Solving the “marketplace” business model

A sizable percentage of Capital Factory startup submissions take the form of the “marketplace.” In fact, 3 of the 10 selected companies from the past two years have followed this business model.


Marketplace companies are notoriously difficult to start, so I’m constantly amazed that so many entrepreneurs chose this route. Maybe it’s the “go big or go home” mentality? If there’s a business plan less likely to succeed than a restaurant, this has to be it.

But it’s not impossible; here’s some of the pitfalls and how to address them.

A marketplace is born

A “Marketplace” connects buyers and sellers who otherwise have trouble finding each other.

Cow salt and pepper shakersLet’s say someone owns a two miniature porcelain cows ironically dressed as farmers and performing the very functional task of salt and pepper shaker. Of course the owner wants to sell these (because now he’s sober), but how?

Halfway around the world, someone else is proudly admiring their collection of 167 cow-themed salt and pepper shakers which, 82 years from now, will be on an episode of Antiques Roadshow where it will be valued at…. (I won’t spoil the surprise!). She wishes she could expand her collection but how?

eBay converts these complementary desires into transactions. It’s a “marketplace” in that they “create a market” in which sellers connect with buyers because eBay provides a sufficient quantity of both.

More examples:

  • Priceline connects leftover rooms to bargain hunters.
  • Expedia connects airplane ticket buyers to fares and routes.
  • uShip connects specialty shipping companies with people who need to ship things UPS doesn’t accept (like motorcycles or horses).
  • SpareFoot (a Capital Factory graduate) connects available public storage units with people trying to find units online.

These companies typically make money either by charging sellers for listing (akin to the yellow pages) or by charging a sales commission (akin to a “finder’s fee”). It’s easiest to charge sellers because they’re the ones trying to make money.

So what’s the problem?

The hardest part of any business is the beginning, but this is especially true for marketplace companies because you have a classic chicken-egg problem.

Specifically, buyers don’t visit the site because you’re obscure and lack inventory, but sellers aren’t interested in listing because there’s no buyers.

It’s worse than it sounds because you also have what I call the double company problem: You’re trying to build two companies at the same time, and both have to succeed or you’re dead.

For example, Priceline has to sell each hotel chain on the value of their service, create integrations between hotel management systems and their database (in real time), and negotiate legal and financial details. At the same time, they also run television ads (with celebrities), are expert at SEO and AdWords, built a user-friendly web site, and do tech support for consumers.

These are distinct operations — different clients, different technology, different sales process — almost like two separate companies. The effort is doubled and the risk is quadrupled. After all, if you get sellers but not buyers (or vice versa), the marketplace is a failure!

This all sounds dismal, but here’s a handful of strategies to overcome the obstacles.

Forget automation: Do everything manually

One of the allures of the marketplace business is that once you reach critical mass, you should be able to “sit back, relax, and let the money roll in.” Automation is the key; buyers and sellers have to find each other and perform transactions without requiring additional human beings.

But just because automation is the goal doesn’t mean it’s the way to start. The good thing about automation is it’s efficient; the bad thing is you cannot learn because you’re not involved in the process. And at the start, learning is where you should be spending most of your time!

For example, when SpareFoot began they weren’t sure how to charge storage companies. Should it be a $20/month listing fee? Or a flat “finders fee” per lead? Or a commission on leads which convert to sales? Could they charge extra for a “premium” listing? Should purchases go through SpareFoot so they can extract their cut, or should they bill storage companies separately?

If they had picked a strategy and automated it, there’s a low chance they would have picked the right one. All that time spent writing and debugging code, worthless.

Instead SpareFoot decided to automate nothing. When a potential buyer made a search, they grabbed their email or phone number and said “Thanks, we’re going to find you a great deal by Thursday.” Then they banged the phone all day, calling up regional storage facilities. Their pitch was awesome: “I’ve got a lead for you; his name is John Doe and he’s looking for a 10×20 with air conditioning. If your rate is competitive, we can do the deal today. By the way, if you want us to send leads like this to you all the time, it’s $20/mo to list with us.

The bold phrase in there is damn compelling, right? And of course they varied the offer based on current pricing theory or in real-time based on the interaction with that particular storage facility.

None of this — determining the pricing structure and amount, building relationships with facility managers, and ensuring buyers’ success — would have happened if they started by writing code or any other sort of automation.

Happy buyers before the network effect

Clearly the value of a marketplace increases as it grows — both as a business and to the buyers and sellers.

