How to Start an Online Marketplace

An online marketplace is a type of ecommerce business that can be rewarding to create, however, it comes with its own unique set of challenges. If you’ve ever thought of doing some online selling like the marketplaces you see online already such as Facebook Marketplace, Amazon, Etsy, or Airbnb then this is the perfect article to start off with. In this article, you’ll learn all about online marketplaces, what they are, how to start one and how to become marketplace sellers.

Ready to start online selling? Read on.

What is an Online Marketplace?

An online marketplace is an ecommerce store where multiple sellers can sell goods or services to customers. Examples of online marketplaces include Facebook Marketplace, Amazon, Etsy, Airbnb, and eBay. These online stores are considered to be online marketplaces because there are many merchants (hundreds of thousands, in fact) who can sell their products to the customers that browse the online shopping website.

Traditional ecommerce stores sell the goods and services of one brand, but not ecommerce marketplaces, which have many marketplace sellers who sell online on their site. They have a greater product offering which can draw more visitors to browse the website. One of the main advantages of online marketplaces is that they draw in lots of digital foot-traffic, which can mean greater exposure for the merchants on their site.

What unites all the online sellers together is that there’s one checkout process. When customers shop on an ecommerce marketplace, they don’t need to click away to different websites to complete the transaction, they can purchase from many different merchants on the marketplace at once, even if the merchants aren’t associated with one another.

When customers make purchases from sites like Facebook Marketplace or Amazon, the merchants they purchase from get a notification that someone has purchased their product, and then each online seller can individually ship and send the customer the products that were ordered from them.

This means that although a customer can complete just one transaction when purchasing from multiple different sellers, their products will be shipped from each seller individually meaning they’ll receive a shipping package from each merchant they ordered a product from.

Essentially, for online shoppers the experience is like shopping from several different online sellers at once, while being able to pay all the merchants in one transaction rather than in many transactions.

Another thing that unites online marketplaces together is that they usually are focused around one particular niche. Amazon, for example, started as an ecommerce marketplace of booksellers. Airbnb started as an online marketplace to rent rooms in San Francisco. Facebook Marketplace started a profile for users, which eventually lead to building a big userbase, which made online shopping possible. When they center around one niche, it’s likely to become successful because it gives consumers a reason to shop there and when they do shop there, they know what to expect from the online sellers.

It can also referred to as a “Collaborative Economy” or a “Sharing Economy” because it’s usually made up of merchants who work together to share or sell their idle assets on a community-accessible marketplace.

Why You Should Create an Online Marketplace

One of the main reasons to start an online marketplace is to either help third-party sellers sell more product and to help shoppers get access to goods or services more easily.

Online marketplace sellers benefit from you creating a place where they can sell goods, spaces or services online at a cheaper price, better quality, or in a more convenient way.

Starting online marketplaces is great because you don’t have to own any inventory to run one. This makes them an attractive option for entrepreneurs who want to provide a service or solve a pain point without investing a lot of their own capital into the business. Since merchants sell or rent their goods or services on ecommerce marketplaces, they source the inventory.

“Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate.” – Tom Goodwin

How to Create an Online Marketplace

 

There’s plenty of online literature documenting how ecommerce entrepreneurs can start their own online businesses, but those online businesses tend to focus on solo entrepreneurs who are interested in selling their own products on their own websites. That’s not how online marketplaces work, so another approach must be taken.

1. Building Online Marketplaces

The best online marketplace platform we’ve come across, and the one that we recommend building yours on, is Sharetribe.

Sharetribe is well-recognized in the ecommerce industry as being the most reliable, user-friendly and cost-effective way for entrepreneurs to start their own online marketplace. With their software, any entrepreneur will be able to build a well-designed online marketplace in the most efficient and secure way possible.

Creating one from scratch with a team of web developers would cost you thousands of dollars, but Sharetribe doesn’t cost nearly as much and you’ll be able to have your site up and running faster than if you were to completely have it built from scratch. Keep things simple, streamlined and efficient by starting your online marketplace on a hosted platform like Sharetribe.

2. Ecommerce Marketplaces Niche

Honing in on one particular niche will ultimately lead to greater success. Select a niche market that your online marketplace will cater to.

This is an important step in the process of starting an online marketplace because it will impact what you sell on your website, the merchants who sell there, and the customers who are online shopping.

