What is product-market fit—and how to find it with your marketplace

You've built a marketplace, reached a problem-solution fit, and now you're consistently facilitating transactions. The next step is reaching product-market fit—a critical stage that shows your marketplace is on track to become profitable.

In this article, we'll explore what product-market fit means for marketplaces, why it's important, and what is required to reach it.

Achieving product-market fit means you’ve built a successful marketplace business that is ready to scale. If you’re not there just yet, check out our complete guide to building a marketplace. It takes you through the practical steps of building a marketplace from the ground up. 

Now, let's dive into the critical stage of product-market fit and discover how you can take your marketplace to the next level.

This video is step nine in our ten-step marketplace course. Here's the full video course on building a marketplace.

Venture capitalist Marc Andreessen defines product-market fit as "being in a good market with a product that can satisfy that market." 

What would this mean in practical terms for marketplace entrepreneurs?

“Being in a good market” means showing that your marketplace can become profitable in its initial constraint.

By initial constraint, we mean focusing on a single category or location, or another way of limiting your scope to a small group of initial users. Some of today’s most successful marketplaces have started small, and you very likely should, too. Even if you're looking to expand to new markets later, you need to reach product-market fit in this first one to prove you can do the same in others.

Moreover, being in a good market means that your unit economics are working—the revenue you generate from users exceeds the cost of acquiring and serving them.

How about a “product that can satisfy the market”? At the early stages of starting a marketplace, a simple MVP (Minimum Viable Product) is usually more than enough. At the product-market fit stage, you may need to start investing more into your tech to automate workflows and bring down your costs (more on this in a bit).

At this stage, you may need additional investments in your marketplace to develop the platform and acquire users (more on this a bit later too). However, we strongly advise against scaling your marketplace before reaching product-market fit. You should only enter new markets when you've reached product/market fit in your first one.

In his blog post “The only thing that matters,” Marc Andreessen says when a startup succeeds, the cause is almost always product-market fit.

Product-market fit marks the critical transition from a startup's uncertain early stages to a business with validated potential for success. Here's why this step is so fundamental in a startup's journey

Achieving product-market fit proves that your marketplace idea is viable and can generate revenue. It shows that you've successfully identified a real problem in a big enough market and created a solution that can be monetized sustainably.

When you’ve reached product-market fit, you can shift your thinking from trying to find what works to improving and growing your business. You’re also in a much better position to make investments into your business, with an understanding of the key areas of the business and the expected returns on your investments.

Marketplaces benefit from network effects, where each new user increases the value of the marketplace, making it even better at attracting more users. Network effects is the core reason why marketplaces like Amazon, Airbnb, and Uber have become so successful.

Reaching product-market fit is the foundation for network effects to kick in. A marketplace product that is a great match for its market has an easier time acquiring and retaining customers. When people get value out of your platform, positive word-of-mouth spreads, bringing in more users—which makes the marketplace even more attractive to new users.

Once you've reached product-market fit in your initial market, you're better positioned to expand into new categories or locations. The lessons learned and the systems developed to achieve product-market fit in your first market provide a blueprint for expansion. 

You'll have a better understanding of what works, what doesn't, and how to repeat your success in new categories or locations.

Investors are more likely to fund marketplaces that have tangible evidence that the business can acquire and retain customers, generate revenue, and potentially scale. In other words: businesses with a validated product-market fit

For marketplace entrepreneurs seeking funding to accelerate growth, reaching this milestone can be a game-changer in conversations with venture capitalists and other investors.

But a word of caution: many investors encourage fast growth, and that’s not always the best method for marketplaces. Marketplaces tend to take much longer to get off the ground than other types of businesses. Here’s a great article for founders considering raising VC funding for their marketplace. 

Here are four great signs that your marketplace is approaching product-market fit:

Liquidity is arguably the most important metrics for marketplaces. Simon Rothman, a marketplace expert, defines liquidity as "the reasonable expectation of selling something you list or finding what you are looking for."

In other words, liquidity indicates the likelihood of a transaction taking place on your marketplace—which, in effect, is a measure of whether your marketplace is providing value to users.

As marketplace investor Josh Breinlinger said in our interview:

"As a marketplace founder, your product isn't your marketplace. Your product is liquidity."

As marketplaces are two-sided businesses, there are two sides to liquidity as well:

1. Supplier liquidity is the percentage of listings that lead to transactions within a specific time period. For example, On Etsy, it could be the proportion of total stock sold in a month. On Airbnb, this would be the proportion of properties that have guests each night.
2. Customer liquidity is the probability of a visit to your marketplace leading to a transaction. A simple way to measure it is to calculate how many unique visits you get in a month and how many transactions you get in the same period.

There is no universal liquidity rate that all marketplaces should go for. The only general rule is that it should be as high as possible on both sides.