This is most apparent with companies like eBay and Craig’s List: The immense variety of listings facilitates long-tail transactions that would be impossible with a smaller, more specialized marketplace.

But at first your marketplace won’t be large, so to get started you have to deliver value even though you’re small.

To see this done right, consider Threadless, a bootstrapped marketplace matching people seeking unique T-shirts with people who invent them. Even if the site contained only ten T-shirts, as long as they were awesome buyers would still be able buy a cool T-shirt. In fact, the site’s initial obscurity would be a virtue, because part of what makes a T-shirt “cool” is relative scarcity.

As another example, consider Etsy: A marketplace linking people who create handmade goods with people who appreciate the craftsmanship and uniqueness that can’t be found at Walmart and who want to subsidize creative arts. Even with just ten items for sale, buyers would still be purchasing a handmade product and supporting an artist; marketplace enormity doesn’t increase the pleasure of the buyer.

eBay and Craig’s List are counter-examples: Their value-proposition is “you can buy anything,” which works only when the seller network is immense. If you’re bootstrapping and your value proposition includes the words “anything” or “anyone,” you’re probably reaching too far.

Solve the seller side first

It’s typically easier to solve the seller side of the equation than the buyer side.

After all, the value proposition to the sellers always boils down to “You’ll make more money,” whether that means a new sales channel or a way to monetize surplus inventory. Sellers are often already selling, which means they’re easy to find and they answer the phone. With the right proposition there’s little reason for them not to try you out.

What could “the right proposition” look like?

  • You build their listing for them.
  • Their listing is free for 12 months.
  • They pay only if the lead you provide completes a sale.
  • They get a low price lock-in for one year.

And you could ask for a few things in return:

  • They complete a survey (your customer/market research).
  • They agree to a public testimonial (after the first sale).
  • They agree to let you A/B test different ways of presenting their offering.
  • If you start bringing monthly X traffic, you get to start charging them $Y.

Another reason to start with the sellers is that if you do attract even a few buyers and there’s no inventory, they’ll have a bad experience (e.g. “I tried a search over the entire state and found nothing!”). They’ll never return.

Whereas if you at least have inventory, each consumer could not only potentially buy something, but might spread the word that your site really works.

Why waste time and money acquiring buyer traffic if you can’t capitalize on it?

Use a novel strategy for attracting buyers

The buyer side of a marketplace often boils down to a numbers game: If you can get N visitors per month and P% of them buy, it works. Typically P is small, so N has to be really big.

Unfortunately that puts you into the same position as every other website on Earth — competing for traffic.

If your answer to how you’ll attract big N are things like SEO, Google Ads, and word-of-mouth, that’s an automatic fail. First of all, this is what everyone else is doing, so none of this is a competitive advantage. Second, you can’t directly control any of these things, so it’s do-and-pray, not a strategy.

To have any chance at success on the buyer side you need superior strategy. As an example of one, take OpenOfficeSpace, a new startup that’s a marketplace for partial office spaces like subleases and co-working; the Priceline of office space. There’s no way they could compete on keywords like “office space” or “subleases,” neither in SEO nor AdWords.

So instead, they wrote an amazingly useful guide to leasing commercial real estate, aimed at the small business audience. There’s a butt-load of important advice in there, some of which was new to me and some I’d learned by screwing it up a few times — things like how to root out all the actual leasing costs, what parts of the lease are negotiable, move-in conditions, how to deal with brokers, and techniques for finding space.

This is so valuable, you know people are going to bookmark it. Many will spread the word through Twitter and Facebook just because it’s genuinely useful information. Bloggers (like me apparently!) will promote it.

This produces a steady stream of new eyeballs — all people pre-qualified to be interested in the marketplace aspect of the business. The chatter even helps with SEO — that link I gave them kicks some juice their way, and deservedly so.

What else?

What are other advantages or pitfalls of marketplace-style businesses? How else can you address the difficulties? Leave a comment and join the conversation!

49 responses to “Solving the “marketplace” business model”

  1. One thing that is possible for some marketplace companies is to be the “sell-side” initially. A contrived example: sparefoot could lease space and resell it, losing/winning only the spread in prices. By doing so, they can satisfy and grow buy-side demand, improving their metrics so that more sell-side companies can be enticed into the marketplace.

    I know that very early on, uShip’s founders did some moves so that they could demonstrate that people were indeed willing to trust a 3rd party to move their stuff.

