Launching and Scaling a Marketplace Business

May 25, 2024

FROM THE FOUNDER OF CANADA’S LARGEST ONLINE MARKETPLACE

Janet Bannister is the Founder and Managing Partner of Staircase Ventures, an early-stage venture capital firm. In 2004, she launched Kijiji.ca, a Canadian online marketplace, and grew it to become one of the most visited websites in the country. Subsequently, she led the Kijiji Global business, launching the website in new countries and accelerating growth in North America, Europe, and Asia. Janet also spent four years at eBay in Silicon Valley where she helped transform eBay from a collectibles to a mainstream marketplace, growing the business 400% year-over-year for four years.

This post provides Janet’s tips and strategies on how to successfully launch and scale an online marketplace.

Launching an Online Marketplace

Online marketplaces, like any network effect models, have a cold start problem. To navigate the cold start issue it is important to focus on the following core principles:

  1. Matching Buyers and Sellers

Marketplace entrepreneurs should start by focusing on matching buyers and sellers. This means ensuring that new users to the marketplace – buyers and sellers – can find what they are looking for. For a seller, this means finding an appropriate buyer who is interested in purchasing their product/service. For a buyer, that means finding a product/service that meets their needs. Matching supply and demand is more important than increasing traffic to the platform at the foundational stage of an online marketplace business. Rather than focusing on driving a large amount of broad supply and demand traffic to the site, think about supply and demand at the individual level, with a mindset of trying to ensure that each seller finds a buyer and each buyer finds what they are looking for. It is more important to achieve a strong conversion rate (percent of buyers and sellers who make a transaction) than the amount of traffic to the site. For example, when Kijiji launched in Canada in 2005, it focused on matching buyers and sellers by calibrating supply and demand at the micro level in each sub-category and in each city using location-specific keywords on Google to drive supply or demand as needed. 

  1. Targeting specific categories or markets

Building on the concept of matching buyers and sellers and maximizing conversion rates, while it can be tempting to start a broad marketplace with multiple categories and multiple geographies, focusing on one or two specific markets facilitates the matching of buyers and sellers and enables a higher conversion rate. Targeting niche markets during the early stages of an online marketplace business is a proven effective strategy by market leaders such as eBay and Alibaba. For instance, eBay initially built its business by concentrating on establishing a robust buyer and seller user base in collectibles categories such as stamps, coins, and trading cards. By prioritizing specific categories, eBay was able to direct its resources to acquiring buyers and sellers most likely to find an appropriate match for their needs.

  1. Double-down on initial traction

After launching an online marketplace, it is common to start seeing more traction in some categories than others. Once this happens, it is important to prioritize growing those categories that are showing the most promise rather than trying to “prop up” the weaker categories. For instance, when eBay expanded into non-collectibles categories, high-end fashion products grew quickly, so the team shifted resources to focus on growing that category and successfully positioned itself as the best place to buy second-hand designer fashion. Similarly, shortly after Kijiji’s launch, the pets category became a surprisingly robust category, so marketing resources were reallocated to grow that area.

Scaling an Online Marketplace

Once an online marketplace has successfully gained traction and initial markets are established, attention should move to scaling and accelerating the growth of the business. This will involve (i) deciding which geographies and/or product categories to expand first (“market expansion strategies”), (ii) enhancing user experience, and (iii) effectively tracking growth.

  1. Market Expansion Strategies

To scale, online marketplace owners need to determine the best market expansion strategy for their business. This often involves deciding whether to expand geographically, by launching the same offering in different regions, or to expand into new categories within their existing geography or customer base. Generally, it is advisable to expand geographically for the initial expansion. Marketplaces are often well advised to take their proven playbook and implement it in new locations. Uber, AirBnB, and Kijiji all employed this approach. For instance, after Kijiji’s successful launch in Montreal and Quebec City, it took its learnings from those markets and expanded across Canada, prioritizing new markets based on several factors, including population density and cities where its citizens were already visiting the site. It is crucial, however, to ensure  idiosyncrasies and nuances of new markets are always taken into consideration.

Once a strong foundation is established, online marketplace owners can start thinking about expanding into new product categories. For example, Uber launched UberEATS after they had established a foothold in all major markets. The prioritization of geographic expansion is particularly important where there are strong competitive dynamics. In Uber’s case, it was important that it establish a strong base in cities before Lyft and other competitors entered those markets, and then once it had a strong foothold in the market, it could expand into other offerings. Depending upon the marketplace and competitive dynamics, first-mover advantage can be critical, and in those cases, it needs to be prioritized via rapid geographic expansion.

  1. Enhancing user experience

As the business grows, user experience is usually enhanced through product upgrades, search engine optimization, safety measures, transaction experience, and other improvements. In thinking about developing new features to enhance user experience it is important to keep the following core principles in mind:

  • Buyers come first.

When developing new product features and marketplace policies, ideally these will benefit both  buyers and sellers. But where the marketplace needs to decide whether to prioritize buyers or sellers, the buyers should generally be prioritized. This is because sellers are often entrepreneurial and will do what it takes to reach a robust pool of ready-to-buy potential customers. Buyers tend to be more selective and finicky.

  • Think through the level of control.

Control in an online marketplace typically involves (i) how much of the transaction process is controlled by the user versus the marketplace, and (ii) who decides how buyers and sellers are matched. Determining the level of control is a key consideration for marketplace businesses and can have a dramatic impact on the company’s value proposition and operating costs. Generally, the more  the marketplace controls, the higher the operating costs and the more consistent the user experience. For example, Uber has a high level of control; they determine the price, control the payments, and match buyers and sellers (riders and drivers). By contrast, Kijiji lets its users decide who they transact with, set the price, and arrange the transaction (meeting place, payment methodology). There is no right or wrong approach when deciding the level of control for an online marketplace, but it needs to be thought through carefully as it impacts the value proposition, user experience, and cost structure of the business.  

