How to build your marketplace supply

Compared to traditional e-commerce, most of a marketplace's unique challenges come from the marketplace having two sides to it: customers and providers.

When launching a marketplace, this means you need to solve the chicken-and-egg problem—how to get customers with little supply and how to get marketplace supply with only a few customers.

It can be argued, however, that the problem is not as bad with marketplaces as it is with some other cases—social networks, for example. In almost all cases, it makes sense to start building a marketplace's audience from the supply side. As Boris Wertz and Angela Tran Kingyens explain in their comprehensive Guide to Marketplaces, providers typically have a bigger incentive to join a marketplace than customers due to it being a major source of revenue for them.

Because of this, the best way to solve a marketplace's chicken and egg problem is to seed the marketplace. You should focus on signing up your providers and getting them to list their products or services. In fact, trying to grow both sides of the marketplace early on is a common mistake for marketplace entrepreneurs.

In this chapter, we are going to go over common strategies for seeding marketplaces that do not yet have customers. First, we are going to discuss how to identify and find your first providers. We will then help you approach them in the correct fashion and convince them to list your site. We are also going to discuss strategies for "faking" initial marketplace supply if getting providers on board proves to be difficult.

This video is part six of our ten-step video course on building a marketplace.

Your first job is to figure out the best way to find suitable early-stage providers. Wertz and Kingyens identify numerous strategies for finding initial marketplace supply, which we will now take a look at.

Your providers are most likely already active in forums or other marketplaces. Want to build a marketplace for pre-owned baby clothes? Check out all the Facebook groups dedicated to this purpose. They will be filled with potential providers.

Airbnb used this strategy in the early days. The founders emailed people who were listing their apartments on Craigslist, asking them to also consider listing on Airbnb. I recommend this case study on Airbnb's growth strategy for details about their early growth efforts.

It is important for your marketplace to have a solid value proposition for the initial supply. You need to be able to offer them something that is way better than the existing alternative. In Airbnb's case, when compared to Craigslist, they offered a better user experience and a much more trustworthy environment in which to conduct the transaction. We will review some of the common early-stage value proposition strategies for providers later in this chapter.

You might be in a situation where you are creating a completely unique marketplace—at least in your area—and don't have a ready source of supply from existing marketplace sites. If this is the case, the strategy to find providers depends on the type of providers you are planning to target.

Finding professional service providers (like plumbers or hairdressers) should not be too difficult as most of them will likely have some kind of online presence. Even if they do not have their own website, they should be listed in a business directory. You could start from sites like Yelp or the Yellow Pages in the U.S. or simply use Google. You should be able to compile a big enough list with these methods.

Depending on the profession, you might be able to find "offline aggregators". If you want to reach hairdressers, you can walk into the biggest hair salons. If you want to reach freelancers who build websites, you could try going to the local coworking space or finding a suitable Meetup group.

Etsy used the strategy of approaching offline aggregators successfully in their early days. As Danielle Maveal, Etsy's former director of seller education, writes on Quora:

– We got off the internet, and there was a team out there across the U.S. and Canada attending art/craft shows nearly every weekend. Supporting potential sellers (we would buy them lunch, drop off 'craft show kits', pass out handmade promos) – these were artists/crafters that were influential in the handmade world. We knew if they set up shop on Etsy and were successful, others would follow.

Let's say you are building a peer-to-peer marketplace that rents aerial drones. Your potential providers are drone owners who have (most likely) never considered renting their drones. These people cannot be found by using Google, business directories, or other marketplaces.

However, they are likely to hang out in certain online destinations, like popular drone-related blogs, bulletin boards, or Facebook groups. Perhaps they use a specific Instagram hashtag or follow a prolific video blogger on YouTube.

Conduct some research on your target audience. Find the places where they gather with other like-minded people. You should be able to find media or a local group that caters to your specific audience and will allow you to reach a big group of providers at once.

Now that you have found people to contact, how can you convince them to list their products or services on your platform and build to your marketplace supply? After all, you still do not have any customers on your platform, and listing requires some effort from the providers.

At this point, it is important to do things that don't scale. If possible, meet your first 50 to 100 providers in person. Take an hour with them to explain how your platform works and your unique value proposition to them. Help them build their profile, list their products or services, and listen to their feedback. This approach is slow, but it is a great way to get to know your providers, receive feedback on your product (remember, you're still in the process of validating your concept), and ensure the quality of the initial marketplace supply.

Your core value proposition is likely tied to the number of customers on your platform. Before you can deliver on that promise, there are other incentives you can (and should) mention to get the providers to join.

