Steps to create an online marketplace? Part 2 of 3

Plan Before You Act

Steps to create an online marketplace? Part 2 of 3

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A woodsman was once asked, “What would you do if you had just five minutes to chop down a tree?” He answered, “I would spend the first two and a half minutes sharpening my axe.
-Anonymous

In a previous article, we talked about how to validate your marketplace idea by interrogating yourself with a few critical questions. Let’s say, you’ve successfully validated your concept and found the idea to be a probable hit. Congratulations! What next?

Well, the next step involves thinking of a name for your marketplace, deciding the business model, choosing the right technology to build it, sketching the initial marketing plan….. And the list goes on. Intimidating? We bet! But slow down, take a deep breath and repeat this mantra-  “Measure twice, cut once”.

Planning is crucial. It should always precede your actions and not the other way around. It can save your time, your money, and if that is not enough, it can also save your newborn idea! Check out a few essential things that you should consider in the planning stage of your marketplace construction for a smoother build-up process.

The Business Model

Every business should focus on a sustainable future. Building a marketplace business model that cannot ensure long-term sustainability is a complete waste of time, effort and resources. Therefore, a good marketplace business model should finance its operations.
There are various options for marketplace monetization based on what you’re selling. However, the three most common marketplace business models are:

  1. Commission: This model is based on charging a commission fee for every sale your marketplace makes. As the money is plunked down only after an actual sale, this approach is the most popular among vendors. E-commerce giants like Etsy, Airbnb and Uber are based on this model.
  2. Membership/Subscription:  In this option, the sellers are charged a recurring membership fee for accessing your marketplace, with a value proposition of a greater exposure to customers. This kind of revenue model best suits those marketplaces where the sellers engage in a huge number of sales and would prefer paying a fixed monthly amount instead of paying for each item sold. Irrespective of the number of sales, you get a fixed monthly revenue from your sellers. LinkedIn, Home Exchange and the dating site OKCupid are based on this type of model.
  3. Listing Fee: This model is typically adopted by marketplaces where sellers get value based on their listing on the marketplace. A listing fee is charged from the seller whenever he puts up a listing on the marketplace. Especially common with classified ads, Craiglist is the biggest example of this type. A listing fee is better than a membership fee for sellers who don’t want a continuous membership but want to sell only for a limited time frame.

However, a single revenue model might not be enough for your marketplace. So, you can mix and match these revenue models to come up with your own business model. Amazon’s business model, for example, is a good mix of various models that lead to its success. Ultimately, it’s up to you to decide which model will be the most suitable one for your marketplace idea.

Solving the Egg-chicken Problem

Yes, this eternal problem exists in marketplace business as well. One of the most critical areas of concern when starting a double sided business, which involves both sellers and buyers, is seeding both sides successfully. A marketplace without a seller is basically useless.Think Zomato, a food delivery marketplace, without their partner restaurants! When there aren’t any sellers, there won’t be any product in your marketplace and therefore, no customer would visit your marketplace. At the same time, if your marketplace doesn’t garner much traffic and potential buyers, vendors will hesitate to subscribe to your marketplace. This is the infamous egg-chicken problem of a marketplace- whom should you attract first? Your sellers or your customers?

There are 3 approaches to tackle this issue –

  1. Attracting the sellers first: You can provide lucrative incentives like free membership or lower platform commission rates for the early-bird sellers. The hope for a larger influx of customers when your marketplace becomes fully-functional will bring a bulk of sellers. You can change your policies later on when your business becomes successful. For example, when Uber launched, they provided a fixed salary for drivers and allowed them to do other jobs unless they have a booking.Attracting the sellers first is a good solution for startups to acquire a decent number of vendors and thus a large pool of products from the beginning. But beware, it might also put a hole in your pocket!
  2. Attracting the buyers first: Some business models require attracting buyers first even before having a basket of sellers. Giving them hefty discounts can be a way to bring in potential customers. Another method of bringing in customers is to provide some value to them for free and thus, build a large pool of audience over time. Once there is enough traffic, sellers will be more willing to get on board.Yelp, an online local search service, is based on this model. Yelp started as a listing website of local businesses where people can search for a business and read reviews for free. It helped users to make their purchase decision and for Yelp, to get the traffic. Later, Yelp introduced Ads for top spots in the search and because of the large volume of traffic businesses get onboard easily.
  3. Attracting both sides simultaneously: A business model can target both buyers and sellers simultaneously. How does it work? Simple, target a specific niche that has both the consumers and the buyers of your line of service.Etsy is a great example of this strategy. Etsy found that people who love art and craft usually like to buy from other craftspeople. So, they lured people who wanted to showcase and sell their arts, which invariably brought in the buyers simultaneously since they are of the same community.

The egg-chicken problem is almost bound to happen in every marketplace business so it’s better to have a clear strategy before you spend your first penny.

Choosing the Right Technology

Now this section requires a different level of attention. This might be the most crucial part of building a marketplace. The right technology can make or break your marketplace. A lot of things depend on deciding the technology on which you can build your marketplace – from setup and maintenance cost to customization as per the marketplace needs to scaling capabilities, etc.

