A common view among digital marketplace start-ups is that once they’ve achieved product/market fit, growing the business will be relatively straightforward, if not easier. 

From my experience working with marketplaces navigating growth, this phase brings on a whole new set of challenges and complexity that are distinct from the earlier marketplace phases. Many marketplace companies consider it even harder to master the growth phase, given that marketplaces must grapple with a broader set of both internal and external factors and acquire a new set of skills and capabilities to be successful. 

Examples of “growing pains” marketplaces face during the growth phase include: 

• With legacy manual processes, such as customer vetting or transaction support, the marketplace struggles to keep pace with the soaring demands of its growing customer base, resulting in bottlenecks and missed growth opportunities.

• Following successful initial seller acquisition efforts, the marketplace struggles to keep sellers engaged in the marketplace and experiences high churn. This requires more resources to acquirie more sellers just to maintain current revenues, which crowds out resources to fund other expansion opportunities.

• After the marketplace gains traction in one city and starts to expand nationally, it starts getting the attention of incumbent players, who mount a competitive response. Now it needs to figure out how to best compete with these larger, more well-funded players.

This article identifies the critical success factors that marketplaces poised for growth should consider to ensure that their internal structure, processes, and growth engine can accommodate and drive growth and avoid these marketplace growing pains.   

Success Factors for Scaling a Marketplace

1. Build your growth engine around programs with multiplier impact – When a marketplace seeks to scale, it is important to have an efficient growth engine. Managers tasked with planning for growth have a wide range of channels to choose from: traditional media, digital marketing, partnerships, etc. Given the multi-sided nature of marketplaces, they have a unique set of tools that has can amplify their efforts, summarized in two key effects: network effects and flywheel effects. 

Network effects – Network effects is a force that attracts buyers and sellers to a marketplace due to the geometric increase in value they receive as more participants join. In practice, network effects inform marketplace operators of the importance of driving increased numbers of participants and corresponding connections among buyers, sellers, and other parties operating on the marketplace. These connections become the enabler to generate additional value through interactions among marketplace participants. 

Flywheel effect – This concept, popularized by Jim Collins in his business classic Good to Great uses the analogy of a very large spinning disc: it may take some effort to get it in motion due to its weight, but once it’s set in motion, it has increasing momentum as its spin increases. For marketplaces, the analogy suggests that once it gets growth going, growth efforts going forward have a baked-in multiplier impact: more buyers drive more transactions, which attract more sellers, which attracts more buyers, and so on. This growth framework suggests that improved cost structure and increased learnings can also contribute to increases the efficiency of growth.

2. Manage your marketplace by a core set of metrics that drive economic value – Once a marketplace enters growth mode, managing the business by the numbers becomes increasingly important, and marketplaces grow, they can quickly become inundated with too many business metrics. 

What metrics are most important for a growing marketplace business? Look for one or two metrics that demonstrate the highest correlation to increased economic value to the business and are actionable for the operating team to execute against. The key question to ask: “If we monitor this metric and achieve this benchmark, then will we achieve the core objectives for the business, such as revenue goals, profitability goals, etc.?”

3. Improve your marketplace product efficiency and productivity – As a marketplace looks to scale, there are some obvious product investment areas to consider, such as new features to address additional categories, localization to expand internationally, etc.  

However, there are other, less obvious product development opportunities that can deliver outsized impact when a marketplace is scaling, such as eliminating hidden drop-off points in the customer conversion process or fixing costly or time inefficient manual processes. These product productivity enhancements can often have attractive ROIs in terms of reducing costs, increasing revenues or both. 

4. Invest in a “smarter” marketplace – As marketplaces scale, they will need more staff to support common business functions such as finance, HR, legal, etc. 

But given the unique complexities of managing a multi-sided business, special attention should be paid to hiring people with specialized marketplace skills, such as balancing supply and demand, understanding the complexities of monetization to two-sided business or managing complex taxonomy. Embedding these specialized skills into the marketplaces’ organization can help unlock value and increase the effectiveness of key business functions as the marketplace scales. 

