What is an online marketplace?
An online marketplace is a form of e-commerce where a platform connects two or more parties to complete a transaction. By connecting Supply & Demand, the platform will inturn either take a rake or a subscription fee from either party. A rake is normally a percentage of the GTV (Gross Transaction Value) that the platform takes as payment for its services. The rake is anywhere from as little as 5% to 70%, it varies depending on the vertical, volume, or different services that the Marketplace is offering. The rake is usually referred to as a “Service Fee” or “Usage Fee” and noted on the checkout or the payout.
In the new era of digital commerce, society has become more accepting of these online marketplace platforms out of necessity in a world stricken by COVID-19. In-person transactions are still a great sales channel, but we can safely say that without a strong online presence, your company may not be able to flourish to its fullest potential.
Online marketplaces are a fantastic business opportunity because they empower the local economy and give unique supply a new way to generate income or revenue and for demand to support their local suppliers.
Why you should start a marketplace in 2021
If you are considering starting a marketplace in the near future, be sure to perform your research on the market and trends on the vertical you’re about to enter. Shopping has for the most part changed from an in-person experience to a digital one, a mobile one at that. A published article suggests that mobile e-commerce will go from ~50% in 2016 to ~73% in 2021. Now, after reading that statistic, you’re probably thinking that your marketplace should be a mobile app first to take advantage of the market.
If that is your first thought, you should instead be thinking about building an online presence first by having a mobile-responsive website instead of a mobile app simply because of SEO (Marketplace Search Engine Optimization) and organic discovery. If you’re searching for a solution, you typically don’t type your questions into the App Store, no you search using Google and select from the options presented to you. For example, more than 91% of Canadians use Google as their primary search engine.
Etsy, a marketplace for an independent craftsperson to sell their unique products has done extremely well during the pandemic despite COVID-19 challenges with supply chains. Another article noting the growth of the industry - “According to a recent report by Mirakl, online marketplaces such as those operated by Catch, Kogan.com, eBay and Amazon grew 81 percent year-over-year in the fourth quarter of 2020, more than double the rate of overall e-commerce growth.”.
Starting a Marketplace Platform from scratch?
There are many things to consider when starting your journey to build a marketplace from scratch. There is a lot of work that needs to be done before you even think about investing in writing code or hiring a developer. This blog post runs through all of the pre-development steps one should take before starting to code.
You’ll have to decide between a few options on where to start:
Custom Build a Marketplace
The main issue with options 1, and 3 is that you’re going to be fitting your marketplace business plan into the restrictions of their solution. You will be getting into a highly competitive market with extremely complex business models with one hand behind your back. Now, this may work for you if you’re only planning on building an MVM (Minimum Viable Marketplace), but why not build an MLM (Minimum Loveable Marketplace) instead?
Why you should choose the custom marketplace option?
This gives you complete control over your marketplace’s destiny. You can literally bring your idea to life (with the right team) and become a disruptive platform for your vertical. You aren’t starting with any restrictions and are only limited by possible technological blockers (unlikely).
There are many no-code, low-code, or simple out-of-the-box solutions to start a marketplace made by companies who themselves never launched a successful marketplace. There are few options in the current market that have real-world experience marketplaces especially at the 0 to 1 stage.
We start with a blank canvas, a mobile phone screen, and design up to a desktop version of your idea. Thinking mobile-first ensures that the majority of your Users will have the best UX possible and anyone on a desktop will be pleasantly surprised. We ask the right questions by leveraging Design Thinking to uncover any potential blockers or unknowns from the User receiving the product/ service to the User’s first impression (end to start).
What core features are included in a custom Marketplace?
These are the main features or workflows that you’ll need in your marketplace to achieve a proper MLM; Home Page, Search Experience, Signup, Listing Process, and the Booking Process. The key to success that most companies miss is the level of personalization that you need to have higher conversion rates. The same article, notes that “74% of marketers know that personalization increases customer engagement, yet just 19% are actually using personalization, says research by Evergage.”.
