Marketplace businesses are exciting, but growing them can also be challenging. Creating supply and demand, figuring out how to retain customers, and knowing how fast to scale the business are just a few of the challenges you’ll likely face, and there’s no “one size fits all” approach for solving them.

Fortunately, there are plenty of success stories out there from entrepreneurs who managed to crack the block—and Carey got to talk with some of them at our last Growth Snacks event. Here are 5 key takeaways from our panel on growing your marketplace business.

Our Panelists

Lesson #1: supply vs. demand: the “chicken & egg” problem

The “chicken & egg” problem is the single biggest hurdle most new marketplaces face. Basically, you’ve got to establish supply and demand—but when you start out with neither, it’s hard to do. That’s because you need to convince one side of the market to commit before the other.

So what’s the answer? Should you focus on supply first and hope the demand shows up, or try to build demand first and worry about meeting it later? Or can you balance the two, working on each side in lock step to drive transactions?

According to our panel, most marketplaces focus on supply before demand (DoorDash, Etsy, and Eventbrite are just a few examples). Other companies like Zillow and Taskrabbit established demand first—but for many marketplaces, supply can actually create demand.

Don’t believe us? Take it from our panelist, Lauryn Vaughn of ReUpp Technology:

“When we started, we really focused on supply. In early 2015, when you looked at the Canadian Landscape in Luxury Resale and what was out there, there was really very little available online. So for us, it was about creating momentum on the supply side

“We did a lot of initiatives for marketing, so if you consigned more than 10 items you got a $100 gift card to Holt Renfrew or Nordstrom—just some creative things in the community to try and build supply before we even had a platform or a business.”

Lesson #2: Constraining your market

In the early stages of growth, constraining your marketplace is vital. Why? Easy—it means you reach critical mass (where you have enough producers and consumers to drive transactions consistently) way faster.

There are two main ways to constrain a marketplace: by geography and by category. Let’s break them down:

  • Constraining by geography: this is what you’ll do anytime your marketplace requires supply and demand to be in the same physical place (like a ride-sharing service or a delivery app).
  • Constraining by category: this is what you’ll do if your marketplace is global. For example, marketplaces that start online typically limit the product types they focus on so that they can attract an audience of people who are specifically looking for them (like how Amazon started out only selling books).

Lesson #3: Kicking off growth (the right way)

The best way to grow your marketplace depends on whether you’ve chosen to focus on supply or demand first (or whether you’re trying to build them together). It also depends on how you’ve chosen to constrain your marketplace.

Skip the Dishes is a great example—a company that focused on supply before demand and constrained their marketplace geographically. By starting out in a single city and using direct sales to build a local network of restaurants, they quickly reached critical mass and proved the business model for use in other cities.

Then you’ve got Etsy, which focused on demand and constrained their marketplace by category. By focusing on vintage items, craft supplies, and handmade goods, they tapped into an existing need for these items and continued to grow via strategic partnerships and smart PR.

Lesson #4: word of mouth matters

Having people talk about you is a massive indication that your product and market are right for each other. Most successful marketplaces consider word of mouth to be their most effective growth channel, even though it’s not really a growth lever per se.

So yes—you should be spending on things like paid search and social media (especially for supply-side marketplaces) and SEO (for demand-side marketplaces). But it’s also worth figuring out how much of your growth is coming from good old fashioned gossip, so you’ve got an idea of whether your customers are excited about what you’re doing.

You should also make sure you’re talking up yourself. Put simply, you can never be too forward about approaching prospects. In the words of our panelist, Grant Lahring of Goodlawyer:

“The biggest question I get asked is, ‘I’m doing sales but it’s just not working that well. What should I do?’ And my first step is always to ask about volume.

“It can be really discouraging to get a 10% conversion rate, for example—you talked to 10 people and only one of them said yes. You might say that’s terrible, but I would say that’s typical. If you want to get 10 customers, then you should have approached 100. Think that way, and then it kind of becomes really clear what you have to do on the sales side. Is it wildy efficient? No, but that’s not the point—it’s effective.”

Lesson #5: scaling slowly

Lastly, our panelists caution against scaling up your marketplace too fast. Instead, they recommend putting in the time to learn about other markets before you invest in them.

For instance, maybe instead of expanding to the west coast as soon as you can, you drive out to Victoria and sleep on a friend’s couch so you can make a local sale first. Will it help the business scale? No. But it will give you valuable firsthand knowledge of how that market is different—which can help you plan how best to enter it later.

Laying that kind of groundwork can also help you get a better understanding of what your value is to different customers. As panelist Shanika Abeysinghe of Bessie puts it:

“Really understanding the customer early on would have been helpful. Don’t make the mistake of thinking that you’ll be for everybody, because that’s not real.”

Want more? Join our next Growth Snack!

Knowing what to focus on is one thing, but knowing how to do it effectively is another. If you’re hungry to learn more about growing your business sustainably, make sure to sign up for our upcoming Growth Snacks events!