A few thoughts on marketplaces
I had a discussion on marketplaces with Adenike Sheriff last week and thought to share some of the things we highlighted.
A marketplace business typically serves as a connector to supply and demand. They act as aggregators of a product. Examples are Uber(connecting drivers and riders), Amazon(connecting sellers and buyers), Airbnb(connecting travellers and homeowners). Some of these marketplaces are open — the people on the demand side decide what to purchase and who to purchase from(Amazon, Airbnb), others are closed — the technology system matches the supplier to the demand(Uber).
Before you decide to build a marketplace business here are some things you should take note of:
Supply and Demand
The laws of supply and demand(and their exceptions) are core to any marketplace business. The business is responsible for acquiring the supply side as well as the demand side. It’s a chicken and egg problem and you want to acquire the chicken and the egg at the same time to grow a marketplace business
User Acquisition costs
Some marketplace ideas don’t scale because the user acquisition costs are too high. If you’re entering a niche where there are larger companies who provide these services, your costs as an aggregator will be high.
It’ll also be rare to find that you can outspend the leading brands. An example will be a price comparison site — they often fail because they spend the same amount of money to acquire customers as the e-commerce sites they send traffic to. The margins are too low and when factored with acquisition costs and other costs, these businesses tend to fail.
Retention
Depending on your type of marketplace, you could lose customers you’ve acquired to the suppliers. Let’s assume you’re an open marketplace for groceries in small towns and neighbourhoods, as soon as the customer discovers a neighbourhood store, there’s no reason for them to purchase or be referred through your service. Marketplaces that sell a recurring service or product(think Uber) are built around an uncommon product — it’s very rare that you would meet the same Uber driver. This has happened to me only twice since 2014 — I have been on thousands of Uber rides. It’s also rare that people build personal relationships with Uber drivers even when the driver lives in their locality.
The problem you’re trying to solve
Many marketplaces being built in Africa are replicas of marketplaces in America and do not solve any local problems. An example is America’s banking, credit, tax and investment system — it’s very complex, cumbersome and difficult for people to decide on providers to use. In Nigeria, the banking, credit, tax and investment services are not as complex. They’ve been built from the ground-up to be inter-operable and are quite easy to access. Most financial institutions provide the same services at the same costs — think how much it costs to make a bank transfer or withdraw money from an ATM.
There’s more work that needs to be done in finance but it’s less aggregation and more inclusiveness — giving underserved populations access to and knowledge about these services.
The above are a few thoughts we had and I thought to share. Is there anything you think founders should think about when building a marketplace business? Please leave a comment, I’ll love to know what you think.
