How to build an online marketplace platform

The wave of marketplace startups

In the digital economy, the technology revolutions have entirely transformed the way we transact on the market. As buyers, we are now able to buy anything with just a few clicks. Vendors from various sectors have precious chances to reach the global market without any friction. That's the reason why the trend of building online marketplaces is booming these days. The impactful success of Amazon, eBay, Airbnb, Uber, Upwork, to name a few, inspires countless enthusiasts to choose to become marketplace entrepreneurs.

Back to the basics, the very concept of an online marketplace is a platform that brings together the supply and demand of a specific product or service. It enables the sellers and buyers to find each other easily and complete transactions efficiently. Building a marketplace requires minimal capital investment as there is no inventory to buy, build and manage. Once the marketplace achieves liquidity, it possesses either the high potential of long-term profit at scale or the high barrier to competing. These bright sides of marketplace startups attract all sorts of investors. Several VC firms explicitly addressed online marketplaces as one of their portfolio focuses, such as SpeedInvest X, Adevinta Ventures, PointNine Capital, and A16Z. In these investors' eyes, marketplaces startups represent a network-effect-driven business where the product's value increases with every new user. It's the business that can revolutionize the world in a way that we can not imagine today.

Source: Dealroom

These movements in this industry drive us to firmly believe that marketplace startups will grow exponentially and define the vibrant landscape of the industry in the coming years.

Typical marketplace use cases

When it comes to the marketplace domain, we often think about eCommerce platforms and the retail industry like Amazon, eBay, and Etsy. But the truth is, thousands of entrepreneurs are creating the next generation of online marketplaces in multiple different sectors.

• Airbnb is a unique home-sharing platform, connecting travelers and apartment hosts.
• Uber is the disruptor in the ride-hailing platform, which connects passengers and drivers. It now expands services to food delivery, package delivery, courier services, and freight transportation.
• Instacart is the US-dominated grocery delivery and pickup platform that allows customers groceries from participating retailers with the shopping being done by a personal shopper.
• Mascus is an international electronic marketplace for buyers and sellers of used machinery and equipment.
• Fiverr is a thriving online marketplace for freelancers to offer digital services across 300 + categories to customers worldwide.
• Taskrabbit is a popular online and mobile marketplace that matches freelance labor with local demands in cleaning, furniture assembly, home repairs, running errands, and more.
• Zillow is the leading real estate marketplace with millions of for-sale and rental listings.
• Zocdoc is an online medical appointment booking that helps to connect patients and doctors seamlessly.
• Coursera is a world-class online learning platform to connect learners to online courses and degrees from leading universities and companies.
• And many more.

In a nutshell, we could see marketplace ideas come in different shapes and sizes, across various aspects of our world. Leveraging the advantages of a collaborative economy, marketplace ideas might come from solving an existing real-life problem, unlocking idle assets, or aggregating fragmented markets. Whatever it is, building an online marketplace platform is an exciting yet challenging journey for any entrepreneur to bring impactful values to communities. And at the end of the road, it might financially pay off if you find out your secret sauce for your model.

Common types of marketplace platforms

Choosing the right type of platform might be one of the most critical decisions that set the foundation for the whole marketplace business later on. It also significantly affects your revenue models in the future. To arrive at an informed decision, it's worth having an overview of different basic types of marketplaces currently available on the market.

Top popular business models for marketplace platforms to generate revenues

One of the most common causes of a startup's failure is that its business model does not scale long-term. It might be easy to acquire several first customers. But at scale, it rapidly becomes too expensive where CAC (customer acquisition cost) is much higher than LTV (lifetime value of a customer). So choosing a business model is also a significant decision in the whole process of starting a marketplace.

There are several typical types of business models that generate revenue streams for the marketplace.

• Commission
• Membership/subscription fee
• Listing fee
• Lead fee
• Freemium
• Featured listing and ads

Two questions that help you choose the suitable business model are:

• Can you find a scalable way to acquire customers?
• Can you then monetize those customers at a significantly higher level than your cost of acquisition?

According to David Skok, a serial entrepreneur and VC of Matrix Partner, in simple language, the rule for choosing business models are:

• CAC must be less than LTV
• Recover CAC in less than 12 months

Read also: How to choose the right revenue model for a sustainable marketplace platform

Typical approaches to building marketplace platforms

There is no single way to build a marketplace platform. Depending on your ideas, technical skills, budget, timeline, and plan, several common approaches go along the way with your startup journey:

• Open-source: Build on top of open-source marketplace software.
• Marketplace builder: Take advantage of the marketplace builder, plugins, themes, and extensions.
• Custom development: Build your platform from scratch.

Each of them has its pros and cons. Several major factors need to be considered in the process of choosing which approach:

• Unique feature set: What kind of marketplace platform are you building? Is it a website, mobile app, or both?
• Time to market: How much time do you have for building MVP and refining the business later on?
• The total cost: How much will you invest in this development journey?
• Tech skills needed: How about your background? Who should you work with, and which tool should you use?
• Customizability: How about your future plan? Does the tech stack and architecture support future customization?

