One of the things that excite aspiring entrepreneurs about marketplaces is the notion that once the technology and platform is up and the network effects kick in, you have to simply sit back and reap the rewards.
The flywheel is set into motion and you can now see the engine printing money.
But wait, it’s not so easy.
Here’s what you need to understand.
You can say a network effect is happening in a marketplace if it provides a better customer experience and increases in value with ‘n+1000’ users as compared to when it had ’n’ users. The amount and variety of listings on marketplaces like Amazon, Flipkart, or eBay facilitates long-tail transactions and enables a customer buying experience that would be impossible without an aggregated marketplace.
But what people choose to ignore is the ‘n’ in this equation. How do you get the initial ‘n’ number of sellers and buyers to sign up?
Of course, you might know the famous chicken and egg problem that happens while starting a marketplace — without enough sellers on the platform, there is no incentive for buyers to sign up, and without many buyers on the platform, there is no incentive for sellers to create product listings!
So, how is this problem typically solved?
To answer this question, I want you to first think about a more fundamental question:
What is that essential thing a new marketplace brings to the table to become successful and create new value?
Take a minute. Think about it.
In my opinion, it is information.
Great marketplaces unearth, source, and aggregate fragmented information about a market that was yet not captured by any third party.
Think about a startup like Uber, Zomato, or Swiggy. These startups managed to capture "perfect" information in an industry where just a few years ago, there was a complete lack of visibility (on both sides of the network) that led to an enormous waste of resources. Uber’s system enables higher car utilization, more fares per hour for the driver, and faster and faster pickup times for the consumer.
Likewise, Zomato's aggregation of restaurants and cloud kitchens means there is now more discovery for the sellers and a better range of choices for the buyers.
High buyer and supplier fragmentation is great news for a new marketplace idea. It means there's a real opportunity to aggregate valuable information in a fragmented market and enhance both buyer and seller experience as a result. Also, in contrast to a concentrated supplier or buyer base, a fragmented market has its incentives aligned with the creation of an aggregator platform as it is beneficial to both buyers and sellers.
But all this information didn't exist somewhere in a neat downloadable pdf on Google Search results before these startups arrived on the scene. They had to go out and get their hands dirty!
And let me tell you: signing up suppliers can be a painfully slow process that requires lots of touch and local presence on ground.
Take the case of startups like BharatPe or Dukaan who had to let a team of sales representatives individually go shop to shop and make shopkeepers sign up/create listings on their app.
Even in the case of Zapier, founders Bryan, Mike, and Wade scoured Evernote, Dropbox, Highrise, and Stack Exchange forums and manually looked for people looking for integration requests. From these, they found their initial set of customers who were happy to pay for Zapier's suite of integrations.
Zapier’s founders did brute-force outreach campaigns and solved customer issues 1:1 over Skype calls. This is how they retained their early customers, which then provided them a good base for growth.
In the early days, you have to do things that do not scale.
Automation is good for scaling, but focusing on automating too early in your journey is putting the cart before the horse. Talking about eventual "network effects" when you do not have an initial set of customers who are happy is a flawed approach.
Your initial set of happy buyers (and sellers) will lead to a network effect, not the other way around.
And for this, you have to go out and collect information right from the source — the existing markets themselves. This also allows you to
- gain a better understanding of unit economics
- understand the incentives that govern the market you're building for
- understand customer buying behaviour and preferences for the said market, and
- nurture in-person relationships with your early adopters: your sellers, vendors, facility managers, and buyers.
Just because automation is the goal doesn’t mean it’s the way to start.
Automation is efficient, but if you start focusing on tech without first understanding the market dynamics, you lose touch with the realities of the market.
And at the start, this is what matters the most: being involved, placing yourself in the shoes of all stakeholders involved, and learning on-ground realities should be your major focus as a founder.
Every marketplace starts small, but to really get big, you need to find ways to deliver value even when you're small.
That involves a lot of messy, unstructured work and doing things that do not scale.