Silver Linings Playbook to Building a Marketplace: 3 Fundamental Principles

Every marketplace dreams of it, but few achieve it.

Avid shoppers stringing along purchases that meet their every need.

The crème de la crème of sellers, loyal to your platform like bees in a honey-laden hive.

And the business.

Well, the business is moving like a well-oiled locomotive as the marketplace simmers with sellers and buyers engaged in a retail waltz.

Think of the bazaar in Aladdin, snakes dancing out of wicker baskets, merchants slanging hand-woven carpets, and barrels of dried fruit wafting through walkways.

Believe it or not, it IS possible to achieve this near-perfect equilibrium marketplace, sustained for long periods of time (think Amazon or Ebay).

But how?

I hope in part 1 of this series we challenged some common misconceptions and assumptions and got your mind reeling of the real mechanics and nuisances to marketplace dynamics.

Now, we’d like to fill in the color and give some additional details that should answer some of the questions we’ve gotten the past few weeks.

#1: Supply is a Money Maker, NOT an Expense

Remember how we recommended growing your Supply 1st, and your Demand (shoppers) 2nd?

To take it a step further, you should never view your Supply base as a cost center, but as a revenue generator.

After all, sellers are not created equal and drive revenue at varying levels.

Following Pareto’s Principle, 20% will be phenomenal and drive oodles of revenue, while the other 80% will fall into various, lower tiers.

Thus, calculate a “lifetime value per year” by using the formula:

Average Revenue Value (per time unit) * Average Service Frequency (per time unit) * customer lifespan = LTV

For example let’s assume you’re Doordash and your driver (Supply) drives $20 of revenue per delivery, completes 50 deliveries per week, and has an average lifespan of 27 weeks:

  • $20 per delivery * 50 deliveries * 27 weeks = $27,000

Assuming you want to reach a certain level of revenue by year (ex. By Year 3, we want to hit $30 million in revenue), you can estimate out that not only by the LTV of your eaters, but through the LTV of your drivers as well.

Roughly this can directionally give you an idea of how many drivers (~1,200) you’ll need and then start to model out your peak and trough of eaters (Demand) throughout the year, adjusting your Supply “recruiting” efforts accordingly.

There is more unit economics to this, but you get a sense of how this could be valuable in getting a bearing on growth, now catalyzed through specific marketing and operating efforts.

Not only should you see your Supply as a revenue generator, but you should treat them like royalty.

Like a famous artist, the company would not exist without the supply base, so give them the praise & appreciation they deserve.

A perks program, monthly community events, complimentary swag, and prioritized customer support over shoppers, all should be included in the experience of being part of your Supply.

This is woefully missed from most successful marketplace platforms and thus, a blue ocean opportunity for attracting quality gig economy workers, sellers, and entrepreneurs.

#2: Reporting will be Your Great Equalizer and Truth Sayer

Any great company needs to have a deep pulse on sales performance and marketing spend, so a strong internal source of reporting should become a top 3 priority as early as possible.

This is for 2 reasons:

  1. The sooner you instill a culture that values analytics and reporting, the more objective everyone’s decision making will be, extinguishing 90% of emotionally-driven decision-making that plagues most startups
  2. If you should trust any company’s reporting, it’s your own. Each marketing channel you use will have their own ads manager or reporting UX, but there is more than likely a chance they will be generous with attribution and spend.

In essence, develop an absolute single source of truth, inside the walls of your company.

To make this possible, have clear data architecture of your database.

If you funnel data in through APIs or FTPs, give each set of data a column for unique ids (Ex. Person ID), so you can follow a single transaction or user.

Identify a primary and foreign key within each data set, and then visually map out how each data set can connect to each other. Later, you can write some basic SQL queries to connect tables and get a full map of transactions and journeys.

Ultimately, you’ll be able to 1) garner extremely valuable user insights and 2) troubleshoot data breaks and marketing questions.

For example, if you can setup a clear data architecture for your Supply, you can track the journey of a single person across their entire customer journey: prospecting, onboarding, activation and selling.

Sweet! Now, you can answer questions like these:

  • What marketing channel did they come from?
  • What’s the quality of people this marketing channel driving?
  • How much revenue is this specific seller driving?
  • What’s the lifespan of this seller?
  • Are top sellers from certain parts of the country, age, or gender?

Without this, you miss a huge opportunity to learn and optimize your marketing channels.

One of the greatest wins of any marketing team is to find such patterns so to cut out bad marketing channels, agencies, and affiliate partners.

Don’t devoid your company of this chance to save thousands, maybe millions, of dollars.

#3: Get Legal Involved Early!

Marketers, creatives, and founders often groan when they think about lawyers setting rules of what they can and can’t do; yet, the sooner a marketplace does this, the better.

Legal will not only help vet the terms & conditions of partners, tools, and marketing channels, but they’ll give you a clear sense of the no no’s of marketing messages to attract users.

Specific to Supply, let’s imagine you want to say “earn $1,500 per week with us” in your Google ads, but you’re unsure if you can actually deliver on that promise.

Better ask your Legal counsel what IS allowed and then stick to it.

For example, at a previous company, we had an agreed upon “30% rule.”

What this meant was that in order to advertise a certain amount of money a Supply user could make a month, the 30th percentile of sellers needed to make on average that amount over a sustained, 12-month period.

We explored 5 different monetary amounts and ultimately came to a reasonable amount that met the rules, while still sounding compelling to potential sellers.

Compare this to a company like Wag Walking, that advertised making $2,200 per month, a generous and risky amount to state given the more part-time nature of their Supply (i.e. vs a full-time gig like an Uber driver who could make $50K+ per year).

“”

By Crunchbase’s count, there are 2,083 marketplace startups at this very moment.

Yes, the “Uber for X” startup has become a category of it’s own, spawning thousands of successful marketplaces that have made life 10x easier for shoppers and sellers alike.

That said, many fail (see this graveyard list for some examples) because of fatal dilemmas in business models, limited reporting, or outrageous marketing costs.

Following the above principles, along with Part 1, I believe can act as your proverbial silver linings playbook, avoiding the common and not-so-common pitfalls that a marketplace can fall prey to, capitalizing on opportunities, ultimately leading to your own bustling bazaar.

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In the mean time, if you found this valuable and would like to learn more growth marketing playbooks, hacks, and insights, take a listen and subscribe to our 5-star rated Podcast, The Daily Marketer.

~JK

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