Should you build a marketplace?

February 9, 2022

Does it make sense to turn a solution into a marketplace? When are you better off with a service? Let's dig in a bit deeper.

A couple of weeks ago I had a talk with a mentee of mine. They were in the process of digging into a deep problem space and came to the conclusion – this is a good space for a marketplace-style app.

While the hype around marketplaces from the time that giants like ebay, Uber and Airbnb have entered the screen are a passé, there’s still a notion that the “Uber for X” could be the next big thing. So it’s no wonder that marketplace ideas rise up again and again.

But there’s also a reason why a plethora of more “simple” businesses are rising up to unicorn status quicker – it’s simply really hard to start a marketplace. We’ve talked about this plenty of times.

So I usually tell folks to keep it simple. Solve the problem with a service first. Think about automations. Maybe down the line a marketplace makes sense, but not today.

But when does it make sense to build a marketplace?

Not drinking my own Kool-aid

Obviously, it’s a bit contradictory for me to tell this to my mentees. After all, after I had found the need for more accessible career coaches and coding mentees, I went ahead and just built it into a fully-fledged marketplace right away.

And while it has worked out for me, I also realized a couple of things:

  • Non-marketplace competitors have sped by with ease
  • I saw multiple new marketplace succumb to the chicken-and-egg problem
  • It’s just a lot of work 🥵

Furthermore, I’ve seen one-sided marketplace models succeed left and right. Be it productized agencies like Embarque, where the supply side is owned/hidden or even just services like “Roast my Landing Page” where one supplier is all that’s needed.

A one-sided marketplace can always progress to a two-sided one. But a two-sided marketplace can rarely be converted to a one-sided place.

So, when should you build a marketplace?

This may be a bit anticlimactic, but “it depends'“! However over the years, I’ve identified a few reasons where it makes absolute sense to go with a two-sided marketplace right away.

If your suppliers are unique or in-demand

For some marketplaces (including, to some degree) it’s crucial to show your supply to the world. In some cases, your supply is what makes your marketplace viable. The service is secondary.

  • Cameo sells short videos from celebrities. It is absolutely crucial that your buyers know who is on the marketplace.
  • An upcoming marketplace for fine art mentoring only makes sense if you can check an artist’s work and credentials
  • Some of AirBnb’s stays are very unique. While you could probably do with any “high-end 2br beach house with garden”, something like a barn stay is very unique and should be presented openly.

On the contrary, if your supply is interchangeable – e.g. you are offering language tutoring services, delivery or driving services – it’s just important that you have a high-quality supply, but now who your supplier is in the end.

Any one-sided model would be easier to start with!

If you can create a smoother matching experience

Many transactions are inherently two-sided. This is often the case if buyers need to have control over their purchase or the supplier they are going to work with.

Examples for this might include working with physical item suppliers, local repair companies, attorneys, specific advisors. Suppliers need to know the customers they take on (and sometimes don’t take on certain cases!), buyers often require some trust or offers before making that step.

These are transactions you can’t simply boil down to one side. A repair company may not be open to taking on any job some app throws their way. A homeowner may want to get in a couple of offers, before making a decision.

The job of a marketplace here is to facilitate that matching process, making it smoother, helping with billing and conflict resolution, whatever it takes. But there’s a case for a two-sided model.

Using an existing supply for new offers

In history, many big marketplaces have made use of an existing supply or buy demand to launch a new, previously unavailable offer.

Uber has not brought together taxi drivers and passengers. It has utilized a supply (everyone with a car) to launch a new service that was more accessible and loved by passengers (many of which were no big taxi enthusiasts before).

Airbnb did not match short-term rentals with couchsurfers. It essentially just unlocked spare bedrooms and vacation houses to be rented out without much hassle.

Unlocking this new offer likely requires some other stars to align, but for both sides matching through a two-sided marketplace might be easier than through a one-sided service (e.g. if Uber would hire drivers first).

If your supply differs in quality/offering

Last but not least, people expect a universal quality and pricing in one-sided services. A product has certain pricing and customer A can expect to receive similar treatment as customer B.

Successful marketplaces today, in combination with the points mentioned above, may differ in depth or quality of offering. That’s a good thing! It means that students can rent spare bedrooms on Airbnb, while someone that’s well-off may be able to afford a house in the city centre for their stay.

With a one-sided offer, you’re taking away options. Or at least, it becomes much harder to market them.