Another rule of thumb for marketplaces: It's much better to have a small group of users with high liquidity than a large group with low liquidity. If your liquidity is strong in your initial market, it's a very reliable sign that you’ve reached product/market fit in that market.

When users frequently return to your marketplace, it's a strong indicator that you're solving a real problem and offering a good solution. This repeated engagement suggests “being in a good market”.

A high repeat-purchase rate lets you spend more on customer acquisition since users will likely make multiple transactions. This can give you a competitive advantage, as you can potentially outbid competitors for advertising space or invest more in marketing initiatives, knowing that the long-term value of each customer justifies the upfront cost.

Another important metric is GMV (Gross Merchandise Volume) retention. GMV is the total sales value of products or services sold through your marketplace during a specific period. GMV retention measures how much of that value you're able to keep month over month.

Let’s break it down with an example from Andreessen Horowitz’s blog:

If ten users spend $10,000 in January and five return in February to spend $7,500, your one-month user retention rate is 50%. But your GMV retention rate is 75%. This indicates that while you may be losing some users, those who stay are spending more.

High GMV retention can indicate two positive scenarios:

1. Most users continue transacting over time.
2. A segment of users significantly increases their transaction volume.

Both cases suggest strong product-market fit. They show that many users find ongoing value in your marketplace through broad adoption or engagement from power users.

In marketplaces, GMV retention often skews towards one side, typically the supply side. This imbalance is normal and can be beneficial.

Olivia Moore explains this in her article "GMV retention: The marketplace metric most ignores” that although, in this case, individual consumers transact less frequently, suppliers can still find enough value to build a business on the platform. 

“An example of this is Airbnb. You may only book once or twice per year, but ideally, your host is filling the property every week."

If you have achieved a product market fit, your Customer Acquisition Cost (CAC) should be lower than your Customer Lifetime Value (CLV). Let's define these terms:

• Customer Acquisition Cost (CAC): The amount you spend to acquire a new customer. 

CAC = (Total marketing and sales costs) / (Number of new customers acquired)

• Customer Lifetime Value (CLV): the total revenue you can expect to generate from each customer during their relationship with your marketplace. 

CLV = (Average purchase value) x (Average purchase frequency) x (Average customer lifespan)

If your CAC exceeds your CLV, you're losing money on each customer—a situation that's unsustainable in the long run. 

One real-world example of this is Homejoy, a cleaning services platform that operated from 2010 to 2015. It grew fast but subsidized cleaners so heavily that it was essentially selling dollars for 90 cents. Such growth is not sustainable.

According to the influential angel investor and marketplace expert Fabrice Grinda, failure to understand unit economics is the most common pitfall amongst marketplace startups.

"Many people value growth over everything else, but this is a mistake. You need your unit economics to really work before you can grow sustainably."

Ideally, your CLV should be at least three times your CAC. This allows for a healthy profit margin and room for unexpected costs or market changes that can sustain your marketplace.

What does it take to bring your marketplace to product-market fit?

First of all, if you're not seeing the signs of product-market fit, make sure that you've reached the previous milestone: problem-solution fit. After that, consider investing more into improving your platform and growing your user base.

If you're not seeing your liquidity improving, there's a good chance you should work a bit more with establishing problem-solution fit for your marketplace.

Probelm-solution fit is a stage where you validate that your idea solves a real problem for users. Improving liquidity is one clear sign that this is happening. To improve liquidity, keep working with your small initial group of early users and try to understand how you can make your platform better for them.

Rembember, marketplaces take a long time to show traction. There's a good chance you need several iterations before problem-solution fit is truly there. That doesn't mean your idea doesn't work—that's simply the nature of marketplaces. Getting your idea working with a small group of initial users is an investment that pays off in multitudes at the following stages.

At the early stages of your marketplace, a simple Minimum Viable Platform (MVP) is often more than enough to validate your idea and business model, build your initial user base, and reach problem-solution fit. Building too much too soon is a waste of time and money—instead, you can do a lot of things manually to start learning from actual users as soon as possible.

But when you’re working towards product-market fit, an MVP likely won't be enough anymore. Very likely, you need a more developed platform with automated processes to reduce costs and efficiently serve your users. You might also need to build some very customized features to serve your market better than any existing solution.

If you built your MVP with Sharetribe, it's quite easy and cost-efficient to begin this work because you can simply start adding your own customizations on top of Sharetribe's no-code builder (if you don't have a developer on your team, you can easily hire one from Sharetribe's network of vetted experts).

In other cases, you might even need to rebuild your marketplace entirely at this point, depending on the tech stack you chose in the MVP stage.

Even if now is not the time to start scaling your marketplace, you do need to start working on your growth engine to build a big enough audience that lets you reach high liquidity, repeat purchases, and strong GMV retention.

Here are some key strategies to consider to grow your marketplace:

If your potential customers are likely to search for your products or services on your platform online, Search Engine Optimization (SEO) and content marketing can be powerful growth drivers. 

