How Much Money Do You Need for Starting an Online Marketplace?

in Business, Business models, Marketplace by Sebastian on November 26th, 2019

Okay, so your dream is to build next Uber, Airbnb, or Upwork? You’re in the middle of the golden age for creating an online multi-vendor marketplace. However, without the right technology behind and an MVP under your fingertips, your brilliant idea for an application is not enough. In this article, we’re going to take by the hand through the corridors of marketplace development. And most importantly, you will find the answer to one vital question – how much would it cost to build an online marketplace?

We admit it. The vision of conquering the digital stratosphere with an outstanding marketplace is enticing. The success stories of products like Uber or Airbnb have made their way to numerous publications about growth hacking.

But we’re also not going to lie to you – the moment a lightbulb shows up over your head with an outstanding idea for another digital disruption is hardly a guarantee for a cash-streaming success.

The harsh reality boils down to this sentence – without releasing an MVP of your marketplace, your million-dollar idea is worth… one dollar or less.

How to transform your concept into a revenue-driving product? This is what we’re going to find out.

But first, let’s start with the rudimental:

How do online marketplaces work?

Over the last decade, the sharing economy and gig economy have tremendously change the business landscape and our habits as consumers.

“Access over ownership is a shift that has taken root, as digital and mobile technologies make it even easier to access goods and services on-demand. It is no longer a millennial preference, but a part of modern society.” – says April Rinne in the article on World Economic Forum.

Examples? It has become a natural choice for freelancers to search for gigs on Upwork or Fiverr and completely redefined the way people look for travel (Airbnb) and commuting (Uber, Lyft) options.

Online marketplaces are the middle ground where demand and supply meet each other. We’re talking about an environment where vendors and clients find the best way to make a deal. A vendor will be able to showcase the listing of what it has to offer, and a client will spot a product or a service that will be an answer to her or his needs.

Those transactions, at the end of the day, will ideally generate scalable income for the marketplace owner.

Sounds like a plan?

How to start up an online marketplace?

Your interest in building a marketplace comes in line with the latest trends. PWC conducted a study about the condition of the collaborative economy (which is the heart and soul of marketplaces), and here’s what they found:

“...while in 2013 the sharing economy companies in the five sectors where the new business model is the most prevalent earned sales revenue of 15 billion dollars, by 2025 this will have risen to 335 billion dollars, so half of the revenues in these markets will go to companies with a sharing-based model.”

Exciting?

It’s great to aim high, but it’s wiser to be rational and prepared at the same time. The first year of your marketplace’s existence can be tough, and likely, it won’t generate your income … at all.

That’s why the best way to launch a new online marketplace, is to validate your business idea first. How? By adopting the lean startup approach.

Minimize your risk by going lean

This is the ultimate way to make that happen. Instead of overspending time and money on developing a complex and perfectly-functional platform and setting it loose to the wild, you need to do something opposite.

The lean startup methodology that influenced startup communities all over the globe, comes down to the idea of handling a very raw version of your product to your potential clients. This way, you will save yourself from the possible fiasco, and to check whether your idea for a marketplace is worth a bigger shot.

If the MVP missed the target… Well, it won’t hurt that much as it would be if you launched a full version of the product, lost a fortune, and possibly never recover.

A side-effect (which is, in fact, a marketing milestone) of letting your target clients experiment with your application or a website, is that you will be building a strong relationship with them. This kind of emotional bond or loyalty to your brand is a priceless asset, especially in our times where customers are usually vendor-agnostic (which means they easily bounce from one vendor to another).

Why should you build an MVP first?

The Minimum Viable Version of your marketplace is the only way to go. Choosing the agile way to develop your web product equals following a process of design sprint workshops.

At DeSmart software house, we break the workshops into five days of the creative and productive hard-work festival:

  • Day 1 – Discovery. Your journey to creating a marketplace website begins with getting to know your business assumptions and your customers’ needs and pain points.
  • Day 2 – Sketching. That’s putting down all the ideas like there’s no tomorrow and sketching the features of your future product.
  • Day 3 – Ideation. The third day is brainstorming at its best. You will be amazed by how many ideas you can come up with. But the real deal is about evaluating them on the move.
  • Day 4 – Prototyping. All the brilliant concepts can now be dressed in a body. This lab-generated prototype can now be put to the test.
  • Day 5 – Testing. Finally, it’s time to check how the first version of your marketplace performs. This stage empowers you with some golden feedback from your end-users and gives you enough material for upcoming iterations.

There are a few solid reasons to decide on building an MVP:

  • First, you save your time. If you went for developing the complete solution, it would take months to deliver that. And most probably – your competitors can come up with something similar but simpler during that time. If that happens, you’re in a fix, because someone will already meet your target customers’ needs and you’ll end up with a website that is a bit off.
  • Second, you save your budget. It’s way less expensive to create an MVP. As we mentioned earlier, even if your MVP fails to conquer your niche, you’re not risking losing a fortune.
  • Third, with MVP you’re doing marketing from the start. You validate your assumptions and guesswork fast, and you know where to go from there. Your early adopters give you insights you could dream of, and most importantly – they participate in creating your marketplace, which makes them more likely to stay with your brand for longer.

What is the technology behind online marketplace?

To put in simply – how to create an online marketplace? What are the components of the website that need to be taken care of during the development process?

At DeSmart, we categorize those aspects to make maximum sense. The ultimate goal is to create a marketplace with all the essentials:

  • Modular flexibility – with modular web design, you can be sure that your website consists of reusable, autonomic components, that you can later flexibly repurpose as your marketplace evolves.
  • Search & Listings – think of eBay, Amazon, or perhaps – Discogs. There is no chance to have a functional marketplace without a search field or listings of products or services. Seamless user experience is at stake - people have to find something they’re looking for, and they need to do it fast and conveniently.

