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. It is considered even harder to master this phase, given that marketplaces will have to grapple with a broader set of both internal and external factors and require a different set of skills and capabilities to be successful.
Below are the critical factors that marketplaces poised for growth should consider to ensure that their internal structure, processes, and growth engine can accommodate and successfully drive growth.
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. Given the multi-sided nature of marketplaces, they have a unique growth lever that can yield multiplier impacts: programs that take advantage of the mutual attraction of buyers and sellers.
The forces behind this increased value acceleration for marketplace businesses can be summarized in two key effects:
Network effects
Network effects, similar to gravity, 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, I see network effects informing marketplace operators of the importance of driving increased numbers of participants and corresponding connections among buyers, sellers, and other parties operating on the marketplace. The 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 that has increasing momentum as its speed increases. For marketplaces, the analogy suggests growth efforts have a baked-in multiplier impact: more buyers drive more transactions, which attracts more sellers, reduces costs (due to increasing scale economies), increases learning, and so on. This concept can be helpful in communicating an overall growth strategy across an organization and is useful in thinking beyond getting more connections to broader sources of value that can accelerate 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. I’ve found that as marketplaces grow, they can quickly become inundated with business metrics.
What metrics are most important for a growing marketplace business? Ideally, I like to find one or two that demonstrate the highest correlation to increased economic value to the business.
To find a tight set of core metrics that are good indicators of economic value, look for those measures around the primary interaction of your marketplace (gross sales, transaction counts, utilization rates, revenue yield rate, etc.) that correlate strongly to profitable revenue growth. It’s easy to get excited about certain metrics, such as registered users, social media followers, or company valuation, but they don’t directly drive economic value.
3. Improve your marketplace product efficiency and productivity
As a marketplace looks to scale, there are obvious product investment areas to consider: localization if you’re looking to expand internationally, updated product definitions if you’re looking to expand into adjacent categories, etc.
One area that can deliver outsized benefits is looking to improve the effectiveness of your product in driving growth. When building the initial version of your marketplace product, you often must cut corners to get the product out the door. However, when you begin scaling your marketplace, it becomes more costly not to address these product inefficiency issues because the cost of, for example, having high customer drop-off rates during the check-out process (resulting in lost revenue) can be greater than the cost of development resources to fix the issue.
To address these product improvement initiatives, marketplaces generally have three options:
- Build a custom software solution
- Rent or buy capabilities from outside vendors
- Implement a better manual process internally
Depending on the costs and benefits of these options, any of them may be appropriate. If time-to-market or internal resource gaps are an issue, tapping into the external market to partner with a solution provider to address product inefficiency issues can be a good option.
4. Invest in marketplace-specific skills and insights to achieve step-function improvements
As marketplaces scale, like any growing business, 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 marketplace business, special attention should be paid to hiring people with specialized skills, such as an economist to help find the right balance between supply and demand or a supplier management expert to help manage a growing supplier base. Hiring people with these types of specialized skills can help unlock value and increase the effectiveness of various business functions as the marketplace scales. If you’re unable to hire specialists in skilled areas, sending folks to targeted training programs can be a good option.
Also, dedicating time and resources to uncover insights into the drivers of growth and sources of customer dissatisfaction can also yield breakthrough results, for example, investing in market research or targeted customer outreach.
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 relationship with a broad array of stakeholders. These stakeholder groups include multiple customer groups (buyers, sellers, and possibly others), governments, communities in which they operate, environmental constituencies, business partners, shareholders, etc.
While all businesses have stakeholder groups like these, what distinguishes marketplaces is that being a central player in the markets in which they operate brings an extra level of scrutiny to their business practices and that they can impact these stakeholder groups in unique ways. For example, when Airbnb listings come into a neighborhood, housing prices have been found to increase, called the Airbnb effect.
To address stakeholder management situations, marketplaces can:
- Establish policy statements or points of view as to how they interact with and support their various stakeholder groups
- Fund dedicated resources to manage various stakeholder groups, such as community affairs or government affairs
- Invest in a robust customer management/success function
6. Exploit the advantages of your marketplace model over the competition
As a marketplace gains broader market adoption, competitors across the board will start to notice. Marketplaces have three primary competitor types: traditional intermediaries (such as brick-and-mortar retailers or distributors to their digital counterparts), large providers that can reach customers directly (through direct sales, sales on company websites, etc.), and other marketplaces.
Relative to the first two competitor types—traditional intermediaries and direct sales by providers—marketplaces, by their very business model, have clear areas of competitive advantage that cannot be replicated by these players, such as superior product selection or a lower cost structure.
Competition from other marketplaces presents a whole different dynamic. Marketplaces can compete on the basis of different business models. Marketplaces can also differentiate themselves from other marketplaces by delivering a superior customer experience, supporting higher levels of trust, or gaining the loyalty of business partners and providers.
At this stage, it’s important for marketplaces to identify their sources of competitive advantage relative to these players to inform their go-to-market strategies, competitive messaging, and other initiatives, such as product development, to reinforce their market position.
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, more customers, and an expanding partner community, often spread across many geographies—this original vision can become diffused. To address this problem, marketplaces need to operationalize what I call their “fundamental purpose.”
This fundamental purpose of a marketplace (or any business) articulates why the marketplace business exists in the first place. The fundamental purpose addresses core questions about the business, such as “What are we here for?” “What gets us up every day?” “How are we making the world a better place?” The fundamental purpose of a marketplace business often combines its unique insight into specific market inefficiencies with a broader emotional appeal as to why addressing the inefficiencies matters. For example, a marketplace for used goods could have a fundamental purpose of eliminating waste to reduce the need to find more landfills.
Once defined, the marketplace’s fundamental purpose can form the basis for a host of company artifacts, such as brand elements, vision and mission statements, and company values, that can serve as the cultural glue that further aligns employee behavior and improves your impression to potential customers and business partners.
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.
This article was originally published on The Marketplace Economy blog on Medium.
