If you’re currently building a marketplace business, you’re joining the ranks of some of the most profitable tech companies in the world.
In 2022:
- Amazon made $127.1 billion¹ in revenue.
- TikTok made $11.64 billion² in revenue.
- Alibaba made $131.3 billion³ in revenue.
Even your favorite retailers (Target, Walmart, Lowes, IKEA, and more) can’t resist these numbers. They have all launched online stores resembling online-only marketplaces like Amazon or Alibaba with fulfillment in their physical storefronts.
How do you match the scale of these giants that each have raised millions, sometimes billions, in capital? Is it even possible for a bootstrapped founder?
As we’re a marketplace business at Acquire.com, we know a thing or two about building successful marketplaces. In our sister publication, Bootstrappers, we’ve also interviewed numerous marketplace startups that scaled to millions in revenue with little-to-no outside investment.
Here are some tips when you’re building yours.
How to Find an Idea for Your Marketplace
When someone mentions a marketplace, your thoughts likely fly to websites where people sell goods like Amazon, eBay, or Facebook Marketplace.
But marketplaces can cover a myriad of industries and trades. The following are all examples of marketplace businesses:
- Services – Famous examples include rideshares like Lyft and Uber.
- Rentals – Relatively new platforms like Airbnb, HomeAway, and car-sharing app, Turo.
- Social Media – Facebook, Instagram, and so on.
- Dating – Tinder, Bumble, or Hinge.
- Recruiting – Ziprecruiter, LinkedIn, Google Careers.
All marketplaces consist of goods or service providers (“sellers”) on one side and customers (“buyers”) on the other. Whether you connect lonely singles in a city or people interested in renting homes from people with a spare room, it results in a marketplace model.
When you’re thinking about ideas for your marketplace, look around you. Do you see two groups of people who need easier connections? You could make that connection happen through your marketplace.
In the beginning, especially when you’re bootstrapped, you might connect people manually in an agency format. Many founders follow this route for cash flow before automating their service.
For example, the founder of Bootstrappers business, nDash, started his business as a freelance writer before building the team that would become one half of his marketplace.
Still not sure what you want to do to start your business? Read our article: Four Ideas for Creating Highly Successful Marketplace Businesses.
How to Attract People to Your Marketplace
Once you’ve figured out the problem you want to solve and connected your first service provider with a customer, you are ready to start scaling your business.
Young marketplaces commonly have a chicken-or-egg problem: You can only attract people to one side of the marketplace when there are enough people on the other.
Most founders we talk to at Bootstrappers say the same thing – if you source the harder end of your marketplace first, the other side will follow.
That harder side will differ depending on the marketplace. If you connect yoga students to teachers with over 50 years of experience, it might be harder to find teachers than students. If your marketplace matches consultants with enterprises with over one million employees, you might find buyers are harder to source.
Strategies for Finding Buyers
When finding buyers, you’ll likely employ different strategies depending on how difficult your buyers are to find.
You might want to start with some means of community building like a newsletter, a forum, or a social media account. These can be easy ways to reach eyes quickly through the extra SEO power of forums (ever notice how Reddit and Quora pop to the top of most searches?). This is exactly the strategy Bootstrappers founder, Greg Spates of ServiceBookie, used to catalyze the growth of his marketplace.
If you’re looking for larger buyers like corporations, you may have greater success with a direct outreach strategy. Usually, you need to target one specific person at these businesses to land the client. For example, we recently interviewed the owner of Brilliant, a corporate gifting marketplace. She frequently targets Heads of People at corporations.
Once you’ve managed to get buyers to check out your business, ensure they stick around. Usually, buyers come to marketplaces because:
- They are seeking a niche product/service.
- They want to compare prices for products/services.
- They want to find products and services within a specific geographic location.
- They want to find a convenient service they can access from home.
Make sure you address some of the above use cases when building your business, otherwise buyers will churn (leave your marketplace).
Strategies for Finding Sellers
Marketplaces generally need fewer sellers than buyers (though they are usually the more important half). Sellers are more likely to make repeat sales on your platform in a short period, whereas a buyer may only buy once a month.
Choose your sellers carefully. Your initial buyer experiences impact how customers perceive your marketplace. That’s why businesses like Lyft have a zero-tolerance policy for poorly rated drivers⁴.
Many businesses try cold outreach to prominent sellers on different marketplaces. Usually, if you can give them enough reasons to jump over to yours, they are more than happy to use your service in addition to their other channels.
Sellers come to marketplaces for these reasons:
- Better sales volume, as big marketplaces can attract the eyes of thousands to millions of people every day.
- More targeted marketing, if your marketplace attracts a specific type of buyer.
- More automation, if your marketplace helps sellers and service providers automate logistical tasks like shipping or sales.
Remember your marketplace benefits sellers when you offer considerable reach (enough buyers) to provide them with a return on investment.
Many marketplaces, specifically those seeking high profits for investors, often charge higher commissions on sellers. When sellers lose their bottom line, they often vacate the marketplace, which can cause buyers to churn due to low supply. This has been a consistent issue for rideshare and meal delivery marketplaces like Uber⁵ and Doordash.