There are even tools that you’re able to integrate with like Segment that will enable you to have omni-channel marketing. Businesses that adopt omni-channel strategies achieve 91% greater year-over-year customer retention rates compared to businesses that don’t, according to a survey conducted by Aspect Software.
Your Home Page can easily be labeled as the most important page of your platform because it gives the first impression to your Users. It allows for product discovery of your marketplace and also educates the User on what your marketplace does all on one page. The Home Page also holds the majority of your SEO power, so make sure the Designer does their due diligence and research popular keywords you need to rank for.
As a new marketplace, your new home page should prove a few things to your visitors such as; trustworthy, safe, educational, and convert. Through proper design & validation, all of this is certainly possible by leveraging Design Thinking.
The Search Experience is vitally important to your marketplace platform. It can vary depending on the vertical and type of marketplace you’re creating, however, the mechanics of a marketplace is to match Supply with Demand. The usual challenge that marketplaces face is called the Paradox of Choice. The Paradox of Choice is essentially the frustration that a User will have when they are presented with too many options which lead to them bouncing and not converting.
That is why focusing on this workflow and ensuring that it is as smooth as possible for the User is priority number one. How will you tackle the Paradox of Choice?
The Signup Process can either be a very complex workflow or very simple, the magic happens when you design an easy and simple UI with a complex background to keep your standards high. An important factor that is commonly overlooked is how important this workflow is to build and instill trust in your Users.
If you’re simply asking for an email and password, it can make a User ask themselves if your marketplace is as safe and secure as you lead them to believe. The opposite end of the spectrum is asking for too much information that leads the User to believe they cannot trust your platform with their PII (Personally Identifiable Information).
By using design, you’re able to build an ideal workflow that marries the ideas of simplicity & safety and the result is a high converting signup process.
Supply is key to a successful marketplace. This workflow is crucial to a supply-driven marketplace and it can be a complex one to design varying from vertical to industry. This workflow is especially where you should be implementing as much personalization as possible. You may have already collected a significant amount of data on the User before they begin this process and can use it to your advantage.
This is certainly up for debate because some marketplaces ask you to signup after completing the listing process and others ask before. There are benefits to both sides, however, if you ask beforehand, you’re able to put abandonment marketing into place to nudge the User to complete their listing if they do not convert the first time.
The Checkout Process can be a very complicated process, especially on the backend behind the scenes. This of course depends on if it is a one-to-one, one-to-many, or many-to-many checkout process meaning if it is one User paying for a product from one Supplier, one User paying for products from multiple suppliers, many Users paying products from many Suppliers, etc.
The traditional and easiest way to design a checkout system is to go the one-to-one route, however, if you want to be less restrictive on the User’s buying process, a many-to-many relationship may be the option to go with.
A real-world example is the buyer’s journey on Amazon versus Airbnb versus UberEats.
How much time do you invest in the Pre-Development phase of a Marketplace Platform?
Performing the necessary steps to build a marketplace platform from scratch takes time, and is something that can’t be rush if you want a quality product. This article discusses it more in-depth but there are 12-steps to follow before writing any code.
Competitive Marketplace Research
Target User Research & Persona Development
Creating a Business Plan
Marketplace Design System
Design Thinking Sprints (Per Feature/ Workflow)
Designing Interactive Prototypes
Integration & Partnership Proposals
Technical User Stories
These 12-steps can be a long process, and to some extent be faster to complete with more “horsepower” on your Product & Design teams but there are some that can’t be rushed such as the Design Thinking Sprints. With a team of 4 to 6 people ranging from Product Management to UX Research, these 12 steps can take anywhere from 8 to 12 weeks. Simply looking at the cost of your Pre-Development phase, you can estimate in burning $30,000 to $50,000 USD depending on the skill level & experience of the individuals on the team. This is for a contractor team to develop a Minimum Loveable Marketplace at Marketplace Studio.