    I have a ticket marketplace idea that I’m bouncing around in my head, and to me the surest way to get the market going is to be a market maker in it myself: buy from people looking to sell, sell to people looking to buy. If the spread is positive, great, if it’s negative for a while, that’s ok: it’s the price of seeding your market.

  2. Nice post Jason.
    You mentioned that its similar to creating 2 different companies. I had always thought of it similar to creating 3 companies – buyers, sellers and finally the feature set which connects them together either by auctions or chat or so on.
    Thanks for the tips.

  3. Thanks for the advice! I run a marketplace business, Speed Dating for the Hiring Process, and one thing I’ve found incredibly useful is starting small and local. I’m currently only working on connecting software engineers and companies that need software talent in NYC. It has allowed me to focus and build a base of dedicated users who have helped promote the company to their friends in other industries and locations.

  4. You’ve really nailed the pitfalls we’ve experienced as an online marketplace for genealogy research services. Fortunately, your suggested strategies look to be extremely relevant and actionable for us (some reflect what we’re already doing with modest success, others we’ll try to implement in short order.)

    Thanks for your highly practical take and for the detailed examples you cited.


  5. Hmmm, interesting.

    I want to develop a mobile market place for ads. My purpose is to try to connect local consumers with businesses that they would possibly interested in. However, this relies on the majority of the population to have smart phones. I think it’s a bit early, but when I’m ready this will be a nice guide. Thanks.

    .-= JP’s latest blog post: Don’t Assume The Negative =-.

  6. You will find something related to this marketplace analysis “The Golden Football” economic post here ( If you merge and articulate both posts in only one piece, I think we have here a new way of thinking ecommerce.

  7. Another great post, Jason. Thanks for sharing your insights.

    The only thing I would add would be that entrepreneurs start w/ a laser-like focus on a local market so that they can become the de facto expert in that space in relatively short order.

    In addition, for those working w/ directory based services, I’d suggest pre-populating some data to provide users with some upfront value and hopefully checking in again at some point down the road.

    Hope this helps.

  8. Instead of jumping to the marketplace business model, step back and see if there’s a problem you can solve (and thereby create value) for the sell side only.

    I’m learning this lesson now– in 2004 I started a web service for selling merchandise online. Niche brands and other groups initially used us to sell merchandise (t-shirts, coffee mugs, etc) to their audiences– die-hard fans & supporters already visiting their website and familiar with them.

    Then we decided it would be a great idea to build a marketplace feature of our website to connect sellers of t-shirts & merchandise to buyers. The sellers who got value from our marketplace were a completely different type of seller than those initial niche brands who didn’t need nor want the marketplace, as their fans and followers were visiting their website directly.

    The marketplace started to work, but like you said it was an entirely separate business. Being a small bootstrapped company, we couldn’t give adequate time & attention to both the niche brands and the new “self expression” artists/ designers who found value in the marketplace (because they didn’t have any built-in buyers of their own).

    We’ve since decided to focus on the niche brands exclusively. Now we have the time and resources to wow this group. And we don’t have to worry about all the problems of a marketplace business model.
    .-= Casey Schorr’s latest blog post: Can You Trust Your Merchandise Fulfillment Service? =-.

  9. As a bootstrapper of a marketplace company, I totally agree with your chicken and egg assessment. However, I think getting an “automatic fail” for SEO is off the mark. I have seen in the For Sale By Owner homes market that you need to get high in the organic rankings to be found by buyers and therefore be attractive to home sellers. A seller wants to list his or her home with a site that has high organic SEO. PPC doesn’t work well for marketplace companies in my opinion.

    Luckily my company Yigdigs hit page one in Google for “for sale by owner” a couple weeks ago.

    Bending over backwards for your sellers is key. Manually doing the work, making sure they are happy, and getting early customer testimonials is extremely important.
    .-= Andy’s latest blog post: Forbes article on How to FSBO your home =-.

    • Good point that “automatic fail” is perhaps too strong. Still, it’s only a competitive advantage until someone else does it, which means it’s not a long-term competitive advantage even if you’re successful today.

      It’s sort of like 15 years ago someone saying they’re going to “have a web site.” Yes, you and everyone else. And for a while yours might indeed be better. But soon others learn or pay others to fix it.

    • Andy, what makes you say that PPC doesn’t work for marketplace companies?

      • Hi Adam,
        If you are appealing to both buyers and sellers as a marketplace company, you need to get into both of their heads and think how they think.

