How to validate your marketplace business idea?

Over 6000 mobile apps were released via the Google Play Store every day in the first quarter of 2016.

That’s over 6000 business ideas that came to fruition.

Imagine how many more, business people like you and I, have abandoned or failed to launch.

Unfortunately, it’s rarely the case that a business idea that comes to our minds is unique. 

In fact, if you’re thinking about something right now, the odds are that someone’s already doing it.

But that doesn’t mean you shouldn’t try. Especially if you look at the following figures.

Recent research predicts that the sharing economy revenues will double by 2022, reaching over $40 billion.

Now that sounds like the kind of stakes that are worth pursuing.

And you can bet – many people are already doing something about it.


So why over 50% of them fail in their first five years?

There are many reasons for that.

Some don’t have enough financing. Others ignore the importance of marketing and sales. And there are those who failed to validate their business idea in the first place.

That’s right. You might think that you have a great business idea.

You’ve figured:

I’m going to build a marketplace platform. I’m going to attract thousands of customers and providers, and make tons of money on commissions.

The reality is often different.

Many marketplace platforms fail to attract customers and providers. Or they do attract them at first but end up losing their users in the long-term.

Some platforms succeed in attracting a reasonable number of customers and providers but end up failing nonetheless. Why? Because the transactions – source of their revenue – don’t happen all that often.

And there are many more scenarios like these.

On the other end, there are many marketplace platforms that do succeed.

Here’s a list of ten successful SaaS enabled marketplace platforms from various industries.

While luck may have been one of the factors that played a role in their success, there usually are solid reasons why some platforms succeed.

And by validating your idea first you can increase your chances of building a successful marketplace platform.

Below, we’ll show you the key steps you should go through to confirm your business idea.

Take your time to analyze what you’ve come up with. 

Tick all the boxes that apply. 

And if you’re looking for professional services, our digital agency can develop a marketplace platform for you.


5 steps to validating your marketplace business idea

Before we dive in and explore how you can confirm your business idea, it’s worth noting the benefits of this process.

It will help you:

- Find out if your idea answers a real ‘problem’.

- With marketplaces, this should be a problem that both of the parties are struggling with.

- Find out if people are willing to pay for the solution.

- It could be that your service would be ‘nice to have’ but not essential or worth paying for.
Find out if it’s worth your resources.

- Even if people are willing to pay for it, the ROI might not be satisfying as the frequency of transaction’s too low or the market’s too small.

- Find out if the business is scalable.

- Is it possible to go beyond your initial niche or market and benefit from the economies of scale?

- Find out if the risks aren’t too high.

-Your business may be subject to changes in regulations or a bigger player could be expanding and entering your market.

As you can see, there are many benefits to validating your business idea.

At the end of the day, it helps you save time and money. It helps you focus on ideas that are worth working on and leave out the ones that are either too risky or have little growth potential. 

Now let’s see how you can actually do this.

Search the market for similar solutions

#List all your assumptions

#Talk to your target audience, a.k.a.potential customers and providers

#Conduct more-complex analysis

Build an MVP

 

1. Search the market for similar solutions

Before doing anything complex, start with the simplest and most obvious of activities – research the market.

The chances are that someone’s already developed a marketplace like the one you imagined. 

There could also be companies that were doing it in the past, but they shut down and no longer offer such services.

If you don’t know the market well, the likelihood of finding existing marketplaces that solve the problem you’ve observed is pretty high.

But if you’re working on a project related to a market you already know, the odds of finding an unserved niche are in your favor.

This simple process has two main benefits.

If you do find potential competitors you can analyze their performance.

Through the analysis you should be able to answer the following questions:

 - Is my idea better than theirs?

 - Is the market big enough for another platform?

 - Would customers and providers make the switch?

 - What are the chances that the other platform will improve?

 - Is it worth to develop another marketplace?

- So, what about the situation where you do find that there was, in fact, a marketplace like the one you came up, but it didn’t survive?

Again, you should analyze the situation and answer the following questions:

- What happened that the business didn’t last?
- If it’s because of the market conditions, are they still the same?
- If it’s because of their bad business decisions, will mine be different?
- If it’s because of the target audience, is the situation still the same?

This process isn’t meant to discourage you from doing what you’re passionate about.

It’s just meant to help you focus on the right projects. Those that are worth being further analyzed and developed. 

Rather than coming up with another Airbnb, Uber, or UpWork, it’s probably better to work on a niche that’s unserved.

I’m not saying it’s impossible to create something better than either of those platforms, but it’s better to focus on ideas that don’t require millions of dollars in the marketing budget.

2. List all your assumptions


You might not want to agree with this heading, but let’s look at it this way:

Every business idea is based on a list of assumptions. Assumptions about the market, the target audience, the future revenue, the costs, and other such elements.

That is why every new business concept should be analyzed with the help of additional tools and models.

One such tool is the lean business canvas, which is a quick and simplified version of your typical business plan.

Lean Canvas

Source: Leanstack

The template developed by Ash Maurya, helps you quickly list the key elements surrounding your new business idea.

These are categorized into:

 - Problem (incl. existing alternatives)

 - Solution

 - Key metrics

 - Unique Value Proposition (UVP) a.k.a. Unique Selling Proposition (USP)

 - Unfair advantage

 - Channels

- Customer segments

- Cost structure

- Revenue streams

But in the case of a marketplace business, you have two key audiences – the customers and the providers.

That’s why instead of using the lean business canvas, you may decide to use its adaptation, the marketplace canvas developed by Kate Logan.

