If you enjoy chatting with Founders and VCs like I do, you’ll hear a lot of marketplace Ideas. Because Uber is the most popular company that has tried to solve the marketplace problem, these companies are now called Uber for X. More often than not, many startups are trying to solve the problem of demand and supply. These ideas although very popular and similar to each other are not bad as genuine problems are being solved. For example, it is still incredibly difficult to get a good handy worker (Plumber, Cleaner, Electrician, etc). The nature of how the problem is being solved is where the issues lie.
Marketplaces like Airbnb and Uber are the most common example. The business model does not require a genius to figure out how revenue is accrued or how they work. These models also require very little capital to start, and if you can get it to scale, you’re going to make a lot of money. I’m a fan of marketplaces in general, but running one requires you to get a lot of things right.
1. The Chicken and Egg Problem
First, a Marketplace is a chicken and egg problem. Which comes first? The demand or the supply? You need to figure out if your Uber for X idea actually has a supply or demand problem. Does supply outweigh demand or vice versa? This is the first internal problem you need to solve as a company.
2. Build a community
Second, a real successful Marketplace thrives on the people – Uber thrives on its drivers, Airbnb-It’s hosts. In some sense, these people from a community, birthing a platform for the Startup to work. A new community requires education and even some help. Airbnb is famous for visiting its early hosts and assisting with photography.
On this side of the world, a marketplace’s dynamics are different because a lot of things are different – for starters the literacy level of the masses, the exposure of your “people” and how well they are able to understand your business, be loyal to it and actually make it work. Brain Chesky of Airbnb once mentioned that a user created their first product roadmap, which they developed Airbnb on.
3. Gain knowledge of your ecosystem
Before you start a marketplace in Nigeria, you should gain knowledge of your ecosystem and industry. Understand the intricacies of every stakeholder that makes up your marketplace, how well they are going to adopt your idea and if they actually have what it takes to scale the business. For example; it would be extremely difficult to have a marketplace that connects grocery shoppers to market women. Not impossible. But extremely difficult. Why? The market women might not be as educated or informed to play their part and make this work.
4. Build processes before technology
Be careful while building your technology, marketplaces are the process. There are just a few things pure tech can solve in a marketplace business; mainly because the marketplace itself is just a well-oiled process intensive business, with everything done in a timely manner.
I once had a chat with a Founder looking to connect consultants with Startups, and the first question I asked was “Are you currently doing this manually?” “Can you share with me the process of how this works on a sheet of paper or an online document?” and unsurprisingly, there was no process, meaning there’s not much technology can do in this case.
For your marketplace to work, figure out how it works manually, tweak the process until you have something that can scale and then build technology to scale it- this is how the most successful marketplaces take off. Another smart trick Airbnb pulled was to list some homes on Craigslist. This helped them perfect their processes while also validating their idea.
5. Know what to measure
It’s very easy to get lost in the sauce of thinking every metric matters. Don’t get me wrong- track everything but have a simple metric of success that shows that you are moving forward. For example; if your marketplace seeks to connect Okada drivers with people who want to quickly dispatch items, then the metric you should optimise for is the time of pickup. It’s invariably different from a marketplace where you’re connecting handy workers to ordinary people. You probably should be optimising for the quality of service – for example, how many complaints or how many “5 — star” services were issued on a weekly basis. You can also track secondary metrics like time I.e how long it takes for the handyman to show up to the customer’s location.
However, I don’t think this is important to the user as long as the value for money is in delivering the service with utmost quality and standard(Which would you care for, a cleaner that comes in 30 mins and provides bad service or a cleaner than shows up 48hrs after the service has been requested and cleans to perfection?) Once you can define the metrics that matter then you can build the entire business on that metrics.
6. Calculate your unit economics
Finally, figure out the unit economics very quickly because Gross Market Value(GMV) is not revenue. This is understandable to few, a marketplace can deceive you to thinking you’re making a lot of money when in reality, 70–80% of the GMV goes into paying the “People”, leaving you with a scant 20% to fund your operations and scale the business. Which is why a marketplace has to scale for the business to make sense. You need to quickly figure out your cash flow, customer acquisition cost, marketing cost, salaries and a lot of other things. Then figure out what you need to do to make a profit, as soon as you can.
Most importantly, know that your Uber for X is feasible by understanding everyone in the ecosystem that needs to make it a reality. The next step is to work hard to make it happen.