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 concept to marketplaces: marketplace entrepreneurs should generally start by identifying an attractive set of markets — usually two markets: buy-side and sell-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.
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, 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.
Traditional Software Product/Market Fit “Iteration”
For marketplaces, this task is essentially doubled. For an early-stage marketplace to get its markets selection right, it needs to identify customer segments in two markets: buyer-side and sell-side (note: it is at least two markets, as marketplaces can serve three or more different customer groups on the same platform. For simplicity, this article will discuss this concept relative to serving two markets, the buyer and seller markets). The goal of marketplaces is to bring buyers and sellers together to interact and, ultimately, complete some type of transaction. What makes this even trickier is getting the market segments pairing right, i.e., simultaneously finding the right buyer-side segment that wants what the specific target seller-side segment has to offer.
Marketplace Product/Market Fit “Iteration”
Next let’s look at the overall product offering for marketplaces.
First, beyond getting the product functionality, interface design, user flows, etc. aligned to for both buyers and seller customers’ needs, there are additional components to the overall product offering that influence the success of a marketplace that do not come into play with traditional software. When a buyer looks for good or service to buy, is there a sufficient selection of supply? Do they trust the quality of the goods or services being offered? When a seller joins, is there sufficient demand to justify continuing to invest time, energy, and, usually, money to participate in the marketplace? Do participants using the marketplace feel safe and believe that they’ll be treated fairly if something doesn’t work out? Do the costs associated with working with the marketplace, particularly any fees, justify the benefits of using the marketplace? With all of these product elements to consider, a marketplace product offering is quite a bit more substantial than a traditional software product.
Once the attractive markets have been identified, the task of changing behavior remains, from doing things the previous way to using the new marketplace product. For a traditional software product, the “locus of change” is a business process, task, or function that would benefit from improved automation. This requires getting individual users or companies to switch from either a manual process or some other software solution — no minor undertaking. For marketplaces, the “locus of change” is a market (in this context, the market is the buyer-seller market enabled by the marketplace), which may or may not already be functioning, and which, by definition, contains many players. A successful marketplace will need to change the behavior of not just an individual user or company, but an entire market. Most marketplaces exist within a broader ecosystem of players, with a wide range of competitors, alternatives, etc.
With all these factors in mind, developing a successful new marketplace is quite a bit more complicated than it is for traditional software.