As an online entrepreneur you generally have two choices: sell your own products/services or promote other people goods as an affiliate.
These are both great and profitable options, but what if there was a way to create a scalable business that requires no creation of products or inventory?
Well there is, it’s called a marketplace.
What is a Marketplace?
A marketplace is simply a place where people can buyer from multiple sellers in one location, a town market or malls are perfect real world examples.
Online is no different: a single site that allows sellers to add their products and purchasers to browse said products.
This is defined as a Two Sided Marketplace.
There are lots of already well known marketplaces online:
- Amazon – allows anyone to sell their stuff, and reach a wider audience.
- Etsy – a marketplace for craft and handmade goods.
- Airbnb – connecting private accommodation owners with short term renters
- Themeforest – providing a home for WordPress theme developers
- Fiverr – showcases a wide variety of cheap tasks and services
Why 2 Sided Marketplaces Work
Creating a two sided marketplace has a number of benefits for an entrepreneur.
First off is profit. Depending on the business model you choose, you can skim off the surface of both sides by charging people to list and by adding to the transaction charges for customers.
Obviously you may not want to do one or the other instead of both, but the option is there.
Secondly is that once a marketplace like this is set up, it can become very stable. Sellers have a tendency to stick with the marketplace as moving is difficult and costly.
Take Themeforest for example. If a seller leaves they then need to do their own marketing and if they sell the products on Themeforest and their own site, they get a lower percentage of any sales on Themeforest which could cost them thousands.
This tactic by Themeforest might be heavy handed but it helps keep sellers working with just them.
The centralized location makes it much easier for customers to work with: there’s no need for them to go from site to site and waste time on search engines when they can just visit your site and find exactly what they need.
A place to list their products with (in theory) no marketing needed to bring in traffic, no need to handle payments and refunds and a targeted audience. It’s perfect for one person or small companies to get their products out there with little work or risk.
It Ain’t Easy
Getting started with an online marketplace is possibly one of the hardest routes to take with ecommerce, but the profits can be incredible.
The Chicken and the Egg
Which came first? It doesn’t really matter of course, but the issue is that if you don’t have sellers, you have no buyers. If you have no buyers, you can’t attract sellers!
This conundrum is the most difficult aspect to overcome.
There are ways though, through what’s called “seeding”. Seeding is effectively jumpstarting a marketplace when you are just starting.
Focus on One Side First
The most common way to start a market place is to build up one side first. For example OpenTable which is a company that handles reservations for restaurants started by just offering restaurants a way to handle reservations electronically.
Only after it got enough restaurants on board did it open up the booking system to customers.
It built up one side, the restaurants, and then let the flood gates open by introducing the customer element.
Offer Something Better
By offering tools or systems that are better than your competitors you can entice sellers/customers over which will bring the other half as well.
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Airbnb got traction when they included a tool to post to Airbnb and Craigslist at the same time. With Craigslist’s own posting tool being difficult to use, the easy to use Airbnb system enticed renters with both ease of use and the ability to post to two sites simultaneously.
This allowed them to bring renters over to their platform, while reducing the risk to renters (they still get to post on Craigslist). Having renters posting, meant that customers would actually be interested what they have to offer.
Build Around an Existing Product
This is really only going to work if you’re the owner of said product otherwise you might run into legal issues. The basic idea is to have an extensible product that others can create for; software is great for this. They then sell the products on your site’s marketplace.
The ecommerce systems Woocommerce and Easy Digital Downloads are excellent examples of marketplaces built around a single product.
It’s Slow Going
The thing with marketplaces is that it’s a long haul, there’s no quick buck to be made with them. It takes time to build and seed the marketplace so it’s at a stage where it becomes the de facto place to go for that niche (Etsy for handcrafted stuff, Themeforest for WordPress themes, etc.).
While a lot of marketers expect to get a return within 6 – 12 months for a project, a marketplace can barely even be growing by the time a year has passed.
This makes it difficult to know whether what you’re doing is actually working or not. Pivoting too early means you might lose out on the site blossoming into a marketplace. Hanging onto a dud project may mean an increased financial loss.
Your Niche Matters
Let me be blunt: it’s highly unlikely you will build the next Amazon!
Building a varied marketplace like Amazon takes a lot of time, and money to do. Even Amazon started small and focused on specific products. Even Amazon started off by just selling books.
Instead take a hint from other successful online marketplaces and focus on a niche.
Whatever niche you go with you must make sure it’s a two sided niche that has enough potential or existing sellers to draw from.
The great thing about building an online marketplace right now is that the costs are much lower than they used to be: no longer do you have to spend thousands or even hundreds of thousands of dollars on a custom built site.
The get a Minimum Viable Product up and running to test out your idea is as simple as creating a WordPress site, and installing an e-commerce plugin and a marketplace theme such as the awesome Marketify.
As well as WordPress most hosted and self-hosted e-commerce systems have a multi-vendor system that allows you to create a marketplace: Magento, Drupal, X-cart and Shopify all have different options you can use to create a marketplace.
As there are so many options available, there’s something for everyone’s budget.
The Bottom Line
As with any online venture building a marketplace has risks, perhaps more than any other way of making money online.
It will take time and dedication to start seeing a profit, but once built marketplaces are incredibly stable and long term businesses.