As SEO expert Mike van der Heijden notes in our Marketplace Academy Podcast, 

"[In our experience working with marketplaces,] SEO was adding a lot more value than just traffic and leads. It was actually accounting for the main growth driver of the valuation in the business."

Marketplace SEO means getting your platform on the top pages of search engines—increasing your visibility whenever people search for something your marketplace offers. When users search for a particular product or service on a search engine like Google, similar products in your market will pop up organically. 

SEO efforts take time to pay off, so if you choose this strategy, you may need to balance it with a growth lever that can bring results more quicky.

Viral marketing relies on your audience sharing your message from person to person via word of mouth or across social media. This could be a very effective strategy to reach a fair percentage of the over 5 billion social media users. Tamara Mendelsohn of event marketplace Eventbrite shares an example: 

"On the demand side, early levers were Facebook and Twitter as attendees shared the events that they had bought tickets for and encouraged their friends to attend. So, in a growth loop, those friends would recommend events to their friends, and so on!”

Another way to boost recommendations is through referral programs. Give people incentives to share about your platform with others. For example, in its early days, Uber generated about 30% of all trips through referrals.

While a marketing campaign that goes viral on social media can be fantastic, ensure your marketplace is ready to serve a huge influx of new users. Remember, at this stage, growth isn't an end in itself, but a means to expanding your user base enough to validate your product-market fit.

In online advertising campaigns, you pay advertising platforms for results like clicks or conversions, which can be a great way to grow. Google and paid social media ads are typical examples. 

If performance marketing is a good growth lever for you (and you should definitely test it before going all in), it needs to be profitable at this stage. This means your customer acquisition cost should be lower than your customer lifetime value.

When implementing performance marketing, here are some things to keep in mind:

• Start with small budgets and test different ad formats and targeting options.
• Use retargeting to re-engage users who have shown interest but haven't converted.
• Continuously optimize your campaigns based on performance data.
• Ensure your landing pages are optimized for conversions.

Direct sales involve actively reaching out to potential suppliers or customers to bring them onto your platform. In other words, getting to the end user without a middleman.

This approach can be an excellent growth lever in situations where the value of a single user is high, for example in B2B marketplaces or supply-constrained platforms.

ResQ, a Finnish app for selling leftover food in restaurants, is a good example. The platform's revenue grows as it adds more restaurant partners since all leftover food listed on the app is sold. To expand its revenue further, ResQ focuses on onboarding more restaurants through direct sales, as this is the most effective way to increase its partner base.

If your marketplace is a B2B platform, you can curate a list of popular suppliers and buyers you can reach out to and offer the unique value proposition of your marketplace. 

Hyperlocal offline marketing focuses on promoting your marketplace to a very specific, geographically limited area, typically a neighborhood or even a few blocks within a city. This approach aims to reach potential local customers using traditional, non-digital marketing methods like distributing flyers or organizing local events. 

Hyperlocal marketing can be an extremely effective tactic for hyperlocal marketplaces. If you become very knowledgeable about the best practices and find teams to do the work, this strategy can be surprisingly scalable, too. For instance, for the dog-walking marketplace Rover, the founder, David Rosenthal shared that they had people go to dog parks and hand out flyers and coupon codes. 

For this strategy, having a high repeat-purchase rate is good, so one customer justifies the intense marketing efforts. 

To implement hyperlocal marketing:

• Identify local events or locations where your target users congregate.
• Create targeted marketing materials that resonate with the local community.
• Partner with local businesses or influencers to expand your reach.
• Track the effectiveness of different local marketing initiatives.

To sum up, the key to creating a powerful growth engine is to test different tactics, figure out which ones work best (and ideally complement one another), and focus on those. If you notice something not working, switch it up. Choosing the right channels is all about knowing your audience, and as with everything else in online marketplaces, there's often a fair bit of trial and error involved.

Remember to support your customer acquisition efforts by activating existing customers with email marketing or in-app notifications to increase Customer Lifetime Value.

Also, it's crucial to choose the right channels based on your target audience and marketplace model. For example, if you're running a B2B marketplace, LinkedIn might be a more effective channel than Instagram.

For more insights on growth strategies, check out our guide on how to find the best marketplace growth strategies.

Overall, working towards marketplace product-market fit is an iterative process. You'll need to continually analyze your results, refine your strategies, and adapt to changes in the market and user behavior. The key is to test different tactics, identify which ones work best for your marketplace, and focus on those. 

To validate whether your platform and growth engine are working, keep an eye on liquidity, repeat-purchase rate, and GMV retention. These will eventually show if your business is sustainable and if you’ve reached product-market fit.

Once you've reached product-market fit in your initial market, you're well-positioned to move on to the last stage of building a successful marketplace—scaling your platform to new markets or categories.