Other marketplaces like Upwork are extremely good at attracting sellers with their giant networks of potential clients. However, they experience high churn because they charge a percentage on every transaction.
How to Make Money from a Marketplace
One of the most enticing parts of marketplaces is monetizing both sides of the business. When you think of the massive scale these can reach, you can see why it’s a lucrative business.
Usually marketplaces profit from
- Commissions on sales (Uber, Airbnb, Amazon).
- Advertisements targeted at users (Facebook, Instagram, YouTube).
- Subscription fees for one or both sides (YouTube, Lyft, Spotify).
Many marketplaces thrive on monetizing all three areas, but you must test how much your customers are willing to pay.
How Much Does It Cost to Build a Marketplace?
We’ve interviewed dozens of founders on Bootstrappers who built marketplaces with money from their own pockets. However, they often used other businesses like private agencies for cash flow until their marketplace started earning regular profits.
To start a marketplace, at a bare minimum, you’ll need to pay for:
- A web domain: ~$15/year
- Hosting: ~$20/month
- A Stripe payment gateway: 2.9 percent of total monthly sales plus 30 cents per sale
The above prices are only for a basic website using a free content management system or template. Once you start storing larger amounts of data or begin creating custom features like chat, your fees may start to scale quickly.
How to Monetize Sellers/Service Providers
Sellers are often the primary monetization sources for most marketplaces.
- Commissions – Most sellers are happy to sacrifice a small percentage of revenue to access more buyers. For example, Managed by Acquire can help you find the best buyers and sell for the highest price in return for a five percent success fee (payable only if you’re Acquired).
- Membership fees – This is less common. Membership fees work well if your marketplace gives sellers access to higher caliber or more niche buyers than they might find on other marketplaces.
- Training fees – Some marketplaces we’ve interviewed for Bootstrappers even help sellers become better at their job and attracting buyers for a fee. This in turn increased the overall quality of their marketplace and attracted better buyers. Some examples of this include Auxe and Midgear.
How to Monetize Buyers
Buyers are usually monetized in the following ways:
- Transaction fees – Many marketplaces will pad prices on the buyer’s end to leverage extra income. The key here is to keep prices competitive but not extortionate.
- Membership fees – On some marketplaces (like Acquire.com) buyers may be willing to pay a membership fee to access better products. Acquire Platinum gives you access to the biggest, best startups we can source. We use membership fees to ensure sellers don’t waste time speaking with insincere buyers. Other platforms like Lyft give buyers discounts on their rides if they are willing to pay a steady membership fee.
Important Things to Remember When Building a Marketplace
Security
As your marketplace grows, ensure it’s also secure. Data breaches can be incredibly damaging to your marketplace⁶. Besides security, you’ll also attract more buyers and sellers if you add privacy controls to give them more control over their data.
At Acquire, our sellers rely on anonymity as most don’t want employees or competitors to know their business is for sale. Buyers cannot view seller information like domains and business names until they’ve signed a non-disclosure agreement (NDA) and the seller has granted them access to their private information.
Communication
While buyers and sellers can usually find a way to communicate outside of your marketplace, you should make it as easy as possible for them to do it within.
Having internal records of buyer and seller conversations makes it much easier for your customer support team to help with any problems or disputes. Keeping transactions on-platform secures your buyers, sellers, and your bottom line. We recommend adding chat functionality to your marketplace early despite the additional expense.
Multichannel Functions
If you really want to scale to the masses, make it as easy as possible for people to join your marketplace. One way to do that is by creating versions for as many platforms as possible. If you have the cash flow, hire a mobile dev to make a smartphone application. Optimize your site for different screens like tablets.
Legal registration
If you’re selling across multiple states or countries, it may be time to hire an in-house legal team and create separate entities if you want to continue. The founders of Upshift, for example, registered their business preemptively in every state they operated in. This put them miles ahead of competitors who spent large amounts of money handling legal disputes when states got angry with them for operating without registration.
Acquire a Marketplace on Acquire.com
Want to run a marketplace business but not sure where to start? You don’t need to begin from scratch. On Acquire.com we have dozens of marketplace businesses of all shapes and sizes for sale by founders ready to exit.
If you’re a beginner, you could invest in a yet-to-be-profitable marketplace and build it yourself. Or, if you have the money, Acquire a later-stage marketplace earning large profits and build from there.
And if you ever change your mind about your investment? You can flip your startup back on our marketplace and validate all of the hard work you put in.
Go to our marketplace and create a free account to see what we have for sale today.
Sources
¹https://www.statista.com/statistics/273963/quarterly-revenue-of-amazoncom/
²https://www.oberlo.com/statistics/tiktok-ad-revenue
³https://www.macrotrends.net/stocks/charts/BABA/alibaba/revenue
⁵https://www.latimes.com/business/technology/story/2021-03-16/uber-to-reclassify-70-000-drivers-as-workers-after-ruling⁶https://www.usatoday.com/story/tech/2016/05/31/360-million-myspace-accounts-breached/85183200/