Note: Need help finding a niche? Check out our free downloadable guide of 500 Niches. It lists a variety of niches in a range of different industries and it can help you think outside the box and really focus in on a niche for your online marketplace.

3. Determining Your Minimum Viable Product Category

With Facebook marketplace and others in the world, it can be easy to get wrapped up in thinking about how you’ll scale yours to service millions of consumers right away. We encourage you not to get caught up in this way of thinking, because it takes a long time to grow one as big as Facebook Marketplace, and you can still build a successful one without being a giant in your industry.

When you’re just starting out, we suggest focusing on your Minimum Viable Product (MVP) and creating that. Don’t get caught up in thinking about how you’ll create the biggest ecommerce marketplaces, just focus on creating an one that a small subset of your niche market really believes in, and start from there.

By thinking too big too soon, you’ll likely cause yourself to feel overwhelmed in everything you have to do and accomplish to get there. However, by zoning in on creating your MVP, you’ll be more likely to stick with it for years to come and that’s how you’ll grow.

Create something that at least 10 or so users can be interested in and use their feedback and experiences to grow from there. Like we mentioned earlier, Facebook Marketplace and Amazon started small too, and so can you.

4. Establishing a Budget for Online Sales

Just like any ecommerce business, starting an online marketplace will take some funds to get going. Fortunately, you don’t have to purchase or create an inventory for online selling to happen, which is pretty light on the budget. The main aspects of your budget will likely include:

• The Cost of the Ecommerce Platform: Using a hosted online marketplace platform like Sharetribe will require monthly or yearly payments.
• The Cost of Advertising to Online Sellers: You’ll need merchants with products to sell to set up shop on your online marketplace, and when you’re just starting you’re going to need to reach out to a lot of sellers to get some to actually start selling on your site. This means plenty of outreach which likely means you’ll need some cash to spend on advertising. Whether it’s advertising on social media, influencer advertising, print advertising, etc. it’s likely that you’ll have to spend money on some form of advertising to get sellers on your ecommerce marketplace.
• Cost of Advertising for Customers: Customers will not come running before they know you exist. You’ll likely have to spend some money on advertising to get customers to start online shopping on your site.

Don’t spend too much in the early days when you’re still learning. It can be tempting to pump as much capital as you have, but remember that it’s going to take some time to grow.

In the beginning, focus instead on hustling to get free advertising whether it’s through SEO or your own social media. Let your online marketplace generate its own revenue before you invest too much more into it. Even if it’s slow growth, it will help to validate your online marketplace idea.

5. Knowing Your Value

Finally, when it comes to creating an online marketplace, don’t forget to focus on the main outcome of the online marketplace. Ask yourself, what are you aiming to achieve with your online marketplace? How does it add value to those in the niche market it services.

The goal of any online marketplace is to connect merchants and customers within a niche to sell or rent goods or services, so think about how that actually works and how you want to bring that to life.

Types of Online Marketplaces

There are several different types of online marketplaces, and although they all run in a similar fashion, there are slight differences to them which can impact the shopping experience, the types of products that are sold, the customers that shop there and the service that the online marketplace promises to fulfill.

1. Physical Products

Some online marketplaces focus on selling physical products only. This means that the merchants create or supply physical products that must be shipped to the customers who purchase them.

When you have an online marketplace that sells physical products, customers will receive shipping packages from each merchant they order a product from, which can impact their user experience. It means that they’ll be receiving multiple different packages, which can be confusing for them if they don’t know to expect that. Be upfront with customers who shop on your online marketplace—if it’s a physical product online marketplace—that even though they may be completing one transaction, the products are sourced from individual merchants and the products they’ve ordered will be arriving individually from each separate merchant.

2. Digital Products

Another type of online marketplace that exists is digital product marketplaces. These online marketplaces sell digital products that can be downloaded to computers or smart devices immediately after purchase which means that customers don’t have to wait for their products to be shipped and they won’t be receiving products one-by-one from each separate merchant they order from.

An example of a digital marketplace is Creative Market, where designers and creators sell digital assets like stock photos, logo templates, graphic designs and more. We wrote a complete Creative Market Review, and we’ve even rounded up some of Creative Market’s Best Instagram Templates, which we highly recommend checking for your online marketplace.