      (c)  Build and maintain trust.

Building and maintaining trust among buyers and sellers is paramount. Marketplace businesses are unique in that buyers and sellers interact directly, even in high control marketplaces such as Uber. This is very different from typical businesses in which a company’s employees are at the front line of customer interactions. In marketplace businesses, the most important aspect of the user’s experience – the interaction with the other party and the delivery of the goods or services – is not controlled by the company. Therefore, it is critical that the marketplace design user-experiences and policies that encourage “good behaviour” by all participants and minimize fraudulent actions. eBay was the first to develop the concept of a feedback rating system to encourage positive interactions and to help its users feel comfortable trusting other marketplace users. In the early days of eBay, we used to talk about how one bad experience could erase hundreds of favourable transactions. Maintaining trust amongst users and creating mechanisms to ensure a safe marketplace is particularly important as the marketplace scales. Increased traffic and visibility will lead to a higher risk of “bad behaviour” and fraud. It is imperative to always  think through how to build and maintain the highest levels of trust and safety.

  1. Track and monitor key metrics.

In addition to the typical metrics that any business tracks, there are a few key marketplace-specific metrics that are critical to understanding the health of the marketplace and how to accelerate growth.

  • Category of First Activity

For a marketplace with multiple categories (such as Etsy and Alibaba), Category of First Activity is an important and often overlooked metric. It refers to the category in which a new buyer or seller had their first transaction. While some categories may be relatively small, they may be very effective in attracting and retaining new users to the platform. Therefore, a marketplace business should understand how many of its active users had their first activity in each category. In addition, a marketplace should look at the lifetime value of buyers based on their Category of First Activity. For instance, eBay discovered that the lifetime value of buyers whose Category of First Activity was clothing was significantly higher than for other buyers. Buyers who came to eBay via the clothing category tended to also shop in a wide range of other categories, increasing their overall value. With this insight, eBay’s growth team placed more focus on attracting buyers into the clothing category.  

  • Conversion Rate of Supply

It is important to understand the conversion rate of supply, or the percent of supply that is sold or transacted upon. A conversion rate that is too high indicates a lack of supply, while a rate that is too low indicates a lack of demand. Either extreme will leave buyers or sellers unsatisfied. Importantly, this metric needs to be understood at the micro level as looking at the overall average can obscure imbalances that may exist at a granular level. At eBay, we found that growth was most rapid when 50% of listings were sold. If 70% or more of the listed items were sold, it indicated that there was not enough supply, and buyers were leaving the site unsatisfied. If 30% or fewer of the listings were being sold, we were in danger of not being a satisfactory solution for sellers. The ideal conversion rate of supply will vary based on the type of marketplace and the specific buyer and seller dynamics, but the marketplace should track this to understand and optimize for the ideal rate.

  • Seller Concentration and Supply/Demand Balance

Online marketplaces should ensure a balance in terms of the number and size of sellers in the marketplace. Large-scale sellers are often attractive to a budding marketplace business, as one seller can bring a significant amount of supply. However, these massive sellers can crowd the market, create an imbalance in supply and demand, and make it difficult for first-time sellers to be successful. As a result, a highly concentrated seller base and  over supply can hinder new sellers from entering the marketplace and stunt growth. For instance, at Kijiji, we initially limited the number of cars that dealers could list on the site so that consumers who were selling their own used cars would be found by buyers and quickly sell their cars. All other used car classifieds sites were courting car dealers to boost their supply. As a result, consumers quickly discovered that while they could successfully sell their car on Kijiji, they would not get buyer inquiries when they listed their car on other sites. As a result, Kijiji rapidly built an extremely robust consumer-to-consumer used car marketplace, and within two years became the leading used car site in Canada with very limited marketing spend. Later, Kijiji opened the site to more supply from auto dealers, once a strong buyer and seller base had been built.

Conclusion

When kick-starting a new online marketplace, it is imperative to match buyers and sellers, select specific markets, and double down on initial traction. Once an initial market has been established, online marketplace owners can think about expanding to new locations and within new product categories. As online marketplace owners scale their businesses, it is important to think strategically about new products and features, ensure trust and safety, and focus on the key metrics that drive actionable insights.

Staircase Ventures invests in early-stage, Canadian-based B2B software companies, including marketplace and network-driven B2B businesses.  If you are working on an early-stage company in this space, please feel free to contact us at info@staircaseventures.com.

OTHER BLOGS POSTS
View all Blog posts
01

Launching and Scaling a Marketplace Business

02

Staircase Ventures Announces Investment in Galatea

03

Who you spend time with influences who you are and how you perform: Why Staircase Ventures invests in peer support for its founders.

04

Staircase Ventures Advisor, Angelo Papatheodorou, on determination, focus, and building a powerful sales organization

05

Staircase Ventures Announces First Four Investments

06

Practical wellness tips from Cleveland Clinic Canada, Staircase Ventures’ partner in providing health coaching for founders.

07

Overnight Success is Decades in the Making

08

Interview with Craig Miller, Staircase Ventures Advisor, on his professional story and advice for startups

09

The Importance of Shared Expectations and Staircase Ventures’ “Terms of Engagement”

10

Introducing Staircase Ventures

View all Blog posts