        As a buyer, you are going to do a Google search for whatever keyword term of the product or service you are interested in. Buyers will look most closely at the organic results for that term and visit those sites. Studies show that almost 70% of the click thrus go to the top three organic results.

        As a seller, you want whatever you are selling to appear high in the organic search results. If your product (through the marketplace site) is only available on PPC, you probably don’t perceive that as legitimately as a high ranking organic site.

        Several SEOs that I have worked with also say that PPC is not as effective for marketplace companies.

        Also – just to answer Jason’s comment about 15 years ago and having a website… while I agree with this, it doesn’t mean that you shouldn’t have a website just because everyone else is doing it. On the contrary, it means you have to do it much better. The same is true for organic SEO. As a marketplace company you absolutely need to compete using SEO, and you need to do it better than your competition. I don’t think that fact can be overstated. Driving good conversions, continual A/B testing, and continual SEO improvements are *mandatory* or you will go out of business.
        .-= Andy’s latest blog post: How to Strategize =-.

  10. If there was a time to get a shot at marketplace, that would be now. Online business is fairly inexpensive and the mistakes are easy to correct, most of the time. True, it is overwhelming to even try to wrap your mind around the entire marketplace, but at a closer look it is often a collection of unsolved problems. Possibly, focusing on providing solutions for each one of the issues will eventually grow into “marketplace” solution.

  11. Great advice… “But just because automation is the goal doesn’t mean it’s the way to start.” Now that is “sage” advice… this is exactly what Seth Godin talks about “Shipping” You need to SELL consistantly first, before you automate! Best, Brian-

  12. Avoiding excessive automation is definitely right – we couldn’t afford to automate much to start with but it meant that as we’ve grown our seller and buyer base we’ve been able to choose to automate those things that really help both us and our customers.

    Maintaining a relationship with your sellers is key – they need to believe that you’re working hard on their behalf so you have to keep telling them when someone looks at their offering or posts something they should be interested in.

    And more sellers do attract more buyers – a lot of our sellers find this counter-intuitive but is absolutely true

  13. “Marketplace companies are notoriously difficult to start, so I’m constantly amazed that so many entrepreneurs chose this route.”

    – Since we are also consumers, this comes up often as a “scratch your own itch”
    – Since money is being exchanged, there is an automatic business model of skimming off the top
    – We want to take advantage of the internet, not necessarily build a business that also has a website, and connecting people is prime territory
    .-= Amber Shah’s latest blog post: Bad Code is Viral =-.

    • Actually, Amber, these kind of businesses are almost ridiculously easy to start. If you your marketplace is online, there are tons of open source applications that allow you to create a platform at a fairly low cost. But that’s where a lot of these businesses end (we built it, now they’ll surely come and make us wealthy…).
      Marketing, customer service, etc.—all the traditional business tasks—play a critical role in determining the business’ success.
      .-= Ray Gulick’s latest blog post: Having a website? Meaningless. Using a website? Priceless. =-.

  14. Jason,

    Thanks for your input on building a successul marketplace. I especially appreciate the dose of reality you paint by saying its actually more likely to fail than a new restaurant concept. I’ve sort of stumbled upon idea through one of Gary Hoover’s presentations on the History of Retailing  — an industry famous for competitiveness, low margins, and great fortunes.. The retail industry has actually been around for over 150 years now so there are many great lessons to be learned from history. Would love to talk with you about more some time.

    Here’s Gary’s presentation fyi…


    • Jason, great well-thought out post, as usual. This is the stuff we should be teaching in MBA classes. If I ever teach one, you’ll be the required reading!

  15. Our first two product/business pivots were based on the idea of building a market place for advertising (media agencies as the buyers, and media publishers as the sellers). We tried to actually create a two sided market where there actually was a value prop for either side without the other. We started on the buy side by creating a cross medium inventory of all available media placement options, and an RFP tool that would allow them to gather the data they needed for the negotiation. This evolved into pivot 2 where we created an inventory mgmt system for the publisher side… needless to say we jettisoned these products – it just wasn’t a marketplace that was ready to be centralized. The other fail point in our case was that it was essentially an enterprise sale on both sides over a one to one match. Anything that is an enterprise sale immediately becomes a longer and harder sale with much bigger expectations attached, and the the of the day we pivoted a 3rd time (at a macro level) to our current business model and dropped the marketplace entirely.

  16. A lot of true things I learned the hard way (probably with you shouting them in my ear the whole time, Jason :) I can especially confirm the wisdom of being (initially) the seller side. If you can’t be that, you might not be in the right place.