3. Property and Spaces

Another type of online marketplace is one that rents or sells property, rooms, event spaces or locations to customers. A great example of this type of online marketplace is Airbnb, which is an online marketplace for property owners to rent out rooms, apartments, houses or properties all over the world.

This type of online marketplace comes with its own unique set of challenges, such as government regulations, property insurance, and booking confirmations that must be adhered to and organized in order to be viable and successful.

4. Services

Other online marketplaces can sell services to their customers, where merchants can rent or sell their own specialties to the marketplace. These types of online marketplaces can provide digital services that can be carried out online, such as website development services, or they can provide services that take place in-person, such as painting and restoration work, for example. For example, Fiverr is one of the top online marketplaces to sell services on.

The Challenges of Starting an Online Marketplace

 

Building online marketplaces is quite different from building online stores. Here are a few of the top challenges you can expect to face when starting an online marketplace:

1. Convincing online sellers and online shoppers to choose you

When you first start an online marketplace, attracting both merchants and customers to use your marketplace is going to be your biggest challenge. Because you’re new, you’re going to have to build trust within merchants to sell on your site and you’re going to have to make sure customers know your marketplace exists so they even think to shop on it.

It will be challenging for you to convince merchants to come sell on an online marketplace if there aren’t customers already shopping there, and it won’t make sense to attract customers to your online marketplace if there aren’t any merchants selling their inventory there yet.

By reaching out to suppliers first before attracting customers to your online marketplace, you’ll also build the inventory supply that your marketplace has to offer which is crucial for customers when they start landing on your online marketplace. Without any inventory, there’s no incentive for your customers to shop on your marketplace at all, so secure the goods and services before you start reeling in customers.

In order to start finding merchants to sell goods and services on your online marketplace, consider reaching out to merchants who are already selling on Amazon, eBay, Facebook, or Etsy. This shows that they’re already comfortable selling on online marketplaces and if you give them a good enough reason to sell on yours too, they might be interested. Look for merchants that sell products that align with your online marketplace’s focus niche.

Sharetribe’s article on How to Build Supply for Your Marketplace can be an invaluable tool to help you attract merchants to your online marketplace when you are first getting started.

2. Providing a useful service

Online marketplaces can only be successful long-term if they solve a real problem for both merchants and customers. This is why it’s so important when starting your online marketplace to make sure that you validate your idea beforehand so you don’t find yourself months or years later with a failed marketplace because it didn’t provide value to merchants or consumers.

Like we mentioned before, take your time building your online marketplace and don’t invest too much capital upfront just in case your online marketplace idea isn’t something that can withstand the test of time. It’s better to grow your marketplace slowly so you can adjust and adapt to merchants’ and consumers’ needs as you go which can result in you creating an online marketplace that provides value to those merchants and consumers and thus, becomes a successful online marketplace long-term.

Focus on solving a problem for both the merchants and the consumers, and you’ll be more likely to provide a useful service for both parties.

3. Dealing with competition

Even if you think you’ve come up with a great idea for an online marketplace, it’s likely that someone else has already thought of it, too. Competition can be a hindrance to starting and growing your online marketplace, however, it shouldn’t completely deter you from pursuing it, either.

If there’s already an existing online marketplace, then you have to find a way to compete against them. Try competing on price, selection, quality, choice, the number of merchants, the geographic area or something else that gives your online marketplace an edge over any others.

If you aren’t sure whether there are any existing online marketplaces that are in direct competition with your online marketplace idea, then be aware that there probably is someone else also working on the same idea and you will eventually have competition. If this is the case, your only option is to execute your online marketplace idea better or faster than anyone else starting a similar online marketplace, so consider how you can make that happen.

4. Marketplace Costs

Every marketplace needs to earn revenue and profit to survive, so you’ll need to determine a viable strategy to ensure that your marketplace earns the revenue and profits that it needs to last without eating away at sellers margins and scaring them away. Here are some tips on managing the costs:

• Funding needs to come from the community you’re serving, so consider how your users will fund your online marketplace
• You need to “own” each transaction which usually means you charge a commission on every transaction you facilitate. This helps you generate revenue for your online marketplace. On average, top online marketplaces charge around 20-30% commissions as seller fees.
• Focus on how many transactions occur on your online marketplace, not users. Your online marketplace exists to facilitate transactions, and that’s likely how you’re going to be earning your revenue, so that’s the most important metric to keep track of.
• Think about how you will pay your merchants and how they will earn revenue from providing your online marketplace with inventory. You also need to consider when to move each transactions’ money from the customer to the merchant. It generally makes sense to only transfer the money from the customer to the merchant when you’re sure the customer will be receiving the goods or services they paid for, without any issues, such as refunds.

