7 Keys to Successfully Scaling Your Marketplace Business

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.