    We’ve also tried to take a lesson from From the very beginning Jeff Bezos’ goal was to create a frictionless marketplace for physical consumer goods. Yet he did not jump in building that: he identified one product, “Books”. Amazon built a repeatable&scalable end-to-end connection from supplier to buyer, doing only stuff they’re good at, proving that people will look up books on the web, will type in their CC #, etc.

    Infochimps has made enormous strides since we asked, “What is our ‘Books’”? Well, people were contacting us out of the blue to get big data analytics on massive social networks, and there’s a growing ecosystem of people who can turn our data into their solution. We’re blocking out all the other products we could hypothesize, to concentrate on “simple APIs derived from terabyte-scale social data / other novel data sources” (eg )

    We’re now hearing a lot of enthusiastic yesses from customers — now we can build out this end-to-end connection, start seeing scalable revenue, and expand /horizontally/ to being a data marketplace.

  17. “But just because automation is the goal doesn’t mean it’s the way to start. The good thing about automation is it’s efficient; the bad thing is you cannot learn because you’re not involved in the process. And at the start, learning is where you should be spending most of your time!”

    I can’t agree with this more. When I started MailFinch, I used a free printer that I got with a laptop purchase. Today, we’re a little more automated but we’re still using off the shelf components to handle nearly 30K pieces of direct mail each month.

  18. This is a brilliantly simple explanation of the issues with the marketplace business model, along with some great tips for dealing with them. As a web developer, I’ve seen more than my share of people who jump into this kind of online business expecting to make it big, only to quit within a few months completely discouraged. Now, as I consider starting one of these businesses myself, this post clarifies things and has given me some ideas for what I hope will be a sound and workable strategy.
    .-= Ray Gulick’s latest blog post: Having a website? Meaningless. Using a website? Priceless. =-.

  19. Jason, Brilliant advice to “Forget automation: Do everything manually.” This advice holds equally for non marketplace startups. The current climate of out of gate automation to reduce involvement is preventing many startups from learning meaningful lessons that will be necessary to be competitive and even survive over time.

    Here’s our company mantra:
    Do it manually. Understand it. Master it. Then automate it.

  20. These complexities forced me to select more “Collaborator”-like idea instead of a cool marketplace one I have been developing for a year since about 2006.
    One more important thing for founders of a marketplace startup is to look at it fairly and get into it from both sides – providers and consumers. Usually, I think, such marketplace ideas come from consumer-entrepreneurs solving own pain. But … and this is why I post here, you get to know providers side very well as otherwise marketplace you will create may become unfair for providers. I was completely wrong with my concept until I met a similar minded guy from the other side of ‘barricades’ who opened my eyes how to make business atrractive for providers too.

    BTW, for eBay – providers are sellers and consumers are buyers.

    I still want to do it marketplace one but may be later, may be even in next reincarnation…
    .-= Igor’s latest blog post: Wikipedia marketing for startups =-.

  21. Jason, do you see “aggregation” or “group buying” sites as a subcategory of market sites with the same challenges and benefits or are they different?

    Seems like some of the same concerns and strategies apply – approach sellers first, and that there is value with even a few participants because they get what they want at a discount.

    • At the high level I see them as the same. You’re selling coupons and just putting a nice, modern spin on how the coupon is acquired and on the advantage to the seller.

      Of course those sites do come with unique challenges since it’s a unique proposition where you’re selling a group rather than an individual (with assistance from the group itself). I would agree that these sites seem to be a little easier to get going than traditional marketplace sites, perhaps exactly because of the built-in sharing feature which addresses the “how will they find you” problem.

      Certainly the “two business” problem remains.

  22. I am bootstrapping a marketplace of services for online businesses.

    I wonder if I should focus my marketplace to something even more narrow.

    At the moment, you can get design tasks or dev tasks or marketing tasks done at a fixed price. I wonder if it would be beneficial to focus on marketing tasks only, or dev tasks only to become like a commenter said the expert in the specific domain?

    How does one know when the potential market is too small?
    .-= Aymeric’s latest blog post: How to get cheap and targeted paid traffic? =-.

    • I don’t know — I took a quick look at your site and I like the concept. Cost-boxing (instead of time-boxing) is a fun approach.

      I think the answer needs to come from the data you currently have on what’s being used and the feedback you’re getting from both sides. If you’re not getting enough feedback, that’s a great place to start innovating.

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