5. Manage the stakeholders within your marketplace ecosystem – One thing that makes marketplaces unique is their central position within their market as an intermediary and their relationships with to a broad array of stakeholders. These stakeholder groups include multiple customer groups (buyers, sellers and possibly others), business partners, shareholders, governments, communities in which they operate, environmental constituencies, etc.  

To address the array of stakeholder management situations, marketplace can consider strategies such as establishing policy statements or points-of-view as to how they interact with and support their various stakeholder groups. They can also fund dedicated resources, such as a community or government affairs lead, or outreach programs to better engage with various stakeholder groups. 

6. Exploit advantages of your marketplace model over the competition – As a marketplace gains broader market adoption, competitors across the board will start to notice. In many markets where digital marketplaces operate, there are three primary competitor types:

• Large providers that sell directly to customers (through direct sales, sales on company websites, etc.)

• Traditional intermediaries (such as brick-and-mortar retailers or distributors, to their digital counterparts)

• Other marketplaces

It’s important for marketplaces, at this stage, to identify their sources of competitive advantage relative to these players to inform their go-to-market strategies, competitive messaging, product development efforts, etc. to reinforce their unique positioning in the market. Relative to the first two competitor types, marketplaces, by their very business model, generally have clear areas of competitive differentiation, such as a wide product/vendor selection and lower cost structure. Relative to other marketplaces competition occurs across different domains, such as business models, quality of customer experience or levels of trust.

7. Operationalize the “fundamental purpose” of the marketplace to excite customers and align employee behavior – Marketplace start-ups are usually formed when the founders identify a market problem and then develop a vision for how they can solve that problem. As marketplaces grow into larger organizations, with more employees, customers, and partners who are often spread across many geographies, this original vision can often become diffused. 

To address this issue, a marketplace needs to operationalize what I call its “fundamental purpose.” This fundamental purpose of a marketplace (or any business) is an articulation of why the marketplace business exists in the first place. Fundamental purpose addresses core questions about the business such as, “What are we here for?” or “How are we making the world a better place?” The marketplace’s fundamental purpose, once defined, can form the basis for key company identity elements, such as company values or customer stories, that highlight the important elements of expected employee behaviors and good customer relationships.

Navigating both internal and external challenges of scaling a marketplace business requires the careful balance of many factors, while striving for business growth. Taking time for thoughtful planning around these seven factors can help drive the success of the marketplace business during its growth phase.

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.

How do marketplace operators determine if they have product/market fit? The first thing to realize is that product/market fit is not an exact measure; it’s more of a general benchmark for marketplace operators (and software entrepreneurs in general) to determine where to focus their early-stage product and customer development efforts and when to transition to the growth stage.

At a gut level, marketplace operators who start to achieve product/market fit will “know it when they see it.” When a marketplace starts to gain traction, buyer satisfaction increases given a healthy selection of supply, sellers become more committed to the service given steady sales, growth starts to gain momentum, revenue increases with less push-back from customers, and so on. It’s a feeling that the proverbial “flywheel of growth” is starting to spin, increasingly faster, in a positive direction — the marketplace is gaining a foothold in the market it serves.

For those who want greater specificity in determining whether they have product/market fit or, more practically, would like to come to their next prospective investor meeting armed with solid metrics to close the next round of funding, below are a number of metrics that marketplace operators can measure to assess its product/market fit. Which metric is best varies by marketplace, particularly as it relates to the type of products or services being offered on the marketplace, data availability, etc.  

Measuring customer satisfaction — Customer satisfaction is one of the more well understood and commonly measured customer sentiment metrics and is a good place to start to get a general pulse of marketplace participants’ overall experience. There are several ways to measure this, but the Net Promoter Score (NPS) is a popular measure of customer satisfaction, measuring how willing a user is to recommend the product or service to a friend or colleague, and compares the number of customers who will strongly recommend the product or service versus those who weakly recommend the product or service. It is not uncommon to have very different NPS scores for one side of the marketplace versus the other, which underscores the importance of measuring customer satisfaction on both sides of the marketplace. 

