I recently attended the Sharing Economy Global Summit 2022 in London, sponsored by Marketplace Risk. The conference brought together people from around the world to talk about the opportunities, operational challenges, regulatory environment, and societal implications of the “sharing economy,” i.e., individuals renting or “sharing” their assets with others. This practice has been in existence for years (e.g., borrowing the neighbor’s lawn mower, renting a vacation home, etc.), but the digital marketplace model has allowed companies such as Airbnb (home sharing) and Uber (ride sharing) to significantly expand the market for shareable assets. 

After spending two days at the conference, I noticed a few themes that I think are relevant for digital marketplace operators and customers, especially in the sharing economy: 1) tools and services developed to enhance trust and safety have matured significantly, helping marketplace operators solve one of their greatest operational challenges; 2) a new wave of sharing economy solution providers is emerging, testing the boundaries of what types of assets are viable within the digital marketplaces model; and 3) the broader support ecosystem in which digital marketplaces operate—including governments, standards bodies, advocacy groups, etc.—are grasping the importance of digital marketplaces and the sharing economy, and advancing a wide range of programs that I believe will ultimately further the growth of digital marketplaces. 

The Maturing of Trust and Safety Tools and Services 

In the early days of digital marketplaces, operators supported safe, trusted environments for their customers by either monitoring user activity, using their employees or volunteers from their customer bases, and/or relying on customers to police customer behavior, usually through references, ratings, and customer support functions. The results of these approaches were often mixed in terms of managing increasingly complex trust and safety issues. Moreover, determining the right level of human moderation was often an elusive task. 

Now a new class of solution providers has emerged, offering functionality to enhance trust and safety for marketplace operators. Maintaining high levels of trust and safety is critical to the success of any digital marketplace, particularly in the sharing economy space. Vendors in areas such as insurance services (Lloyd’s, Tint, Ibott), identity verification (Veriff, Trulioo), fraud detection (Unit21), and trust and safety operations (ActiveFence, Seon, Dodgeball), are providing robust solutions to manage this critical capability. I was particularly impressed with how well these solution vendors have grasped the complexities and unique requirements of digital marketplaces, as many providers support other types of online businesses, such as social media, ecommerce, etc. as well. This is good news for of digital marketplace users as it reduces the risks of bad actors, fraud, etc. 

Advances in trust and safety capabilities will increase individuals’ and businesses’ confidence in digital marketplaces, thereby enabling broader adoption of marketplaces across more industries and geographies. Lower value items, such as consumer goods, can be shared among customers more cost effectively for the marketplace operator. Higher value items, such as homes, industrial equipment, luxury items, special event services, etc. can be purchased with greater confidence on digital marketplaces. More esoteric items, such as digital assets, NFTs, environmental commodities, etc. will have better information to assert their validity. Smaller domains, that require high adoption rates to support enough transactional volume to sustain a dedicated marketplace, e.g., used goods in Poland, will be able to support more regional and/or language-specific marketplace businesses. 

Next wave of sharing economy providers

Thanks to pioneers such as Uber and Airbnb, the concept of sharing assets with strangers has become broadly accepted. These companies exploited the fact that major assets lay idle much of the time and can be redeployed productivity if a trusted service is available to safely match those willing to rent rather than buy a particular good and sellers willing to offer those items. The relatively high cost of cars and hotel rooms provided the incentive to offer lower cost/higher quality services and expand these initial sectors of the sharing economy. 

Now entrepreneurs are looking further afield to other assets with low utilization rates and the potential for matching buyers and sellers. Companies such as Parently (kid gear for parents), iHopa (home tools), Allihoop (living spaces) are examples of companies entering this space. They’re challenging consumers and businesses to rethink buying everything they need and consider using an online service that provides a good as a service for the amount of time that they need it. These new sharing economy services have the potential to deliver tremendous value to consumers and businesses, by decreasing the cost of access for many items. Second, for those attuned to the environmental impact of producing goods, the sharing economy can reduce the resources needed to manufacture and distribute new goods (and at some later time, dispose them) given that a stock of existing goods can be shared with others instead. 

Governments, Standards Bodies, and Advocacy Groups

One of my biggest takeaways from the conference is that governments, standards bodies, and advocacy groups are beginning to see the still-emerging sharing economy as too big to ignore. These entities are expanding their reach to address sharing economy issues and re-thinking traditional ways of doing things. 

This was the first tech conference I can recall that was attended by representatives from a government agency tasked with measuring economic output. Their view was that the levels of economic activity in the sharing economy are significant enough that they need to understand it better so they can account for it adequately. More practically, governments are viewing digital marketplaces as important intermediaries in accounting for taxable activities; hence, they have an interest in understanding these types of businesses so that they can address leakages in their tax bases. It remains to be seen whether government involvement will help or stifle the growth of digital marketplaces, but early regulations such as the General Data Protection Regulation (GDPR), the California Age-Appropriate Design Code Act, the proposed Online Safety Bill (UK), and the proposed Digital Services Act (EU) all seek to advance trust and safety in online services for individuals and businesses, which has a lot of benefits to the industry.

