If you're starting a business where a set of people are going to sell something on your website, and another set of people are going to give them money for it, then you're starting a marketplace.
Marketplaces are a popular business model right now, and for good reason - the internet has made us used to being able to buy, rent or find anything, but sorting through options can be a huge hassle. Plus, many types of sellers need some extra software on top to be able to effectively sell or deliver their product or service. Building a marketplace plus whatever that extra functionality is is a great foundation for a business.
However, for a marketplace to work you need to ensure you have two things: supply and demand. You need enough supply to make the marketplace more useful than a Google search, so buyers will turn to you first. You need enough buyers, so that the people providing their goods or services invest their time and energy in your platform.
Many marketplace founders make a critical mistake: getting too excited when they build up a ton of supply on their platform, and claiming that means that they're on their way to product market fit. Unfortunately, getting a ton of supply doesn't mean much - it's basically a vanity metric.
Supply is almost always the easiest thing to get. If your platform takes off, it will provide more income to the sellers. What seller wouldn't take a few minutes and sign up for a platform they may be able to get more money from? If you're building a marketplace and aren't able to get people to sell on it, you have a huge problem on your hands, and may need to reevaluate the whole idea.
Demand is much harder. Oftentimes, you're competing against some big incumbents - things like Amazon, a free Google search or "the way we've always done business." It's likely that the marketplace you're trying to create exists in one form or another, and you'll need to lure buyers away and convince them that using your service is better. It's not going to be easy - changing habits is hard!
But here's the thing: even if you have both a ton of buyers and a ton of sellers on your platform, it still doesn't mean anything. Frustrating, right?
Ultimately, the most important thing to keep an eye on is transactions (even if you're not monetizing via transaction fees). If you don't have transactions, then ultimately you're not providing value to either your buyers or your sellers, and you're headed towards going out of business.
If transactions aren't happening despite having a healthy number of buyers and sellers, then something else is wrong. Maybe you have the wrong sellers, the wrong buyers or both. Maybe your platform is harder to use than whatever they usually use. Whatever the diagnosis ends up being, a major symptom will be lack of transactions (and yes, you should absolutely know how many transactions your marketplace is facilitating, even if you have to manually ask your users because you don't actually have transaction functionality in place).
You may be wondering what the ideal number of transactions is. Unfortunately, that's a difficult to answer question. It's going to vary widely depending on the nature of your marketplace. The best thing to do is pick a small goal and just keep growing the number as fast as you can. Maybe you'll get 5 transactions in your first month, 15 in your second month, 45 in your third month.
Once you start to have some data, there are a ton of secondary metrics you should start paying attention to - average number of transactions per buyer, how much revenue you're bringing in for your sellers, etc. That data will be super helpful as you improve your business model or pitch to VCs.
But first - get your first few transactions!
I wrote this post because I've spoken to and worked with tons of marketplace founders who have spent too much time building up their supply while neglecting the rest of their business, and then don't understand why they're having trouble raising money. If you read this post with a sense of dread because you've fallen into the same trap, don't panic - just refocus and get that transaction number up.
Want some support as you navigate getting out of the Marketplace Product Market Fit trap? Coaching can help. Schedule an intro call today!