Another way to look at customer satisfaction is assess Customer Passion. A good way to measure this is to see (almost counterintuitively) how strongly a customer would dislike not having the product — in essence measuring their passion for the product. Sean Ellis, author of Growth Hacking, developed a metric that looks to measure this by asking the question, “How disappointed would you be without the product?” This question puts the value proposition of the product front-and-center and is a good way to gauge how willing customers would be to consider alternatives to using a marketplace, such as traditional channels, manual interactions, other marketplaces, etc.

Measuring customer behavior — Measuring preferred customer behavior is another important approach in determining the maturity of a marketplace, which sometimes can be a more accurate measure of which direction a customer’s compass is pointing than survey-based metrics. Customer Retention Rates are particularly insightful in that they evaluate customers who have experienced using the product over some period of time and look at how many customers who started using and/or paying for the service at some point in time X are still using and / or paying for the service at some future time Y, using a technique called cohort analysis. Having low customer retention rates can be a significant headwind for revenue growth and will require additional investments in acquiring new customers to make up for the lost revenue and participation from existing customers.

Measuring organic growth — A valuable insight into the how well a marketplace is turning “the flywheel of growth” is look at how well does the marketplace in essence “grow itself,” unaided by traditional marketing and/or sales efforts. Word-of-Mouth measurements, such as surveying what percentage of new customers joined directly from a referral from other customers, is one way to measure this. This assess the strength of the reputation of the service in the market and how willing customers are actually recommending the marketplace to others (buyers or sellers), generally through vehicles outside the marketplace itself (such as email, social media, etc.). 

An equally valuable way to look at this is to measure how effectively do customers attract other customers (generally counterparties, i.e., buyers inviting their sellers and visa-versa) to the marketplace through using the product itself — the essence of network effects. This can be a powerful growth mechanism for a marketplace in that it leverages existing buyer-seller relationships that may be transacting somewhere else (or stimulating new ones) and brings them onto the marketplace. This can be measured by looking at the marketplaces’ Viral Coefficient, which measures for each new customer how many counterparties join the service directly because of the new customer.

Dig Deeper Into Markets Or Overall Product Offering If Necessary 

Tracking one or a few of these metrics can help marketplace operators determine whether (or not) product/market fit has likely been achieved. If after measurements have been taken the results suggest not, then the marketplace operator will need to dig further to determine the root cause(s) of the misalignment. Does a customer group not experience enough pain to join or stay on the service? Is the marketplace losing users at key conversion points? Is there insufficient demand to keep sellers engaged? Are there policies that negatively affect behavior? These are a sampling of the areas that may need to be assessed to uncover impediments to attaining product/market fit.

Navigating The Journey to Product / Market Fit For Marketplaces 

After examining the considerations for determining product/market fit for marketplaces in this series of articles, we can see that it is a fairly complex undertaking. Early-stage marketplace entrepreneurs would be well served to clearly understand the market problems they are addressing and assess the level of pain and/or missed opportunities that exist in the markets (both buyer and seller) they are looking to serve. Marketplace operators need to continually tune the six elements of the overall marketplace product offering to meet the unique needs of its customer groups. Devoting time and resources to measuring the maturity of both sides of the marketplace can also be a prudent investment to determine when it is the best time to turn the corner to invest in accelerating growth.

I have often called this process outlined above for determining product/market fit for marketplaces, “Markets/PRODUCT Fit,” to underscore the two key points to successfully achieve this level of maturity for marketplace businesses: (1) start with identifying two (or more) markets who need each other commercially but are not well served and then (2) develop the six elements of the overall marketplace offering (hence all caps) to solve the unmet needs of those markets.

This is admittedly a meaty topic, with many nuances across the wide variety of marketplace types. I encourage others to comment on their own journeys to achieving product/market fit for marketplaces.

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.

Let’s now look at the first area to consider for product/market fit for marketplaces: the markets. There are certain conditions under which marketplaces are uniquely positioned to solve problems between prospective buyers and sellers. The following are common conditions ripe for a new marketplace, and in many cases, more than one factor may exist.