Marketplace Canvas

Source: Kate Logan

The idea is roughly the same, but it helps you focus right away on both of your target audiences.

And since your business can’t exist with only one of them, it’s critical to look at the simultaneously.

Going through this process will probably take you some time. 

But once you’ve completed it, you’ll have a good overview of what you want to develop. You’ll learn also what it takes for your idea to be turned into an actual business. Finally, you’ll reduce the risk of failing or acting upon a concept that doesn’t have significant potential.

 

3. Talk to your target audience, a.k.a.potential customers and providers
 

Your next step should be taking all your listed assumptions and talking to your target audience.

This process is crucial, especially if you don’t have a lot of experience in this particular market. 

So, what’s the point behind this step?

It’s simple.

It’s to confirm that the business idea you’ve come up with, makes sense.

And by making sense I mean that it solves a true problem. One they want to solve and are willing to pay for.

Let’s take an example.

A marketplace that connects car-repair shops and customers who want their cars fixed.

The idea behind it was to make it easier for car-repair shops to build a better presence online, find new customers, and manage their jobs more effectively.

For customers, it allowed them to search through and review places where they could get their vehicle fixed.

This is an actual business that did not last too long, where I live.

And why was it a flop? 

Because if you talked to any car-repair shop owner, they wouldn’t complain about not having enough customers.

In fact, it’s usually the opposite.

That’s why many of them don’t even bother to set up anything beyond Google My Business page and adding their address to Google Maps.

On the other side of the equation, you had the customers who preferred to call the shop directly, once they’ve found one they liked best.

The platform was a fiasco because it didn’t solve a real problem. Sure, for a new car-repair shop finding new customers may be difficult, but that’s a small fraction of the market.

This could have easily been avoided. 

By talking to someone who knew the market well.

As you can see from this story, interviewing or talking to your target audience is crucial.

You need to understand their behaviour and motivations before you start developing the actual platform.

And who knows, maybe your interviews will help you identify some of the key segments in the market. Those who’re worth focusing on and are willing to pay for your idea.

4. Conduct more complex analysis

Some would already go out and start building things. I’m more on the cautious side.

That’s why my advice is:

Cover all the grounds before you invest too much in your idea. It’ll save you from some unpleasant surprises, later in the future.

One way to do this is to supplement your business-plan or marketplace canvas with this platform design toolkit.

Like the name implies, it’s not a single canvas but an array of frameworks, each of which helps you focus on individual critical areas of platform design.

These canvases are:

 - Ecosystem canvas

 - Entity portrait

 - Motivation matrix

 - Transaction board

 - Learning engine

 - Platform experience

 - Minimum Viable Platform (MVP)

Although going through all these frameworks is a lengthy process, it’s going to help you get a full overview of the market you’re about to enter.

For instance, they’ll help you identify and pinpoint key stakeholders or entities that play part in your ecosystem.

They’ll also help you focus on their motivations, so you’ll be able to better adapt your strategy in terms of education, pricing, and promotional activities.

On top of that, the frameworks should provide you with guidance through the last step I’m about to discuss i.e. building a Minimum Viable Platform.

The link I’ve shared above also includes a handy user guide. So if you decide to explore these canvases, be sure to download it, too.


5. Build an MVP

Finally, it’s time to develop something. Your MVP, which stands for Minimum Viable Product.

The idea behind MVP is to develop a product that satisfies the early adopters with sufficient features.

In other words, it’s not the full version of the product but something that can already be presented and tested by a subset of your potential users, to help you confirm your assumptions.

Take Airbnb as an example. 

Their platform as you see it today is robust. It lets you search through houses and rooms, based on different qualities and features, across the entire globe. 

But their minimum viable product wasn’t anything close to what they’ve got now. 

In fact, it only targeted one specific demographic, at one event. 

That’s all they needed to confirm that they were onto something.

Another famous example is Dropbox. 

Today, it’s a cloud-based file-sharing solution for individuals and big companies alike. It’s got lots of great features that let you access your documents on all your favourite devices.

Just a few years back, Dropbox wasn’t nearly as sophisticated.

But they knew they were onto something when they started getting replies to their beta-testing invitation which they’ve done over this simple video that you can watch below.

Needless to say, it was a hit. 

And as you can read more on in this article from TechCrunch, thanks to this stunt, their beta waiting list grew from 5,000 to 75,000 people overnight.

 

Other than getting people interested and letting them test your product, developing an MVP has another benefit.

It’s to gather feedback from your audience. To learn what they think of the solution, what they’re missing, and what they like. 

In essence, the purpose of an MVP is to learn what you need to build.

Because up until this moment, all you had was a vision and a list of assumptions. 

The moment people start testing your product and providing you with constructive feedback is when you start seeing the clearer picture of what your platform will become.
That doesn’t mean you won’t have to pivot later on in the future, but that’s a topic for another book. 

In fact, there’s already a book that talks about it and you might have even heard about it, it’s called Lean Startup.

As Eric Ries stresses in this book, companies that want to be agile, have to be ready to pivot or in other words, change their direction. 

Otherwise, they may end up focusing on an idea that’s doomed to fail.

Only because they had already invested in it so much, that they don’t want to look at the data objectively.

Summing up

Coming up with a business idea might sound like the hard part. 

In reality, what is hard is finding the right business idea.

But taking into account how high stakes are ($40 billion in 2022), developing a marketplace platform may be the right thing to do.

And when you find the holy grail, be sure to hire the best agency to develop that marketplace for you :)

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