There are 3 broad ways of creating an online marketplace:

  • Creating from scratch
  • Using a hosted software solution (SaaS)
  • Using an on-premise marketplace software

Let’s get on to the basics of the three methods.

Creating from scratch, as the name suggests, implies to building a marketplace from the ground up. If you’re a developer yourself, using modern programming languages and frameworks, you can build up your marketplace just the way you want it! However, taking this mammoth task in your hands involves a lot of time. Although it depends upon the complexity of your marketplace, it takes around 3-6 months to build a marketplace from scratch. Talking about the monetary part, while a basic marketplace can be created in about $10k, a well-developed marketplace can cost cost you $80k+.

But what if you have zero knowledge of coding? Hiring developers becomes way too expensive, especially for startups with tight budgets. The only plus point about building your marketplace from scratch is the fact that it will be tailor-made to your requirements.

If you require a fully customized platform, have sufficient resources to invest and can code yourself (or hire someone who can), then this should be the best option for you.

Pros:

  • 100% customizable
  • Tailor-made features and no extras
  • Optimized performance
  • Code and data remains in your server

Cons:

  • Time taking
  • Costlier than the other two. You might even need an investor.
  • Highly skilled developers needed
  • In-house maintenance and support team is a must.

Using a SaaS to create your marketplace is basically building your marketplace on a pre-defined template with limited scope of customization. As for this method, you select an online marketplace software service and contact them, explain your requirements and concepts of your marketplace and they’ll provide you with a readymade marketplace platform.  These platforms provide maintenance of their software which means you don’t need to worry about speed optimization, security updates, bug fixes etc. on your own. Easy integration with leading 3rd party apps are another advantage of SaaS based platforms. But, the biggest advantage of them all is the lowest build time. You can launch the MVP (minimum viable product) within a week or so. Some platforms like Sharetribe even offers Zero set-up fees.

There are cons too, like the SaaS platforms build your marketplace on pre-build templates and therefore, lack the flexibility of customization. They don’t provide access to the software codes and therefore, you cannot make any changes to it the way you like. Also all your data, both financial and non-financial, will reside on their cloud servers. There are complaints from users who faces trouble when trying to migrate to some other platform, as getting the data from the server is not always easy.

However, their biggest drawback might be the monthly subscription charges. Based on the number of transactions on your marketplace and the added features on scaling (if required), their monthly subscriptions might shoot up to hundreds of dollars. For example, Arcadier charges $499/month for marketplaces where the number of monthly transactions fall between 2,501 and 10,000. It is found that marketplaces selling low cost products but generating a higher number of transactions feel reluctant to pay the subscription due to low revenue margin. It becomes quite stressful for startups to pay high monthly subscriptions, especially when revenue from the marketplace is quite uncertain during the initial months of business.

Pros:

  • Fastest way to start your business
  • Maintenance is provided
  • Fairly optimized performance
  • Large number of integrations available
  • No coding required

Cons:

  • Less customization options
  • Monthly fees, even if you couldn’t make a sell in the first few months
  • Data will remain on service providers cloud
  • Migrate to a different platform is a known issue
  • Scaling adds up more recurring cost

Using an on-premise marketplace software allows you to customize on a readymade software to build your marketplace. Software solutions like WordPress and Magento can be downloaded and hosted on your server and then modified as per your requirements. With the help of a few plugins and addons, you can easily build your marketplace, even if you have little or almost no knowledge of HTML or CSS.

The biggest plus point of developing your marketplace on such open source software is that you can freely customize your marketplace to a larger extent. Magento is created in such a way that it can adapt to your business needs through compatible extensions without even changing the source code.

Once you test your MVP, you can further develop your marketplace pretty easily as per the results. And what could be better than the fact that this model is the cheapest in this segment and by quite a bit? The plugins and extensions are way affordable than a few months subscription, if not one, of any SaaS platform. WordPress, one of the best in the class of such open-source software has zero installation charges. Apart from that, a lot of essential WordPress plugins are free while most of the premium ones cost less than $100.

Although choosing this method will not let you release the MVP sooner than the SaaS, it definitely helps you to build your marketplace much faster than from scratch.

Pros:

  • Less starting time than doing it from scratch, on average takes 1-3 months.
  • Data remains at your server
  • Lowest cost
  • Large number of integrations available
  • Less coding required
  • Huge availability of developers
  • Less recurring cost

Cons:

  • Performance though good, but less than the other two.
  • Need to hire developer or do some coding yourself
  • Maintenance is your responsibility, though the cost is not much.

Feeling confused? Here’s a quick comparison between the three methods that will help you judge them individually and choose your technology.

The choice of technology largely depends on the type of marketplace you want to build and the amount of resources you’re ready to put into the building stage. Conveniently, the best solution should be something that is easily customisable and scalable and relieves you from the pain of recurring costs. Analyse different options, weigh each of their pros and cons and choose what suits your budget and priority.

Once you have the right business model and settle for the appropriate technology for building your marketplace, you almost have the planning stage sorted. The next step would be to actually build the marketplace based on your choice of technology. If you choose to build your marketplace on WordPress, our article will take you through the steps to build your own marketplace based on WordPress. So, go ahead and make your dreams come true!

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