If you were to hire your own team to accomplish this on salaries ranging from $50,000 to $80,000 annually, the costs will certainly increase to around $50,000 to $75,000.
How long does it take to code each feature for a Marketplace?
By following the Pre-Development steps, you will increase your development velocity immensely because by doing so, you’re able to give your prototypes wrapped with a bow on top to your developers to start writing code.
The time to code will obviously change from marketplace to marketplace and also has variables like level of experience of the developer, complexity & size of the project, and the quality of the Design Specs and User Stories. Assuming that everything in place is as planned, coding a feature could take anywhere from 3 weeks to 4 months with a team of developers ranging from intermediate to senior.
What roles do you need to cover to Build a Marketplace?
These are the following roles required to build a high-quality custom marketplace and in order in which they should be hired, this article goes into the details more.
Sales / Business Development
Intermediate to Senior Backend Developer
Junior to Senior Frontend Developer
Junior to Intermediate Quality Assurance Engineer (Manual)
This list can certainly be expanded upon and depending on your abilities & skills change based on your needs. The above list is intended to be for a Non-Technical Founder of a marketplace to design the A-Team to create a special platform.
An important role to call out is number 4 because without a product, given you have the right sales pitch, you can start building your supply and manage it all in a spreadsheet. You can sell your Supply on the dream and vision on your platform and the problems you’re solving for them as long as it is relatively quick and painless for them to do.
How much does it cost to hire my own Product & Development Team to build a Marketplace?
Hiring your own Team is definitely a great option, but it is also the most expensive. Hiring and training your own team on your product can be expensive and time-consuming. The annual cost of an average development team is $1 Million USD annually. That is only for a team of 6 people too.
On the likely chance that you do not have $1.5 million (add the Product Team) to invest in your first year developing your product, there is an out-of-the-box option or go the contractor route. The issues with an OOTB Solution are noted at the beginning of this article. As for hiring a contracting company, everyone has heard the horror stories of Founders being taken advantage of and the result being a waste of money and time.
The next option is hiring a company like Marketplace Studio or an equivalent and building your marketplace platform piece by piece. This option still requires a sizable investment, however, depending on the company, they can provide you with favorable payment terms.
How much do Design, Product & Development contractors cost?
Contractors have a wide range of how they price their services and usually include factors similar to ours, complexity, urgency, and size of the project. Again, depending on the service it can range from $20/hour on the junior end to $150/hour on the senior level in Canada & the USA. The average freelance website developer will earn $62,000 USD annually.
The main issue with hiring individual contractors is having the coordination between each role to ensure everyone is on the same page and understands the requirements. Managing the communication between them all would be a full-time role in itself as a Project Manager.
The ideal team to hire would be 8 to 10 people covering roles in Product Management, UX Research, UX Design, Technical Writing, Backend Developer, Frontend Developer, DevOps & Security, QA Engineer. At least 8 professionals would be required to complete research, design, code, and release a marketplace platform.
There are many Founders who believe they can manage multiple hats of this team and go directly to a contractor development company. This usually results in a buggy platform that isn’t scalable and a lot of technical debt because requirements weren’t thought out before coding. Again it can easily turn into a disaster story.
What are some of the custom development options for marketplace platforms?
Luckily, for Founders, there are many options to choose from to build a custom marketplace! However, very few actually have real-world experience in bringing a marketplace 0 to 1, meaning designing, developing, launching, and scaling the platform.
That is one of the many reasons why Marketplace Studio stands out from the rest. We aren’t here to simply research & design your ideal marketplace. We want to also educate you on what it takes to build, launch, and run a marketplace from our perspective building the world’s largest rent anything marketplace, Ruckify.
We don’t want you to rely on us for the lifetime of your marketplace, we want you to be sustainable and successful without running into problems that our team faced.
If you are interested in a conversation about anything related to marketplaces (researching, designing, or developing) we’d love the opportunity to have a coffee break with you. Please contact us and let us know, we want to hear from you!