If your providers are already active in other marketplaces, they already understand the basic value proposition of a marketplace. Your job is to communicate to them why your offering is better than the alternatives. As a refresher, below are some of the ways in which you can provide a better value proposition. You need to focus on these aspects in your communication with providers.

One option is to focus on building your marketplace trust mechanism. Airbnb improved on Craigslist by increasing the trust between hosts and guests. Today, they offer insurance and payment processing to prevent fraud. They also provided a smoother user experience for hosts, making the site more appealing than Craigslist's "classic" look and feel.

Concentrating on your marketplace pricing and offering lower fees for the marketplace supply-side is another way to outdo the competition. This is how Etsy managed to get people from eBay: the seller would keep a bigger portion of the total price. Most of today's big marketplaces have a huge pressure to increase profits, and your opportunity lies in their margins. You can emphasize this benefit by offering early-bird discounts. For instance, give a six-month 50% fee discount for the first 100 providers who sign up.

You could also consider offering your initial marketplace supply a stake in your company. This is how Stocksy was able to undercut incumbent stock photo marketplaces. Juno is planning on doing the same against Uber. Professional photographer Thomas Hawk explains his rationale for leaving Getty Images for Stocksy:

– The exciting part about Stocksy, though, isn't just the higher payout, it's that the members of Stocksy actually OWN the agency. That's right, after paying out costs, Stocksy will distribute profits to its members — so members will get dividends and actually hold real equity in the business.

In the early days of your marketplace, you will only have a few providers. While this has obvious downsides, you can also use this to your advantage. You could make your marketplace an exclusive club, stating that only the best marketplace supply will be accepted. You can vet each provider manually before letting them in. When you invite new people, you can tell them they have been selected based on very specific criteria, and only the very best will get this invite. For reference, I encourage you to benchmark the provider application processes of successful marketplace companies.

There are multiple benefits to this approach. First, it creates buzz in the provider community. People will talk to each other about such opportunities, and having restricted access instantly makes your offering more interesting. Everyone wants to be part of an exclusive club. To your providers, exclusivity means better publicity, which means they will soon be competing for your attention.

Moreover, focusing on quality instead of quantity is an important business move. It is better to have ten quality providers than 100 lousy ones. Since they will be your "earlyvangelists", you want to make sure that all your early customers will have a great experience. It is better to scale only when you know you can keep the customer experience at a high enough level. As a bonus, the best providers will bring new customers with them.

EatWith, a marketplace for home-cooked dinners, has been focusing on quality instead of quantity in their marketplace supply since they started. It has been an effective strategy for them: they are currently a category leader in their crowded space. Even today, they only accept 3% of cooks who apply to join. Stocksy is another platform that has used this approach effectively. As Thomas Hawk mentions in his blog post, quality was another important reason for him to join:

– Even if you don't care [about owning their shares], still give Stocksy a look because the imagery there really is miles ahead of what you see in the run of the mill stock photography library out there today.

Finally, having a vetting process in place means you will have a good excuse to talk to each provider. This means you will be able to build a relationship with them, better understand their needs, and get valuable feedback on what works on your platform and what doesn't.

Since customers have not yet found your platform, you need to convince your providers that they will eventually come. There are several ways to do this.

In an ideal world, you already have an existing community of potential customers. It can be a popular Instagram account, a mailing list, a popular blog, or a Facebook group. You should tell your providers that they will get instant access to this existing customer base if they sign up. Some start by building a marketplace community, then develop the marketplace business around it.

If you do not have such a community, you can try to find partners who can give you access to one. If you are creating a marketplace for fashion, you could start by contacting five popular fashion bloggers and offering to partner with them by giving them and their readers discounts in exchange for visibility. With these agreements in place, you can then mention to your providers that their products will be mentioned in these blogs.

Another example is a marketplace for tutors. In this case, you could try to partner with universities. Telling your potential tutor candidates that their offerings will be sent to the mailing lists of the five biggest universities of the country is a major selling point.

Finally, yet another way to attract initial marketplace supply is by creating an offering that provides value even with no customers at all. This is often called a single-player mode of two-sided platforms.

Using a marketplace for hairdressers as an example, the initial value proposition could be a Software-as-a-Service tool that can be used to manage the hairdressers' bookings, invoicing, and accounting. It would be an easy way for them to get an online presence, allowing them to direct their potential customers to your platform for booking and payments. In many service industries, such an offering is compelling enough to get the providers to sign up—even without the added benefit of gaining more customers through the marketplace model. Once you have enough initial supply, you can start attracting customers and gradually switching the focus towards a marketplace.