Standards bodies are beginning to apply their capabilities in developing common standards to address digital marketplace conduct and business practices. ISO, known for its quality standards for manufacturers and other industries (e.g., the A4 paper size, PIN standards for ATM machines, etc.) have developed a set of standards related to digital marketplaces. ISO 42500, for example, provides a set of common definitions and principles for sharing economy providers. In the coming years, they are planning to roll out additional standards relating to digital marketplaces, including trustworthiness and safety requirements, provider verification, and shared manufacturing. As with product manufacturers today, a digital marketplace with an ISO certification offers an extra layer of trust for buyers and sellers, signaling that they are following well-vetted processes for quality, reliability and safety. 

Finally, advocacy groups, such as CBI (economic development), ICMA (Internal Classified Marketplace Association), and TSPA (Trust and Safety Professional Association), provide resources, best practices, connections, and advocacy across a range of areas that can benefit digital marketplaces. Digital marketplace operators do not have to act alone in advocating for policies that affect their businesses; they can tap into these valuable resources and capabilities specific to their industries.

Collectively, I see the various advances in government, standards bodies, and advocacy groups as providing a support layer for the sharing economy and digital marketplaces, thereby helping these businesses grow by legitimizing them and reducing the risk of bad outcomes. It’s still early, but I see these advances as a net positive for the industry.

The Win-Win For Digital Marketplaces

This conference revealed the growing maturity of the broader digital marketplace ecosystem, from trust and safety tool providers to governments, standards bodies, and advocacy groups. I believe that this maturity, combined with the creativity of entrepreneurs in applying the marketplace model to an ever-increasing set of sharing economy scenarios, will drive further mainstream adoption of these services in our everyday lives. This will deliver tremendous value to individuals and businesses across the economy, through lower usage costs and, likely, better service – a true win-win proposition. Also, increased utilization of physical assets by the sharing economy will help reduce the environmental impact of the physical goods lifecycle, making it a further win-win proposition for economic efficiency and the environment.

During the dot-com days of the early 2000s, marketplaces sprouted up in a variety of markets, particularly B2B markets, and most of them failed. Why? There’s a longer story that can wait for a future article, but the short version is that these early marketplace operators thought that by simply inserting themselves into a functioning market, buyers and sellers would naturally gravitate to them because of the inherently superior economics of a marketplace.

In this article, we’ll talk about why, to create a thriving marketplace, operators need to look beyond the marketplace’s UI and product design, to the overall marketplace product offering. 

There are six elements of an overall marketplace product offering. Below, I’ll outline how each element meets marketplace participants’ needs. As you’ll see, it’s way more complex than what a traditional software product needs to do to address product/market fit, and way more complex than the original dot-com marketplace operators ever anticipated. I would argue that you need to satisfy all six to achieve product/market fit for marketplaces.

1. Marketplace design that solves real problems — This follows from the discussion in the previous article of what makes an attractive market: a “real” problem that represents some market inefficiency or missed opportunity between two participant groups who ultimately want to conduct a commercial transaction with each other. If the market problem is an “access” issue, then the full marketplace design needs to support solving that specific problem, from how participation is determined, to what the core interaction (e.g., search-based, matching-based, scheduling-based, etc.) is used, to how trust between the two parties is determined, to what behavior is acceptable, etc. Marketplaces that miss key design elements, such as failing to address trust issues between buyers and sellers, or failing to maintain satisfactory buyer or seller quality, will fail to gain the commitment of its participants. SeedInvest is a good example of a marketplace that uses it marketplace design to encourage as many high-quality interactions as possible by imposing stringent qualifications on its participants (investors and companies looking for funding).

2. Product functionality that supports streamlined core interactions — The marketplace needs to have minimal friction for participants to complete their core interactions. If the goal of a marketplace is to solve an asset utilization problem, then the product needs to support buyers in finding inventory that meets their needs as easily as possible. Similarly, asset providers need to have an easy way to manage their inventory. Some early-stage marketplaces distract users with unnecessary content, cluttered home pages, or insufficiently tested interaction flows which work against providing a consistent customer experience for their most important functionality.

3. Pricing that minimizes friction — Ultimately, every marketplace needs a business model that supports ongoing operations and investments needed to sustain and, hopefully, grow the business. A poorly designed business model devastates the healthy growth of a marketplace. Some marketplaces set up pricing structures that create perverse incentives, e.g., excessive costs on the buy-side, forcing the buyer to make an economic decision each time before participating. Others fail to put a business model in place until a later stages of maturity, making the change to new pricing structures unsettling for the marketplace participants. The structure of the marketplace business model needs to align with the goals of marketplace participants and exist within their willingness-to-pay range.

