Bootstrapping an online marketplace and addressing the cold start problem
Reading time: 6 minutes
“Build it and they will come.” While a historically true adage, it becomes less powerful over time with the innovations in distribution and the creative methods people have come up with to ultimately connect buyers and sellers. In the fast-growing and ever-popular space of online marketplaces, where do you begin?
This article will guide you through the initial steps of building your online marketplace to:
- Define the differences between online marketplaces and ecommerce stores
- Explore the cold start problem and potential solutions
Online marketplaces and ecommerce stores have different value propositions
Imagine yourself as a simple ecommerce store owner that sells amazing tchotchkes. You have the greatest tchotchkes. The best tchotchkes. As an ecommerce store owner, you’re responsible for ensuring you have products in stock for potential customers (assuming that logistics are perfectly fine). In turn, customers can be sure that they can buy whatever you have in stock if they’re interested. As long as you can maintain the quality of your products and the store, your store can grow.
However, all this changes once you become an online marketplace owner.
You likely sell no products. You are now, primarily, a service selling the means through which a buyer can obtain a tchotchke from a tchotchke merchant. Before, you were only concerned with the buyers’ experience. Now, you have to worry about the buyers’ experience, the merchants’ experience, and their relationship on your platform. In other words, as a store owner, you only have to worry about one side of a transaction. As a marketplace owner, you have to worry about both sides of the transaction. And by nature, they’re linked.
As an online marketplace, your value is in providing access between customers and merchants in the most frictionless way possible. Merchants want access to customers so they can make money easier than if they opened their own store, online, or otherwise. Customers want to feel like their shopping experience is not only easy, but that their selection is the best available. For your marketplace to succeed and provide value, you must fulfill these fundamental requirements.
Your first major hurdle is attracting customers or merchants
Now taking a step back, remember that when you start to build your online marketplace, you’ll likely have no initial user base. Your first major hurdle is often called the cold start problem or the chicken-and-egg problem. The problem is this: why would a customer shop via your marketplace if you have no merchants and therefore no products? Conversely, why would a merchant agree to sell on your marketplace if there are no customers shopping through it? Your marketplace could be something that greatly simplifies the online shopping experience – maybe even revolutionizes it – but that doesn’t matter if not enough people adopt it to make it function. So, how do you convince your initial merchants or customers to use your online marketplace?
You can bootstrap one of them.
Bootstrapping: Build your supply or demand first
The biggest initial hurdle to getting your online marketplace running is creating that initial supply or demand. One potential solution is bootstrapping; building an initial user base through artificial means and/or constructed incentives. Since neither merchants nor customers have an inherent incentive to join the marketplace first (without the other being there yet), another method is needed. Depending on the particular marketplace and its audience, you can bootstrap either the customer or merchant base first.
Customers or merchants? Your situation will dictate
Depending on the customers and merchants that your marketplace serves, either the supply or demand will be more difficult to establish.
As a general rule, you should identify and build up the more difficult side first. This is because generally, that side is inherently more valuable. By building the more difficult side first, you in turn build up the value of your platform. Once your platform has built up a sufficient level of inherent value, attracting the easier side will come more naturally. As for which base a marketplace should focus on, generally, C2C or B2C marketplaces should focus on supply, while B2B marketplaces should build up their demand.
Consumer-oriented marketplaces should build supply first
A C2C or B2C marketplace (think Craigslist) should focus on building supply first. The supply side is often more difficult to build because that initial supply will likely have more hurdles to join the platform than the demand side. Once you build up the supply, the demand will naturally come, as long as the supply continues to match the increasing demand.
For example, for ride-sharing platforms like Lyft or Uber, the drivers (the supply) need a driver’s license and a sufficient monetary incentive; these are two big hurdles. On the other hand, to ride with Lyft or Uber as a passenger, all you need to do is download the app and create an account.
The demand for people that need a ride will always exist. By giving customers a consistent supply of drivers and a seamless customer experience, they’ll continue to use the platform and the customer base will naturally grow.
Business-oriented marketplaces should build demand first
On the other hand, a B2B marketplace (think Alibaba) should focus on building demand first. This customer base is likely more sophisticated with particular demands based on their business needs. Pricing is usually less important than factors such as reputation and quality of the products or services. And depending on the customers, there can be a potentially large demand that’s concentrated on a select few businesses with high barriers to entry.
For example, DesignRush is a B2B marketplace where businesses list digital projects and receive proposals from qualified agencies. The demand side includes the businesses looking for project proposals. These businesses have projects with particular needs in mind, including deadlines, budgets, project goals, and key performance indicators. The supply side involves agencies looking for work, and they will always exist. Provided that there is enough demand from businesses on the platform looking for project proposals, the supply side will naturally grow to meet the demand.
Examples of how to build your initial supply or demand
There are many strategies to build up your initial supply or demand. Thankfully, most of them can be applied to both the supply and demand sides, and include:
1. Subsidizing the user base
Uber: Drivers were initially provided with a guaranteed hourly rate with conditions. To build up demand, users are regularly given discounted ride coupons.
2. Aggregating available data to make one side "look bigger"
Indeed: To build their initial supply, they aggregated data from job postings on other platforms and made them available on their own. This made their supply look much bigger and created a better experience for visitors.
3. Leveraging an existing audience (if you have one)
Amazon: They slowly built up their user base on top of their original bookstore customers, appealing to existing users as they expanded their offering into a fulsome marketplace.
4. Targeting users that can bring their own audience
Patreon: They allowed fans of content creators to give money directly to the content creators through membership payment models. Patreon only had to attract content creators (supply) to their platform because the fans (demand) would naturally come to them.
5. Making an existing service or product more accessible
Wealthsimple: Retail investors traditionally needed to apply for trading accounts with financial institutions that also charged trading fees. Wealthsimple provided an easier way to start trading stocks, with zero trading fees.
Before you start building an online marketplace, a solid understanding of the inherent value of your marketplace is essential. Once you ascertain that value, you can begin to address the cold start problem by picking strategies more effective for your particular situation.
What’s next? After you’ve addressed the cold start problem, you’ll have to decide whether to build or buy your online marketplace. In a recent article written in partnership with Arcadier, we outline seven key factors to consider when choosing to build or buy.
If you’re unsure how to address your own cold start problem, you can reach out to us for a conversation and an assessment of your unique digital context.