It's not an easy task to compare different approaches clearly without the unique nature of your marketplace as a context. Still, we try to generalize several vital points when it comes to choosing each approach.

• Build on open-source codes

Building your marketplace on top of open sources could save you a lot of time and money at the early phases of development. It significantly supports your faster time to market. You could easily pull the source code into your server and start the customization. However, the downside of this approach is that the platform might also contain more or less the features you need, which slows down the customization with unnecessary complexity. It also sticks to several specific technologies that are less likely to be flexible in choosing or changing the languages and frameworks to work with. So the vital step in selecting an open-source marketplace platform is to make sure the customizability from the sources is compatible with your future plan of business and development.

• Build on SaaS marketplace builders

Leveraging marketplace builders is also the most recommended approach to launch your MPV and validate your ideas. It reduces the time to market from months or even years to weeks. You can benefit from typical essential marketplace functionality available, i.e., search, payment, messaging, review, availability, and scheduling.

In contrast, the first con of using these builders is that it also needs us to customize to best fit your marketplace's unique nature. Fortunately, these days, the API-first approach of marketplace builder allows you to customize your workflow and user interface more easily. It also facilitates you to integrate with third-party software or build mobile apps conveniently. So it's essential to make sure your builder vendor allows you to create on that API first (a.k.a. headless architecture).

The second con is the cost of development from a long-term angle. It's pretty tempting to initially build your product with quite acceptable monthly/yearly fees. However, in the long run, the accumulated cost could outweigh the benefits that used to attract you at the beginning. Thus, one more thing to take into consideration is the business model of the marketplace builder. If they cost you a large amount of money upfront, it could be a sign that they will make money whether you succeed or not. The customization later might be tricky and sluggish. If the vendor's business model is based on your transactions, you could leverage these mutual benefits from both sides to go alongside them. After all, depending on your future plan and the uniqueness of features and workflows on your platform, consider either opting into marketplace builder first and customize later or start coding from scratch.

• Build from scratch

Building your platform from the ground up is the potential option that seems to fit highly complex marketplace development.

On the one hand, it allows you to flexibly choose the tech stacks that your team is comfortable with and plan for the architecture that suits a scalable, high-performing, and resilient system. You have all access to your source code. You could create your competitive features standing out from the market in the early beginning without workaround customization.

On the other hand, the major drawback of this approach is that it takes a lot of time to set up your product, while speed to market is critical for a startup. The best practice here is always to embrace Agile development in building your MVP phase. You can take this phase as a chance for building team momentum, learn, and iterating your business ideas by getting real feedback from the market. The second drawback of custom development is the upfront cost is much higher than the two above options. But in a sense, it could be a reasonable decision in the long run. In case you have enough budget and time, and your platform requirement is more complex than the average, you could go to build your MVP with your development team without worrying about escalated subscription and transaction fees in the long run.

To be frank, it's tricky to have a straightforward answer for your path to build the marketplace platform. It all depends on how you balance all of your current resources, the nature of your platform, your business plan, your short-term goals, and your long-term vision. The critical point here is that building a marketplace is a long-term process. It requires a high level of customization. Sooner or later, you will move forward on building additional features that help you differentiate from your competitors. Whatever the options you will opt-in, always prepare for the extensibility and scalability of your platform down the road.

Several necessary features and functionalities to include in the marketplace MVP

The marketplace can be seen as a field that potentially embraces various revolutions of the world. The creativity here is unbounded. It could appear in the kind of commodities exchanged on the platform, how buyers and sellers find each other, or how people conduct transactions. This list still goes on. We hope to see many innovation possibilities here where we can contribute our added technical value to the whole value chain of marketplace communities.

Despite the limitless innovation here, different types of marketplaces are pretty similar at their core. It acts as an intermediary between sellers (supply) and buyers (demand) that facilitates their transactions and removes any existing friction in the physical world. According to Forrester Consulting, several main reasons that people opt for online marketplaces are:

• Convenience — 89%
• Wide range of products — 89%
• Availability of rare items — 85%
• Discovery of new retailers — 83%
• Diversity of sellers — 81%

Given this in mind, I think it's worth taking a look at several essential features and functionalities that should be included in your MVP to create a seamless connection between 2 sides or even multiple sides on the platforms.

Assume that you are building a 2-side platform with sellers, buyers, and platform admins:

For sellers:

• The straightforward process of signing up, and creating profiles and listings to build their engaging online profile with their bio, listing, catalogs, pricing/currencies, availability, and reviews.
• Real-time inventory tracking and availability updating to support streamlined product management (goods marketplace).
• Real-time availability tracking and automated appointment booking (service marketplace).
• Convenient order processing and dispatching, integrate seamlessly with logistics parties.
• Promotional tools to sales-off campaigns and marketing tools to upsell, and cross-sell.
• Real-time chat box to communicate with buyers, building trust between 2 sides.
• Analytics reports.

