What Does It Cost to Build a Marketplace? Part 2: Our Takeaways and Recommendations

The first article in the series about marketplaces described how you could build one with a minimal features set. Now let’s have a closer look at further stages - maintaining and managing a marketplace - which are often overlooked or underestimated by business owners, and especially startupers. We still use Upwork.com, a global marketplace connecting service buyers and service providers, to showcase some best practices.

Building a Marketplace Is Cheaper than Maintaining It

In the previous article, we have disassembled a marketplace and found that a minimum viable product can be produced by a small development team in around 600 hours. Yet, you should consider the strategies for marketplace scaling and monetisation from the very beginning. This would ensure the platform’s sustainability in the long term. The marketplace economic design should be carefully planned; it is determined by the business vertical and the type/purpose of your platform. The systems of ratings, penalties and incentives, though implemented differently depending on a marketplace, play an important role and should find their reflection in your marketplace architecture.

Budgeting for a marketplace is another hidden reef many startups crash upon. The development cost are easily measurable as they depend on the features and functionality. However, significant costs should also be planned for maintenance and management of the platform - business owners often neglect this. A marketplace could hardly survive without human moderators and administrators. Whatever safe-haven services your platform offers, there will always be disputes, payment issues and rating conflicts to be resolved by the man. And the man has to be paid.

You would also need personnel to scan the system for the suspicious products/projects and users. A nice way to save both financial and human resources on this is engaging your users to cooperate - the strategy used by Upwork.com. The platform encourages both buyers and providers to report and flag any suspicious activity they notice: jobs or invitation that look suspicious or inappropriate, profiles that contain violations of identity policy. It sends a notification directly to Upwork administrators to investigate the case and take appropriate measures. This allows marketplace owners to curb expense on admin workforce.

Retaining Users Is Business-Critical

If your marketplace is intended for repeated deals and lives on transaction-based commissions, subscription fees, or other type of reward, then retaining users on the platform becomes critical. It is natural for most marketplace users to move repetitive business out of the platform trying to bypass its commission. To avoid such circumventions, marketplace has to leverage between “sticks and carrots” and make users return for more and more deals.

Prohibit the Deals Outside of Your Marketplace

On the one hand, your marketplace Terms of Services should explicitly prohibit moving the deals off the platform. Users who violate these policies should be fined or banned. You could also limit the pre-deal negotiating phase solely to the platform space.

On the other hand, these rules should not go too far curtailing your users’ freedom. They should know of a way to opt out if/when they want to. Opting out in this case is not a circumvention move but a sound legal right of every user to continue a business started on the platform in a way they are comfortable with (e.g. offline or within another legal framework).

Upwork.com balanced between its own profit and users benefits in a great way. Per User Agreement, service byers and providers must keep business relations only on Upwork.com for 24 months or until they pay a sol-called “opt-out fee.” This means that, during this time, all payment transactions between the client and freelancer must go through Upwork. When “under the table” payments are discovered, both parties engaged get severely punished. This is an example of a strict but fair agreement between the marketplace and its users, which allows both parties to enjoy cooperation.

In terms of pre-deal negotiations, Upwork.com policy is user-friendly too. The system encourages on-the-platform communication between the users. It automatically scans the bids and messages, immediately recognizes if a stop word or the at sign (@) was typed, and reacts with a pop-up window suggesting a convenient in-marketplace messenger. Yet, it does not prohibit the users from choosing a different communication tool (e-mail, Skype, Slack, etc.).

Make Your Users Comfortable with Repetitive Deals

You could certainly restrict your users’ right to leave marketplace for repeated deals. Yet the forbidden fruit is tempting, so, instead of forcing the users to stay on your platform, make them comfortable staying.

Think of a fair and user-friendly economic design for the deals by gradually lowering the commission rates. Upwork.com, for example, starts with 20% for the first $500 billed and drops to 5% after first 10K earned.

Marketplace_Economic_Design

Other way to entoil your users is giving them effective and convenient communication and progress tracking tools (again, this is something Upwork.com already has). But - most importantly - offer value by your marketplace, and this would work as the best retaining strategy.

Building up a marketplace that offers value is not easy as administrators should first solve the eternal chicken-and-egg problem. To make the platform valuable, it should first accumulate a rich pool of users, but this takes value to attract them.

Marketplace_Value_for_Users

Here are a few tips for increasing the value of your marketplace for both categories of users.

  • Protect user rights by the platform’s terms of use: no service buyers should be able to underrate a service provider out of sheer pet peeve; no service provider could get money for a poorly done project. There should be a clear-cut system of punishments and unbiased (alright, close to unbiased) dispute resolution.
  • Encourage diligent work among service providers to earn a better rating. This would be a win-win for both user categories: providers with higher rating get access to more and more projects, and buyers - to qualified and motivated workforce.
    Upwork.com came up with a great initiative to award active freelancers with a “Rising Talent” badge, which a) encourages such freelancers to keep up and b) prevents monopolization of service by a single provider with a high rating.
  • Offer goodies and personal approach. This could come up in different forms like loyalty program tiers, educative webinars, or personal account managers for active users.
    One of numerous Upwork.com goodies, for instance, is an option to form a freelance agency. Another benefit its users enjoy is a strong community (forum) where topic questions are discussed.

To make marketplace a better place to run business, place your users at the head. Care more about their comfort and convenience, not about the revenue. In the long run, these are users who make your marketplace a success or failure.

Related articles

Tags