4. Appropriate policies and governance structure — One of the unique attributes of marketplaces is that they’re dynamic systems, controlled by a policy and governance structure to ensure that its participants act appropriately. A key area that marketplaces need to manage closely is their policies for bad actors. Too many bad buying situations can harm a marketplace’s reputation and impact participation. For example, a marketplace that has lax enforcement policies for sellers that allow fraudulent vendors to offer substandard and/or counterfeit goods can ultimately hinder the full participation of buyers (for fear of receiving a sub-par product) and sellers (trustworthy ones who may lose legitimate business).

5. Sufficient selection of supply — Good experiences for buyers in a marketplace requires adequate supply to ensure that they find what they need. “Adequate supply” varies by marketplace and is impacted by sellers’ selection and availability, but over time, marketplace operators will find the magic number of sellers to ensure a good customer experience for buyers and encourage repeat usage. This speaks to the need for early-stage marketplaces to have a certain degree of focus in acquiring and retaining the right type of sellrs such that a good buyer experience is maintained.

6. Sufficient buyer demand — Potential sellers in a marketplace have choices to get their offerings to market. They can work with traditional retailers/eRetailers or distributors. They can go direct to the market with their own websites or sales forces. A well-functioning marketplace supports a business channel for sellers that drives enough business (and ultimately profit margin) to justify investing in that marketplace. For early-stage marketplaces, they’ll need to employ a range of strategies to get sellers to participate as buyer demand grows, i.e., the “chicken and egg” problem. At some point, if buyer demand is lacking, sellers will go elsewhere, or at least not invest in the marketplace. Inactive sellers can ultimately harm the perceived quality of sellers to buyers if too many have out-of-date catalogs, poor customer service, etc.

As we can see, marketplace operators have an extremely complex task in addressing these six elements simultaneously. Marketplaces are often sensitive enough that getting even one of these elements wrong can stifle growth of the marketplace and, I would argue, inhibit the ability for it to achieve product/market fit.

I had an opportunity recently to facilitate a discussion at The Marketplace Conference 2021, on one of the more complex topics for managing digital marketplaces: determining product/market fit. (Note: “marketplace,” unless otherwise noted, refers to a digital marketplace). It was an engaging discussion that surfaced many of the unique challenges marketplace entrepreneurs face in designing, launching and growing their early-stage marketplaces. As a follow-up to that discussion, I thought I’d write some additional thoughts about what early-stage marketplace operators should consider on their journeys toward building sustainable, thriving businesses.

The reason this topic resonates so much for entrepreneurs is that it represents one of the most important measures of maturity for an early-stage technology product: it’s usually considered to be the optimal point at which a company can transition its focus from iterating on product features to sufficiently meet customers’ needs to investing in growth and scaling the business.   

Much has been written about determining product/market fit for traditional software products (e.g., SaaS software), but not so much for marketplaces. Andy Rachleff, cofounder of Benchmark Capital, and Marc Andreessen, cofounder of A16Z, are considered to be early evangelists of the concept. A simple definition we can use as a baseline for this article is from Marc Andreessen: “Product/market fit means being in a good market with a product that can satisfy that market.” It sounds easy, but we’ll see that it’s actually quite difficult for traditional software startups, and (at least) doubly so for marketplace startups.

This series of four articles:

1. Describes why achieving product/market fit is especially challenging for marketplace companies

2. Outlines the characteristics of attractive markets for marketplaces

3. Describes the components of the overall product offering for marketplaces

4. Provides a unique approach and some metrics that marketplace operators can use to measure product/market fit. 

These articles will highlight one of the unique aspects to successfully applying this this concept for marketplaces:  marketplace entrepreneurs should generally start by identifying an attractive set of markets — usually two markets: the buyer-side and the seller-side — and then consider a broad set of product offering elements, beyond just the software, to address the needs of their target markets. Technology innovation by itself may bring some new marketplace opportunities, but I’ve found that most successful marketplaces businesses started with fundamental insights about a breakdown in a buyer-seller market that’s ripe for improvement.  This overall approach that could alternatively be called “Markets/PRODUCT fit.”  Read on further to understand more fully what I mean by this. 

For many early-stage marketplace entrepreneurs, figuring out why the “flywheel of growth” isn’t working is not easy, and it often suggests they have not yet achieved product/market fit. I hope to provide marketplace operators a lens through which to examine this complex topic and, ultimately, get to product/market fit more successfully.

Why is Determining Product / Market Fit So Difficult For Marketplaces?

What makes attaining product/market fit for marketplaces so difficult is that it has far more moving parts than traditional software, and they all need to be aligned to the needs of the markets they serve.

Let’s start with the “markets” first (in this context, I am using the “market” definition to mean group of people who want to buy a specific good or service).

For traditional software products, which generally solve some productivity, analytical, and/or operational tasks for a single customer type, the startup entrepreneur, in their quest to find product/market fit, needs to find a single initial market for their product. If the product isn’t getting traction in one market, the entrepreneur can go to another one, or modify the product to better meet the needs of the original target market. The key is that, for the most part, the entrepreneur needs to develop one product for one market segment whose needs are not adequately met by existing solutions.