At the end of the day, successful online marketplaces offer solutions for their users that didn’t exist before. Airbnb creates an alternative to hotels, Turo acts as a replacement for rental cars, and Faire offers a new way for independent sellers to supply their small businesses. Online marketplaces vary in size and granularity, but they all must offer value to their users that they can’t find someplace else. Even if a marketplace does create a new alternative, it must retain its defensibility so another company can’t come along and do it better. So, how does a marketplace create value for its users? And how is that value maintained?

Starting small

Successful marketplaces require more than a good idea. Andrew Chen, the author of The Cold Start Problem, proposes that the solution to getting your marketplace going isn’t by stockpiling as many users as possible. Industry leaders often started small.

According to Chen, “...the key is the ‘atomic network’-the smallest, stable network from which all other networks can be built” (69). The idea here is to focus less on maximizing individual user counts. Instead, shift your focus towards creating the smallest successful self-sustaining network possible that can later be replicated.

Lenny Rachitsky, the creator of Lenny’s Newsletter, compiled data that showed leading marketplaces often started by constraining based on geographical location (Rover focused on San Francisco), or category (GeekMarket, exclusively sells board games). The beauty of creating an atomic network is that once you’ve established one in a specific location or category, you can create a playbook and simply replicate to your desired scale. This way, as you grow, everyone on the team has a crystal-clear picture of the core function and value that your marketplace offers.

Marketplace disruption – a good thing

A marketplace is coined “disruptive” if it matches customers and merchants that were not making transactions in the market prior. These new economic players can be referred to as “non-consumers” and “non-producers”. Truly disruptive marketplaces are hard to imagine before their existence because they are creating an entirely new way of doing something.

Consider Airbnb. Hotels have dominated the short-term vacation rental market for decades, and they monopolized prices with little variation in user experience. As far as Marriott and Hilton were concerned, their main competitors were other leading hotel chains. I don’t imagine Hilton’s CEO could have ever pictured that the competitor who would take the lead was one where the supply came from their previous customers.

Now, users aren’t limited to four corners with a desk and a mini fridge. I could book a stay right now on a boat, in a treehouse, or in a yurt on the beach with ease. I could just as easily list my extra bedroom, RV, etc. and act as a supplier when I had no pathway to before. Airbnb is a disruptive marketplace because it creates new transactions, instead of just improving on existing ones.

Targeting user pain points

One way to create a disruptive marketplace is to focus on existing pain points. What do people dread dealing with? And what are the basic human needs that dictate our behavior? DoorDash made it easier for people to eat, Uber and Turo makes it easier to get a ride or rent a car, Rover makes it easier to find a pet sitter, and HipCamp makes it easier to plug into the outdoors.

To find out what these pain points are, one easy way is to look on social media platforms and see what people are asking for. Local Facebook groups are a great place to start. I saw a post on my local group asking for a housecleaner. Is there a marketplace that connects people who love to clean to people who hate to clean? What are people asking for? Parking in my neighborhood is abysmal. How could I connect to people in my neighborhood with empty parking spaces to spare? What do people own but not use often? I live on the coast, but I can’t afford a boat. Maybe there’s someone with a boat that they aren’t using today?

These are just a few ideas to get yourself in the mindset of creating a disruptive marketplace. First, think of people with a potential supply that is currently going unused, then think about the people who might find value in that supply. Make a connection between the two and you’ll be on your way.

Another timeless pain point is work. Typically, employees are bounded by hourly schedules and set wages. These boundaries are especially restricting to populations such as parents and students who might have less time in the day to devote to working a 9-5. Service-based marketplace operators can utilize this flaw and capitalize on it. Bellhop offered people a way to make a sizable income and work on their own schedules. HipCamp allowed people to make money on land for camping which likely wouldn’t be used otherwise.

Operating through an online marketplace is often a less risky bet for users since payment is protected through the platforms and there is an intermediate party to oversee issues.

With any marketplace, there must be economic advantages for either the buyers, sellers, or both. With a disruptive marketplace, there is an inherent economic advantage because new transactions are being made. Circling back to the Airbnb example, the economic advantage for the seller is being able to list their space and act as host when they couldn’t have otherwise. The economic advantage for the buyer is the lower cost and wider variety for short-term rental stays. For Faire, an online wholesale marketplace, the economic advantage is greater exposure for independent sellers and lower prices for retail shops. The perceived economic advantages are often what will initially bring users to your platform, so they must be clear and confidently presented to your customers.

Maintaining value and satisfaction

Successful online marketplaces must be hypersensitive to customer and merchant satisfaction to stay competitive. Satisfaction is a measure of performance, and people are constantly comparing your marketplace’s performance to your competitor’s performance. Why drive for Uber if DoorDash pays better and gets me more rides? I wouldn’t have to quit jobs, but simply switch apps on my smartphone in a matter of seconds. This situation is called multi-tenanting, and it can be mitigated by creating a unique experience that users feel can’t be found elsewhere. Online marketplaces cannot thrive if they don’t prioritize the satisfaction of their users, because the buyers and sellers are the supply and demand, and competition is fierce.

Incentive loops are a powerful tool for reinforcing user value. Creating incentives that don’t hurt your bottom line will require some creativity, but it can be done. Bellhop incentivized their movers and drivers by creating a pathway to ‘level up’ based on their personal reviews and the ability to become a captain. This ranking strategy mimics the feeling of getting a promotion and strengthens user loyalty. Similarly, Airbnb rewards their best hosts with ‘Superhost’ status which indicates to customers that this host has been vetted and likely won’t give them any trouble.

In Eric Jorgenson’s article Building Marketplace Incentive Loops, he likens successful marketplaces to meritocracies. Like meritocracies, Marketplaces should function to reward those who create value for your platform and create consequences for those who disrupt the process. Disincentives are the flipside of incentives and should be used thoughtfully as people might be less likely to commit to a marketplace with a laundry list of intimidating policies. However, Marketplaces operate on trust, and anyone who breaks the trust between the buyer or seller (i.e. those who don’t deliver on their promises) should be corrected.

Incentive loops serve to improve your marketplace liquidity. According to Julia Morrongiello, investor for Point Nine Capital, marketplace liquidity is “the efficiency with which a marketplace matches buyers and sellers on its platform”. This measure can be quantified by several popular performance metrics, such as the ‘Search to Fill Rate’. To find your ‘Search to Fill Rate’ simply divide the number of people making transactions on your site by the number of people viewing your site. The higher the number, the better. If you get a low number, target your window shoppers by creating an incentive loop that entices first-time customers.

While the exact metrics you use will depend on the marketplace, marketplace liquidity captures the ultimate goal of a marketplace, which is how successfully your platform facilitates a connection between your supply to your demand.

Final thoughts

Value is the beating heart of an online marketplace. Every marketplace decision made requires a delicate balance of value incentives between both sides of your marketplace. Sometimes, putting your marketplace users first is not the most economical decision in the short term but absolutely needed during the 'cold start' phase of your marketplace.

However, once your marketplace flywheel has been established, you’ll see that your customers start to act more like stakeholders and the threat of competition diminishes as the size of your marketplace moat increases.

If you are building a marketplace, learn why we believe email is the "glue of UX" for marketplaces.

This article was originally published on Marketbase (a Waypoint product).