Building a marketplace is like trying to pat your head and rub your belly at the same time—or perhaps more accurately, like juggling flaming torches while solving a Rubik’s Cube. Marketplaces are notoriously difficult to launch.
Sure, there are success stories like Bolt, Depop, Upwork, and Airbnb, but countless startups haven’t made it past the first year. If you’re still operating after 12 months, you’re already in the top 20%. As marketplace investors, we frequently observe common challenges that can stunt marketplace growth. The question is: How can these challenges be addressed?
In this post, we’ll dive into some of the most common obstacles marketplace founders face—and, more importantly, how to address them.
Tackling the cold start problem
While biologists debate whether the egg or the chicken came first, marketplace founders face a different dilemma: Should they prioritize supply or demand? When this question arises, atomic networks often come to mind. However, they typically matter once some parts of the network are already in place. But how do you go from zero to one?
Suppliers often lack the incentive to join when there aren’t enough buyers. Therefore, on the supply side, we’ve seen success when founders provide additional value through vertical SaaS solutions. On the demand side, building a waiting list with added perks can be effective. These perks can be unlocked once suppliers are onboarded, encouraging early sign-ups without disrupting the user experience.
Balancing supply and demand
Once you’ve reached critical mass, the next hurdle is maintaining a balanced marketplace. However, balance doesn’t always mean a 1:1 ratio of buyers to sellers. Depending on the business model, the balance could mean having more buyers than sellers (as in job marketplaces or luxury goods) or more suppliers than buyers (common in fashion or consumer goods marketplaces).
To find the right balance for your specific case, it’s crucial to implement robust analytics. This system should track key metrics such as customer behaviour, purchasing frequency, preferences, seasonality, and decision-making patterns. This data will help you identify when to shift focus to supply or demand.
Solving the leakage problem
As your marketplace grows, the risk of platform leakage increases. Leakage occurs when users take their transactions off the platform. This is less of a concern in one-off transactions, such as purchasing expensive furniture, for example. However, for services that are frequently repeated—like tutoring, cleaning, or handyman work—both parties may feel tempted to bypass the platform to save fees.
The key to preventing leakage is providing enough value to both buyers and sellers to keep transactions on the platform. This can be achieved through loyalty programs, enhanced visibility for suppliers, or offering buyer protections like insurance, among other strategies. However, leakage is closely linked to the next major challenge: establishing trust.
Establishing and managing trust
Trust is multifaceted. On one hand, there’s trust in the transaction itself. For instance, in secondhand marketplaces, buyers in some regions may not think twice about buying from a stranger. In others, buyers may need guarantees that they’ll receive their item and that sellers will get paid. Another layer of trust involves the quality of supply. For example, in a peer-to-peer bike-sharing marketplace, how does the platform ensure the bikes aren’t stolen?
These trust-related issues are usually case-specific and quite difficult to solve, but if you can crack this challenge for your marketplace, it can become your unique competitive advantage.
Choosing the right monetization strategy
Even with a thriving user base, monetization remains a significant challenge. Many marketplaces fail because they can’t figure out how to monetize effectively. Whether it’s a flawed business model, high operational costs, or excessive spending on customer acquisition, there are many ways things can go wrong. Small margins in competitive markets can lead to disaster.
The solution? Experimentation. Too many startups fixate on a single business model, even when it shows signs of failure. Instead, if your current model isn’t profitable or isn’t working as expected, run tests and try new approaches. Flexibility can lead to discovering a more sustainable path to profitability.
Wrapping it up
Building a marketplace is no easy task, but it’s far from impossible. The key to overcoming these challenges is constant experimentation and iteration. Pouring resources into systems that aren’t working will not only stall growth but also make future fundraising more difficult. By staying agile and open to change, you’ll be better equipped to build a marketplace that can attract investors and thrive in the long term.
