Three things that matter for marketplace startups

May 2015 /

Thinking about starting or already started a marketplace startup? Read this article to learn about the challenges you are already facing or will face.

I recently had a great conversation with Matt Fineberg over at Bestimators, a DreamIt Philly graduate, the other day. Bestimators is a marketplace for home improvement services like roofing, siding, windows, doors, gutters, etc. I was really excited by what Matt had built in such little time. After hearing about Thumbtack’s $100M raise I started started digging deeper into understanding marketplaces.

I’ve been generally wary of marketplace startups because of the complexity of scaling. Instead of just having one category of customers to figure out (which is hard enough already!), there are two or more broad category of customers to figure out. In the case of Bestimators, they need to attract home owners to post their projects and contractors to bid on these projects. This can prove challenging for a startup with limited resources on their hand due to the added operational complexity.

There are a variety of startups in the service marketplace space particularly Angie’s List, Yelp, Groupon, HomeAdvisor, Thumbtack, and RedBeacon with different business models of course. After doing some research, I’ve come to realize that all these companies are simply in the business of lead generation for service companies. The winner(s) in the space simply master the art of acquiring prospective customers as cheaply as possible and pass them off to service providers hoping to collect a fee in between.

In order to build a successful marketplace startup here are three things things that matter:

#1 - You need to have one side built


Marketplaces face the chicken and egg problem, you need both suppliers and customers to win. If you can’t find a scalable and easy way to build one side of the marketplace, succeeding will be difficult.

After doing some digging through the internet, it looks like Thumbtack originally started off as a platform to help service providers manage multiple web postings and pivoted into a lead generation business after they acquired a critical mass of traffic.

Thumbtack used machine learning to scrape through a list of suppliers, a team of analysts in the Philippines to clean up the data, and outbound emailing to onboard these suppliers.

#2 - Generate tons of free inbound traffic


Keep in mind that marketplaces are a CLV-CAC arbitrage, the lower your CAC, the higher your take. Find every possible creative source to generate traffic for free, don’t pay a dime for your customers.

Before Airbnb became the huge sensation it is, they used some creative black hat tactics to drive traffic to their site from Craigslist by automatically e-mailing potential leads that post on Craigslist. In addition, they would encourage owners post their listings on Airbnb to increase their inbound links and generate traffic. The marginal cost per lead for Airbnb in doing this is basically $0 and they got tons of inbound traffic.

#3 - Treat leads like gold, chase each one down

Every lead can generate revenue for you, find every tactic possible to chase down your leads initially. I would go so far as to advocate personally calling or e-mailing each potential lead on your website to educate them about the service and offer to help. Yes, it isn’t scalable, but you need to do this early on to drive the customer acquisition engine.

The Airbnb team would contact each person that posted a listing to schedule a professional photography session for their property. This helped the listing increase the likelihood of a booking and Airbnb generate revenue through commissions. They stopped eventually, but this helped them kickstart their lead generation engine.

Ultimately marketplaces are all about acquiring tons of qualified customers as cheaply as possible (ie. FREE) and then connecting them to service providers and collecting your rake in between. Before you think about starting a marketplace business, I strongly urge you to think about the economics of customer acquisition.

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