketplace provides more value to a user so that the user would continue transacting through your marketplace.
Cost of Building and Hosting a Marketplace Business
Running a marketplace business comes at a cost which should not be overlooked. Naturally, there is no single answer to the question of the cost of building and running a marketplace business. Different industries and businesses require different levels of investment. Starting costs vary from as little as $100 a month to potentially tens of thousands of dollars, depending on what you’re trying to achieve with your platform.
For simplicity sake, I’ll address the most common marketplace that we have helped entrepreneurs build and launch at Mogul Tech International.
Let’s assume that you are interested in building a niche marketplace of small providers to offer them an online presence and access to a potentially large consumer demand. Popular niche marketplaces include marketplaces for natural homemade products, home-baked goods, and motherhood and child care essentials.
Your marketplace will require the basic essentials such as a solid invoicing tool and a simplified user interface for users to register quickly, upload and manage their listings. For such marketplaces, we generally work with Sharetribe Go to build and launch the marketplace to test the validity of the business idea. It is common for new businesses to receive little to no revenue during the first year, and hence always advisable to launch a business idea quickly with a workable platform (aka the “minimum viable product”) to test, iterate and improve the platform or business model. With Sharetribe Go, the initial costs are significantly less than hiring a team to build your marketplace platform from scratch as you are able to build your marketplace without coding it yourself.
Building The Platform with Sharetribe
Sharetribe Go offers entrepreneurs the opportunity to build their desired marketplace platform with little to no coding experience, at the least possible cost.
Our estimate of the cost of using Sharetribe Go to build a marketplace platform on your own is approximately $200 a month, and 1-2 weeks to launch. This includes the basic plan (Hobby Plan) at $79/month which allows up to 100 users and a landing page which costs $99/month. Generally, most of our clients end up exceeding this budget and using the Pro Plan instead of the Hobby Plan, which allows up to 1000 users on your platform and costs $119/month to host.
If you prefer a custom domain (aka www.mogultechinternational.com instead of www.yourmarketplacename.sharetribe.com), you can expect to be paying anywhere between $10-$50 a year for a custom domain name.
Usually, entrepreneurs will want a custom logo that reflects the business name or type. For cost-conscious entrepreneurs, Canva is a great place to create a simple logo by yourself with no cost. You’ll have to work on the design on your own, but with Canva’s templates and varied font types, it’s relatively easy to design a simple and elegant logo for your business. Other options are hiring a graphic designer on Fiverr for anywhere between $5 to $200 per logo, or 99Designs for $299. If you are scaling your business or prefer to have your own ideas translated into a beautiful, custom-made logo, you could consider hiring a professional graphic designer or design team to help you.
Following the launch of the marketplace, it is common to find yourself spending 20-30 hours a week trying to make your marketplace business a successful one. Commonly, you will find yourself spending time working on growing your business by meeting vendors and buyers with a goal of turning them into users. You’ll also be spending time on social media, working on increasing your marketplace’s social presence. For this to happen, you might find yourself in need of a social media graphic designer or perhaps a virtual assistant to carry out some repetitive tasks so you can focus other tasks. This could cost you from as little as $5 to $20 per hour of work. If you fancy doing it yourself, the following tools are free to use and great for entrepreneurs who are cost-conscious or who are just getting started:
Canva - the free version allows you to get started with some really great social media graphic designs done on your work with little design experience. Canva offers free templates that come with different sizes suitable for almost every social media platform that exists.
Buffer - the free version of Buffer, a social media management tool, allows you to connect up to two social media platforms. This is a great way to help schedule and automate some of your repetitive social media posts.
Trello - a fantastic task-management tool to manage all your tasks.
As you can see, starting a marketplace business will not cost you very much in the first year of operation. Even without programming and development knowledge, it’s easy for you to start building your marketplace platform on your own.
The difficulty comes in growing your business, which is where most entrepreneurs struggle. All successful marketplaces and businesses require significant time and effort invested in order to scale it into a profitable business. Convincing vendors and consumers to sign up on your platform should not be assumed to be an easy task.
It is common for entrepreneurs to see little to no traction within the first six months of the business. Our advice is to use this time to validate the business idea and improve on your marketplace experience for your users. Marketplaces can be slow and take years to get going. Most of the time, businesses fail because founders give up too early or too quickly.
Persistence is key, and if you refuse to quit and accept failure, you’re more likely to succeed.