I detailed the process of quantifying the value that his marketplace provided to both vendors and buyers, and how to derive margins and profits from that value (and spoiler alert, I came up with a third option for mining additional value, essentially suggesting turning his 2SM into a 3SM).
During the answer, I also went into a quick rant on lazy internet marketplace startups — mind you, this had nothing to do with the question or the asker’s startup — but I threw it out there as a counterpoint.
In other words: Here’s what NOT to do.
Because I see this problem all the time. I get questions and requests for help from purveyors of marketplace startups that are fading because they’ve already made a critical (and lazy) error in their business model.
I stopped short with that rant because I didn’t want to blast the asker with fire that had nothing to do with his business.
But I’ll continue that blast in this post, in the hopes that I can preempt some of those last-minute cries for help.
What is a lazy internet marketplace startup?
A lazy internet marketplace springs from the same place we entrepreneurs get our ideas for all those easy-to-start, easy-to-monetise businesses.
Here’s the problem. Those ideas only look like good ideas when we don’t do the proper due diligence on the idea. It usually goes like this: We look at an existing business that seems to run automatically, seems to have a lot of traction, and seems profitable.
For example: Any two-sided marketplace. Let’s use the OG: Angie’s List, now called “Angi.”
Now, if you wanted to avoid the entire bad idea ordeal altogether, all you’d have to do is read about how “winner-take-all” is a defining characteristic of two-sided marketplaces or just read the history of Angi’s rise-fall-rise-fall-rise-meh.
An ounce of due diligence is worth a pound of cure.
When due diligence is skipped, one of two additional ideas gets applied to the original idea:
- “I can do this better.” In almost every case, “better” comes down to “cheaper” (the incumbent charges too much), “prettier” (they’ve fallen behind visually or culturally), or “techier” (there’s some kind of new trend like Zoom’s video or Affirm’s buy-now-pay-later that we believe the incumbent hasn’t thought about yet).
- “I can carve out a niche.” In almost every case, “niche” comes down to limiting the total addressable market (TAM) in some way — by location, by industry, by business size — but all that does is limit the ultimate potential success of the idea in the first place.
Then once this idea is realised, we Superman 3 it. For those of you younger than me, this is the idea that if we can make a fraction of a penny on millions of transactions, we can create a turnkey, automated, no-hassle, profitable business.
Here’s the problem. This theory never works, because it needs a perfect machine to work, and in real life there are no perfect machines. Otherwise every credit card company would be run by a handful of people instead of thousands.
Those folks who are more industrious than the rest (and I love those folks), then set about to build that perfect, limited, better machine. This is happening a lot more frequently, because it’s the 2020s and almost anyone can no-code/low-code or hire cheap technical talent to put a working beta of a business model online within a couple weeks.
Here’s the problem. The vast majority of those quick-and-dirty betas are nothing more than a listing of vendors and a bare-bones search option for customers. There’s no value there, because value takes time and money to create.
The vendors always come on board first, because it’s much easier to convince vendors to try a new method to find new customers, especially if that method is free. And in most lazy internet marketplaces, the vendors get to list themselves on the marketplace for free.
Here’s the problem. For every good, acceptable vendor out there, there are at least 10, if not 100, barely adequate/incompetent/shifty vendors. There’s little vetting, because proper vetting takes time and money to do.
Then the doors are opened to customers. Customer traffic trickles into the marketplace in direct proportion to the amount of marketing the marketplace convinces the vendors to do for them, i.e. “Tell all your customers and friends that they can find you on our marketplace!”
Here’s the problem. Good vendors don’t want to put a middleman between themselves and the customer. Bad vendors don’t have customers and friends to promote them (OK, that’s harsh, they probably have friends).
And furthermore, if the bad vendors were good at marketing, and maybe even good at what they do, they wouldn’t need a marketplace to find new customers.
Then the initial customer traffic dies off almost instantly, because customers realise quickly that there’s no difference between the marketplace and a random internet search. Then vendors get complacent and don’t follow up on what little traffic there is, because marketing an internet marketplace properly takes time and money.
That’s when the founders of these lazy internet marketplaces come to me. But at that point, it’s already way too late.
I mean, there’s one simple answer to this. Value. Most entrepreneurs would never waste their time starting a company built around a product where the value equation didn’t generate enough margin and profit to make the company unique.
With internet marketplaces, there’s something — probably that idea “twist” I mentioned at the top — that makes this step seem skippable.
I started my answer to the original question by stating that marketplaces were one of the best things the internet has brought us over the last 10 years, and also one of the worst, because there are so many marketplaces out there that either don’t add value or act as some kind of discount broker for products and services that should never be discounted.
The thing is, a good internet marketplace is an amazing business opportunity, but it takes the same amount of time, money, and hard work as any other business to make it successful. Maybe more.
Joe Procopio is a multi-exit, multi-failure entrepreneur. He is the founder of startup advice project TeachingStartup.com and is the Chief Product Officer of mobile vehicle care and maintenance startup Get Spiffy. You can read all his posts at joeprocopio.com
If you want more direct advice and answers, look into Teaching Startup.