Why Two-Sided Marketplace Startups Aren’t For Everyone
By: Joe Procopio
Tags: Technology, Startup, Entrepreneurship, Product Management, Business

Why Two-Sided Marketplace Startups Aren’t For Everyone

Offering everything to everyone could result in offering nothing to anyone

image by katemangostar

2020 was the come-to-mainstream year for marketplace startups.

There’s certainly good reason for the marketplace startup trend to continue — fueled by a perfect storm of user-friendly no-code options for prototyping, a quarantine-accelerated demand for digital business models, and the headline-grabbing IPOs of several success stories — AirBnB, DoorDash, and Vroom, just to name three.

There’s never been a better time to at least try to build a market of buyers and sellers around almost any product or service. And truth be told, a lot of marketplace startups are finding success. The question is: Is that success sustainable?

We’re still in the early stages of 2SMs as fertile ground for disruption. But their success will only be sustained if those marketplaces are built properly. To do that, they need to avoid the mistake I see most often.

A marketplace should never try to be everything to everyone.

“A costly, painful, and time-consuming failure.”

That is a word-for-word quote from a fellow entrepreneur who watched their marketplace customer base splinter, fragment, and then fade away, done in by a problem he described succinctly in just two words:

“Shitty vendors.”

In 20-plus years of building startups and digital products, I’ve spent a bunch of that time focused on marketplaces, from my first self-founded startup — writers network Intrepid Media — to my most recent project — a startup advice-on-demand app called Teaching Startup.

In that time, I’ve learned that even if you choose the exact right product or service sector to disrupt, even if you develop amazing technology, and even if you perfect the customer experience, the success or failure of your marketplace startup will be determined solely on your sellers meeting the expectations of your buyers.

It doesn’t matter if the vendor side of the marketplace is made up of providers, producers, or procurers, they have to be consistent and the marketplace’s offering has to be thorough.

Of course, vendor vetting is critical to that equation, and the deeper and more integrated a marketplace’s vetting process, the less likely their platform will buckle under the weight of poor quality, poor customer service, or even fraud.

But to be a realist, vetting is a secondary problem, because no amount of vetting is going to solve a supply-and-demand problem. A marketplace can offer the most-vetted providers in the world, but if their products or services don’t fulfill the customer’s needs at an acceptable price point, the marketplace is already doomed.

With marketplace startups, staring has become easy, but scale is everything. And the scale mistakes on the vendor side are usually made way before the vetting process is even considered.

Completeness: Those disengaged customers aren’t coming back

The most common mistake I see is when a marketplace sacrifices vendor depth for breadth. It’s the same difference in retail between your corner specialty store (depth) and Walmart (breadth).

For whatever reason, probably in anticipation of attracting venture capital, most marketplace startup entrepreneurs want to build Walmarts right out of the gate. Their marketplace platform attempts to be everything to everyone within their chosen product or service sector, and they attract a lot of customers.

But unfulfilled customers aren’t customers at all. In fact, they’re detractors.

When a marketplace opens its doors to all customers and all vendors, the result is chaos and the model almost immediately breaks. Instead, a marketplace must offer a compelling reason for a buyer to engage with its vendors. The 2SM platform does that by offering those buyers a value proposition they’re not going to find anywhere else.

That offering starts with a narrowly-defined product and a narrowly-defined market. And this is the part that’s most often skipped.

Instead of trying to copy the incumbent market’s breadth of offering, a 2SM needs to pick apart that offering and decide if each component is intended to provide value to the customer or merely increase the margin for the vendor. The marketplace should only offer the value components.

Then, rather than aiming for the widest option of vendors to serve the largest possible customer market, a 2SM needs to start by onboarding select vendors who can offer the exact right value to a very specific type of customer.

Once the platform starts to see traction with that niche product in that niche market — and by traction I mean demand volume from customers that the platform can consistently meet with its vendor supply — then the offering is complete. Then, and only then, should the marketplace expand into less-niche variations of that product and wider segments of that market.

Variability creates friction, friction pushes away customers

The other side of the completeness equation is just as big a problem and even gets a little Catch-22: The more variability you offer the customer, the more friction you create for those customers.

The good news is that friction can always be removed. But the mistake here is the same mistake inexperienced coders make: If you want to be able to debug your codebase, you need to introduce code changes in small chunks with lots of testing in between.

When a 2SM rushes to offer a multitude of products and services, even if those products and services have a common thread within a given sector, the customer experience will vary wildly from product to product or service to service.

This is especially true with services. Different providers execute with different strategies, and the marketplace platform not only has to provide the infrastructure to accommodate those differences, but the platform should also be constantly pushing its vendor population to conform to a consistent model whenever possible.

That means consistent pricing, time to delivery, fulfillment or execution, quality, and communication.

Not only does offering variety in product or service type create more friction, execution on the same product or service is going to be handled differently by different vendors.

So not only should a 2SM onboard different types of vendors one at a time, they also need to strategically onboard each of the first few vendors for each type. This means building a platform infrastructure flexible enough so that the customer experiences none of the friction caused by two different vendor approaches to fulfilling the same customer expectation.

Onboarding includes vendor vetting. There will be different vetting requirements for different types of vendors and the vetting process will inevitably fail and need to be revised. It’s better to onboard a handful of vendors with a flaw in the vetting process than onboard hundreds and not know where the process went wrong.

Balance between customers and vendors is the key

Sustaining a successful marketplace is a constant struggle of maintaining equal volume of supply and demand. The moral of my friend’s 2SM story is that scale without balance will crash on the customer side.

In other words, shitty vendors don’t result in more customers, they result in more detractors. A 2SM will always need fewer vendors than they might think. And if that’s not the case, then the marketplace doesn’t have enough customers.

Don’t build 2SMs like Walmarts, build them like the corner specialty store. Then, when that store is a raging success, do the digital equivalent of buying the building the next door and expand there too.

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