The marketplace is a difficult business to run. Like all multi-sided platform businesses, they suffer from the classic chicken and egg problem: the technology has no value unless buyers and sellers are present and you can’t get the buyers on board unless you have sellers and you can’t bring in sellers without having buyers.

    Building a marketplace is a lot like building two separate companies simultaneously, each dependent on the other: for sellers and for customers.

    There are three factors that determine success for a marketplace business

    Liquidity or critical mass

    The lifeline of an eCommerce marketplace (and any platform business for that matter) is liquidity.

    Liquidity is a state where there are a minimum number of producers and consumers in the marketplace and there is a high expectation of transactions taking place.

    The first and most important metric to watch out for is the percentage of listings that lead to transactions within a certain time period.

    This serves as a proxy for the efficiency of the marketplace. Merely increasing the number of buyer and seller sign-ups doesn’t serve a purpose unless this metric starts rising. The time period would depend on the category.

    Airbnb listings would find transactions sooner than listings on a buy-and-sell real estate marketplace. This could also depend on ticket sizes within the same category. Fiverr and Upwork are both services marketplaces but the turnover on Fiverr is most likely higher, owing to the much smaller ticket sizes.

    The eCommerce marketplace also needs to solve the chicken and egg problem and get both buyers and sellers on board. Marketplaces leverage a variety of tactics for circumventing this problem including single-user features, stealing traction and copying other platforms. Presentation of products/service

    Users visit a marketplace with a highly transactional intent and want to find what they’re looking for at the earliest.

    In this aspect, transaction businesses are different from engagement businesses. A user visiting AirBnB or Yelp has a specific intent in mind. Hence, the quality of the search algorithm and the intuitiveness of the navigation are critical to delivering value. In contrast, a user visiting Pinterest often wants to spend some time and consume content on the platform. Hence, the infinite scroll!

    The efficiency of discovery and matching is critical to a marketplace’s success. Percentage of searches that lead to listing profile visits within the first page of results is one such metric. When listings are served instead, as a feed, the clickthrough per session can serve as a proxy as well. The best metric to track matching efficiency varies with the business model of the marketplace as well as the category.

    Marketplace Trust

    Building trust is central to eCommerce marketplaces where transactions carry risk. Airbnb is an example of a player in a high-risk category, that succeeded because of its ability to curate its participants. Airbnb allows hosts and travelers to review each other and has one of the highest review rates among marketplaces. It also takes additional measures to build trust, including having photographers certify a host’s listing.

    This was one of the factors that helped Airbnb challenge CraigsList because CraigsList never built a strong curation system for participants.

    Amazon is another story. It has a great reputation as an application and full self-service tools.

    Focus on the trust metric is very important to move from appealing to an early adopter audience to appealing to a mainstream audience. While early adopters use new marketplaces because of the novelty, opening up to a larger market requires the trust and reputation management systems to be alive and kicking.

    User interface design

    On a marketplace, the ability to search and transact/interact should be as intuitive as possible. Beyond that, the look-and-feel and design are purely hygiene factors. Unlike social networks, marketplaces are transactional and users typically don’t have long visit lengths engaging with the product. Hence, UI is not as important a criterion as the other three mentioned above.

    In summary, if you’re building an eCommerce marketplace:

    1. Focus on liquidity, not just user growth

    2. At critical mass and beyond, closely track matching efficiency

    3. When moving from an early adopter to a mainstream audience, ensure that the trust systems are in place and functioning well.

    4. UI design is important in engagement marketplaces – not transactional but you need to add all required elements for e-commerce that people are used to like cart, login, contact data and legal condition in visible places.

    One watch out

    Recently I read information from Google that people simply leave the service if it doesn’t appear in 3 seconds. It has to be taken into account if you are designing your marketplace as well.

    Of course, another topic is a mobile-friendly website. It is simply just to have or you should have a mobile application easy to download and operate. Based on my clients almost 55% of users are smartphone and tablet users now.