    We have two case studies in mind, that serve as great examples of how DeSmart delivers smooth search fields.
    The first is Oliv.com - a platform that helps students and fresh graduates to find their first jobs. By implementing the Algolia search tool, we managed to boost the site’s efficiency, page speed, and enhance the user experience. The second project from our portfolio is a marketplace for booking venues for events. With venues scattered over UK, Australia, Singapore, and Ireland - the Tagvenue.com needed a solid piece of search tool with a select to narrow down the results to a specific city, and a handy virtual map with venues placed on it.

  • Ordering Features – this is another fundamental aspect. It seems obvious, but your end-user will have to find buttons to proceed with the order.
  • Store Management – you will have to equip your future vendors with tools they will use to upload their products, edit images and descriptions, and so on. Let’s come back to the Tagvenue story. What we did there was enabling venue managers to make their property stand out from the crowd. Photos and descriptions are a good starting-point, but Tagvenue offers also include the icons like a number of seats, standing capacity, or catering options.
  • Payments – this is the direct way you will monetize your digital business and a crucial part of your marketplace development. With our developers, you will be taken care of when it comes to global payment gateways and systems.

    Example? While working on developing the Oliv.com platform, we have decided to implement two payment solutions: the Checkout payment system for job seekers, and the Telr payment gateway for companies looking for future employees.

  • Checkout – closely related to the previous one, you cannot imagine a vendor-customer web platform without a checkout form and a fast checkout track.
  • Chat & Notifications – Real-time communication with vendors and customers is a common and valuable tactic. However, if overdosed like on Facebook, it can drive your end-users crazy.
  • Analytics – every digital business project needs to have its KPIs. To be able to determine whether the performance of your marketplace meets your objectives, you will dive into metrics like: GMV – Gross Merchandise Volume, AOV – Average Order Value, Rake (or “take rate” which stands for the percentage of the GMV), Buyer / Seller Overlap, Buyer-to-Seller Ratio, TBS / TPS (Transactions per Buyers / Transaction per Sellers – for instance the TBS / TPS for Airbnb is 1/70, for Uber – 1/50), and more!

    But there’s much more to it! You can narrow down your analysis to specific actions taken on your marketplace. What can be on your radar, is not only the number of completed transactions. You can also track other events like product selections, product searches, filtering, or viewing particular pages. The technology behind it is called Event Tracking, and if you do this right, you will be able (for instance) to track and analyze the path that your user took to get from typing something in your search field, to entering his credit card number in the checkout form.

    Oliv.com will again be a primus-case of how we covered the Event Tracking for the sake of the marketplace’s analytics.

  • Marketing and SEO – When it comes to marketing, the entire lead startup and MVP-building process is a pillar of your marketing strategy. In terms of the marketplace development itself, we ensure the branding customization of the platform to meet your brand recognition.

    As for the Search Engine Optimization, there are a plethora of development aspects to cover, especially with regards to Google’s Mobile-first Index (it’s a bit too early to state how their latest algorithm change will influence any of this). Take a deep dive into the SEO development know-how and read our complete guide on how to implement the best SEO practices on your website.

  • Service and Support – it brings convenience and user experience to another level. The way Airbnb handled their Help center – class!
  • 3rd party integrations – power up your multi-vendor online marketplace with multi applications. For instance, you can level up your communication with a seamless chat tool - take a look at what we deployed for Oliv.com marketplace.

So, knowing all this, we can answer your one fundamental question:

What are the start-up costs for an online marketplace?

How much would it cost to build an online marketplace? To build your online marketplace from scratch with an experienced and highly-skilled software house, you will need to prepare yourself for having a budget for the development itself 50,000 EUR/GBP/USD.

You need also to have in mind that you need another 50k to be assigned for creating and deploying your marketing strategy with the entire set of marketing activities.

Next step: from MVP to getting traction

As soon as you created your MVP and came out victorious from the validation process, it’s time to take your marketplace to another level. This comes to getting traction.

What does it mean in practice? Let’s say you already have gathered a community around your product or showed up in theme groups where your potential customers are active. What we have in mind are Facebook or LinkedIn closed groups, or niche channels on Slack.

Without pitching any sales, encourage them to test your website by taking an action. That would be creating an account or uploading a product. Ask them for a feedback and make them feel special by rewarding them with any bonus your product can deliver at that stage.

The grand final: expansion

The brutal reality for startups is that the vast majority of them don’t survive after clashing with the market. But the robust ones do, and we believe that’s you!

After launching your MVP, pursuing further iterations, testing, stabilizing, there comes a time when you start wondering how to scale it up.

Some entrepreneurs decide to exit the business and start something new, but the other option is more enticing – making it grow, hiring smart and creative people, getting more sellers and buyers gravitate to your website.

To expand to other markets, you will need to ask for a back-up. There are loads of venture capital investors out there, but it’s quite challenging to pitch them. You can prepare yourself for it by trying out the Pitchbot, a tool create for simulating pitches addressed at seed funds, startup incubators, angel investors, and VC companies.

Are you ready to start building your marketplace?

Let’s wrap it up. By now, you know:

  • How to build a marketplace startup,
  • What is the best way for an online marketplace to start,
  • And what is the actual cost of starting an online marketplace.

To make it all become reality, you need to:

  • Team up with an experienced software house,
  • Make the most of a set of design sprint workshops,
  • Create an MVP and validate your business assumptions,
  • Iterate, test, gather feedback, iterate…,
  • Expand and grow with the help of a VC.

Are you ready to start? Let’s talk!


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