For buyers:

• Multiple log-ins with different kinds of accounts like Facebook, Google, LinkedIn, Apple, etc. 
• Intuitive search and display, faceted category filters, and well-designed and informative pages of products/services.
• Straightforward checkout flow with reliable payment processing.
• Order processing and tracking delivery statuses.

For marketplace administration:

• Manage the whole operation of the marketplace like users, payment gateways, and delivery methods.
• Monetization structure and fees like subscription fees, transaction fees, listing fees, etc.
• A mobile app goes alongside the web application.
  Integrated with analytics tools to get insights into traffics, and encourage social sharing.
• Optimized with SEO best practices.

Common technical concerns on marketplace tech stacks and architecture

To prepare for integration, extensibility, and scalability, marketplace platforms should be designed to handle dozens of API calls daily. Several technical concerns below should be addressed and properly selected:

• Hosting solution: Using cloud-based or shared hosting doesn’t seem to be a difficult decision to make as cloud-based solutions have been developed and offer all necessary services that are secure, reliable, and highly available for hosting a modern software system. For startups, the Amazon Web Services cloud solution is the right choice as it’s not very expensive to host your MVP but it’s easy to scale your system later on.
• System architecture: Depending on the complexity of your platform, the selected architecture could be n-tier or microservice. If your platform is not so complex and you don’t plan to grow it as a big marketplace where it would include many subsystems like inventory control, order management, chat system, analytics, etc., a monolithic architecture would be enough, otherwise, microservice should be the best choice.
• Headless architecture: All business processes from product searching, scheduling, order process, etc., should be done from the backend and provide necessary API to all frontends and third-party clients. It enables centralizing business processing as well as providing data and content fast to varieties of clients, even byte-size content.
• Web technologies: For modern web applications, the front end is as important as the back end in terms of selecting the right technologies and frameworks. Reactjs, Angular, and Vuejs are the three UI frameworks among many out there you can consider.
• Mobile technologies: Using native or hybrid technologies for mobile applications is often a concern for startups especially because of limited budgets. Except for very specific reasons to go with native, hybrid technologies like Flutter is a good choice to develop mobile applications for your marketplace platform.
• Product searching: Fast searching capability no matter how big the system scales is crucial for marketplace platforms. Therefore, applying search and analytics engines like Elasticsearch or Azure Search is very important.
• Real-time chat: For many marketplaces where allowing real-time chat between suppliers and buyers is another important feature, you can think of either building a real-time chat system from scratch or licensing out-of-the-box systems like Sendbird or Stream. The concern is about how much you will scale in the future on both sides of technologies and revenue generation so to decide your approach.
• Payment: Payment processing is a cornerstone of any marketplace platform. Therefore, implementing it right and safely is very crucial. The most affordable approach is to consider leveraging third-party payment gateways like Stripe or PayPal.
• Security: This factor must be considered seriously at the outset by selecting the right development team that understands and has experience with building secure systems. It must be done right from the code level where developers apply standard approaches to input validation, output encoding, error handling and logging, and access control to name a few. Another level of security to apply is the deployment model where you should consider applying security models and practices like using virtual networks, API management gateway, web firewall application, etc.

There are many other concerns to address like autoscaling your infrastructure, data backup and restoration, app insights, and log data analytics. Luckily most of these concerns can be addressed and solved by cloud platforms like Amazon Web Services or Azure.

Read also:

• How to build an efficient Minimal Viable Product (MVP) for startups
• How to validate your Minimal Viable Product (MVP) for startups

Final thoughts

How to turn your initial idea into a viable marketplace platform? How to kickstart and scale a marketplace platform successfully? It might be a very tricky question that every marketplace entrepreneur has to think of every day. To answer these questions, you need to resolve dozens of other aspects. They might be choosing the business model and revenue models, selecting the approach to MPV development, choosing tech stacks and infrastructures, cracking chicken-and-egg problems, scaling growth levers, and maintaining quality and reputation... However, it all starts with the first step - building your MVP and validating how your marketplace interacts with the outside world.

This article covers the fundamental knowledge about the marketplace, but it's our first article to embark on a series of marketplace development. In the following posts, we will go deeper into listed technical concerns on the marketplace tech stacks and architectures, which are based on our experience in developing custom software and marketplace MVP over the years. We hope it will ease your journey to accomplish your vital goals.

References

• Li Jin, The Marketplace Glossary, Feb 2020.
• Sjoerd Handgraaf, Build a marketplace platform: Six ways to create your online marketplace website, www.sharetribe.com, Feb 2020.
• Juho Makkonen, How to choose the right business model for your marketplace, www.sharetribe.com, Oct 2020.
• Platform Revolution, The platform stack: For everything building a platform and for everyone else, platformthinkinglabs.com.
• Forrester Consulting, Retailers Must Seize The Marketplace Opportunity, April 2016.