In some situations, getting enough providers on board in the early days can require a lot of manual work. Before investing the time and money to go through with it, you might want to validate your concept with customers. In these cases, "faking" your supply—creating the supply in a way that is different from the marketplace model you eventually aim for—can be a good choice.

In the early days of your marketplace, if it is in any way possible, it might make sense for you to act as a provider yourself.

Morgan Brown, former head of growth at knowledge marketplace Growthackers.com, writes this about their strategy:

– One way we supply hack is with our growth studies of different companies. It's our own supply engine of high-quality growth content.

If you are building a marketplace for used DVDs and have a large collection yourself, creating the initial marketplace supply by listing your own stuff is a no-brainer. You could also ask your friends and family to list—they might not be part of your eventual target group, but since they know you, they might be willing to help you out. Of course, this approach will not take scale well beyond the initial stages.

If you have capital at your disposal, one way to make sure your marketplace has enough supply is to pay for the inventory. This is what Uber reportedly did in the beginning: when they launched in Seattle, they paid town car drivers to idle. Only once they had enough customers did they switch to paying a commission.

In some cases, you might be able to pay for inventory without risking big losses. Steve Sammartino used a clever approach when building his rental marketplace Rentoid. As he explains in a blog post, he would go through major department store catalogs, pick all the items that were suitable for renting, and list them on his site. When somebody rented an item, he went out and bought it. After renting the item, he would sell it on eBay for around 80% of the original price. Using this method, he was able to get transactions on his site without losing money by holding a big inventory.

Affiliate networks are one way to pre-fill your marketplace with supply from other websites. Vacation rental marketplace Dwellable, later acquired by HomeAway, used this strategy in its early days. Udemy, a marketplace for online courses, did the same: they searched for courses legally available under a creative commons license and quickly grew their inventory to 5000 courses.

The benefit of this approach is that you can reach a massive scale without spending money. However, as Wertz and Kingyens point out in their guide, you should be cautious with this approach. It has two major problems:

– First, while you may have a lot of inventory, none of it will be unique. Why should buyers come to your site instead of the other sites you're pulling inventory from? The second problem is that when you aggregate existing inventory, you run the risk of becoming a cross-platform utility rather than your own marketplace with lots of highly engaged users."

Let us now put what we have learned to use with the case study from our previous chapters: a personal trainer marketplace.

After some research, you find there are no other marketplaces for personal trainers in your area. This means you cannot find your initial marketplace supply from them. However, as trainers are professional service providers, finding them is easy using business directories. You also contact local gyms, which act as "offline aggregators" for trainers. You manage to get a local gym to advertise your platform to all the 30 trainers they are affiliated with. You now have your initial list of trainers to contact.

You also strike a partnership with a local fitness blogger who gets excited about your concept. You offer her and her readership their first booking for free. You mention this partnership when you contact the trainers for the first time with a cold email. Since most of them know the blogger, it makes your platform more appealing to them as they want to associate themselves with the blogger's brand.

You decide to make your marketplace exclusive: only 50 trainers will be accepted in the beginning. You figure 50 is a big enough number for your launch. You interview and vet each trainer carefully, helping them create their listings to make sure the quality is good enough. You also ask each trainer if they know others who might be interested in your platform as well.

You also realize that many of the trainers don't have a web presence. This lets you offer a single-player mode for them as well: a personal profile page with a description of their services, photos, and videos, and a calendar that lets customers schedule an appointment and pay for it immediately. Many of your trainers use this option and start using their profile page as their online presence, directing their existing customers to it for booking.

By now, you should have an understanding of why it is important to first focus on one of the two sides of your marketplace. Typically, the better option is to start with your providers, building the initial marketplace supply before you open your platform to customers.

One good option for finding the first providers is to contact people who are already active in other marketplaces. If this is not a viable option, you should instead find blogs, forums, or other online communities where your target audience hangs out. Offline communities can also be effective initial sources. If you are dealing with professional service providers, you might also be able to find them from Google or online business directories.

You might need some creativity to convince your providers to list on a site with no customers. A good approach is to focus on quality and make the marketplace exclusive. If the providers are already active on other marketplaces, you need to highlight the benefits of your platform compared to the existing solutions. You should also communicate why you can bring them new customers and, if possible, offer them a way to benefit from your platform even when there are no customers.

If you are unable to create a network of providers initially, you can "fake" supply by creating it yourself, paying for it, or aggregating existing supply from other online destinations.

If everything goes well, your platform is now ready to start taking on customers.