Highly fragmented markets — Markets with many buyers and sellers are generally attractive for marketplaces. Marketplaces can play a role in organizing disparate buyers and sellers and helping participants find each other more efficiently. Markets with a high degree of concentration, particularly on the seller side, are often less attractive for marketplaces, as there’s less need for an open intermediary to help in the matching process. Moreover, large incumbent sellers can opt out of participating in the marketplace, given that they likely have other paths to their markets (such as with retailers/eRetailers). As an example, before eBay, the collectibles market was generally very local (such as the local antique shop or comic bookstore) or catered to a small audience (such as those willing to travel to a map collector convention).

Access problems — Marketplaces can solve matching problems when it’s difficult for buyers and sellers to find each other at the moment of truth: when buyer and seller are ready to make a deal. Marketplaces can help when large geographical distances separate buyers and sellers. They also can help when timing is critical (StubHub for concert tickets), or an item is unique or scarce (Etsy for crafts), used or out-of-date (Carvana for used cars). These examples represent purchasing situations where, absent a well-situated intermediary, buyer and seller may never find each other to complete a transaction.

Market inefficiencies — Marketplaces can solve problems in markets in which existing ways of doing things with incumbent players are inefficient. Local taxi markets are a good example; prior to Uber and Lyft, you would have to call an individual taxi company or hail a passing cab if one happened to drive by when you needed it. Ride-sharing services made the process of moving reliably from point A to point B much easier.

Low asset utilization — There are situations in which under-utilized assets could be made more productive if users could be found who are interested in utilizing those assets for specific periods of time. Airbnb is a great example of a marketplace increasing productive (i.e., money-making) utilization of underused assets (spare bedrooms and empty apartments, condominiums, and homes). Marketplaces such as Airbnb and Vrbo make it easy for travelers to locate accommodations and give property owners the flexibility to earn incremental revenue on their underutilized assets. Similarly, DoorDash makes its delivery drivers more productive and reduces the cost of home food delivery.

High transaction complexity — There are certain markets, especially B2B, in which the complexity of completing transactions for both buyer and seller makes the process inherently difficult. Think about a situation in which a product is purchased by one organization (procurement), used by another organization (a business unit) and paid for by a third organization (account payable). Marketplaces, also referred to as business networks in this case, such as SAP Ariba Business Network, solve the multi-party transaction completion problem by coordinating document flow, collaborations, and payments between its buyers and sellers, making the overall process efficient for both sides. Just ask a small seller how to figure out when they will get an invoice paid by large multinational company, or to whom to follow up if it’s late. Before B2B marketplaces, this was much more difficult.

If you can meet one or more of the above conditions, you may have a good marketplace opportunity. However, the market validation process doesn’t stop here. Marketplace operators also need to look at the current set of alternatives existing participants have in meeting their needs (e.g. traditional retail or distribution offerings, eCommerce providers, etc.) and how large the pain is with existing solutions between market participants in not finding and ultimately completing a commercial transaction with each other. In other words, is the market problem real and substantial enough to support a new marketplace solution? 

If so, then the next step on the journey to product/market fit for marketplaces is to design the overall product offering to address the market problem.

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.

For the better part of my career, I have built, scaled and/or managed digital marketplace businesses.  During this time, I have had my share of successes, failures and “in-betweens.” Probably one of the reasons for this dispersion of results it that the marketplace business model is a particularly complex business structure.  While many times I would seek out insights from books, articles and experts in the field, there were often situations where I had to figure things out on my own. 

This blog is a collection of viewpoints on a variety of topics related to managing digital marketplaces. It is written to be a resource for marketplace entrepreneurs, investors, product managers, strategic planners, and anyone interested in learning more about how marketplaces work. Hopefully it can provide a unique perspective on familiar topics as well as fill in the gaps on some of the more specialized topics related to managing digital marketplaces. 

This blog will also touch on the bigger picture role digital marketplaces have in our economy today.  Digital marketplaces have transformed numerous industries, such short-term accommodations, local transportation, collectibles and many more.  In the process they have made buying goods and services more efficient and provided income for millions of people.  They are also often key stakeholders in the communities in which they operate and can have a significant community footprint.  Taken together, these factors suggest marketplaces have an important role in our economy today, which this blog will hopefully illuminate.   

Thank you for reading The Marketplace Economy blog! I encourage your feedback on the ideas I and other contributing authors have put forward.