For great information on financing your online marketplace, check out this article on How to Design Your Marketplace’s Transaction Flow.

How to Run a Successful Online Marketplace

 

1. Select An Online Marketplace Business Model

Your online marketplace business model will impact how you will earn revenue and profit and how your merchants will earn revenue and profit, as well. It’s a fundamental aspect of every online marketplace and one that you should decide on before you launch.

The different types of online marketplace business models you can choose from include:

• Commission-Based Business Model: This is the most common type of online marketplace business model and means that you will earn a commission from every transaction that takes place on your online marketplace. It’s an ideal business model because you’re guaranteed to earn revenue from each transaction and it builds trust within merchants and customers because they know that facilitating successful transactions is important to you because you have a stake invested in it.
• Membership/Subscription Fee Business Model: This business model sets up your online marketplace so that each merchant or customer pays a membership fee in order to sell or buy on the online marketplace. Using this business model ensures that you get a consistent amount of revenue monthly but it can also deter merchants and customers from using your online marketplace.
• Listing Fee Business Model: By using this business model your online marketplace will charge merchants a fee for listing their goods or services on your online marketplace. The listing fee could be based on a flat-rate amount or a percentage of the value of the good or service, and it’s typically used when there’s value in how many listings a merchant has posted on the online marketplace.
• Lead Fee Business Model: This business model is more common in Business-to-Business (B2B) industries, as there’s often a lot of value at stake. When using this business model, the customer posts a good or service they’re looking for and merchants pay a fee in order to bid for the work. This isn’t a very common online marketplace business model, but it can work well for some industries.
• Freemium Business Model: This is a great business model for online marketplaces that facilitate sales of low-cost items. When using this business model, merchants and customers can use the online marketplace for free, and the online marketplace will offer other services to the merchants and customers can purchase that boost the value of the online marketplace. These types of services could include providing insurance, vetting services or delivery options.
• Featured Listing & Ads Business Model: When using this business model, merchants can often list their goods or services for free on an online marketplace but in order to promote their listing to a viable audience, a fee must be paid. This ensures merchants use the marketplace but the online marketplace can still earn revenue from merchants who are eager to sell their goods or services.
• Any Combination of These Business Models: Oftentimes, these business models are combined together to create more favorable conditions for merchants to sell their products and for online marketplaces to earn consistent revenue.

2. Create a Positive User Experience

A large part of creating a great online marketplace includes creating a great user experience. If merchants can’t run their online business or customers can’t do their online shopping the way they want to, then they’ll simply go elsewhere.

Make it as easy as possible for customers and merchants to connect with one another so a transaction can take place. There are some important aspects you can integrate into your online marketplace to help make this as efficient as possible:

• Have a Smart Search Function: When customers come to your online marketplace with a purpose, a search function is going to be instrumental to their success. Make sure you have a smart search function embedded onto your online marketplace so customers can use it to find exactly what they’re looking for as quickly as possible.
• Make Your Marketplace Browse-able: Some customers may come to your online marketplace knowing exactly what they’re looking for, while others may not. Customers who aren’t sure what they’re looking for need a way to browse through your marketplace, so make your online marketplace friendly for browsers. This could mean using categories, filters, and menus to help browsers navigate around your marketplace.
• Use Systems: If you’re providing services, in particular, or if your online marketplace is focused more on renting items rather than selling them, you may need to use certain systems to ensure that everything operates smoothly. These types of systems could be calendars, booking systems, maps, etc. and could be essential to how your online marketplace operates.
• Merchant & Customer Profiles: It’s likely that merchants and customers will need to create profiles on your online marketplace to ensure that they can create listings, access their purchase history, manage their orders, etc. so your online marketplace will need to be equipped to handle these profiles and define how they’re able to interact with one another. Keep in mind that most people prefer to check out as Guest, so don’t forget to add that as an option for customers.
• Mandatory Listing Information: It will be useful for you to determine upfront what kind of information merchants on your online marketplace will have to include in their listings so it can remain consistent across all merchants. Having consistent information across all third-party sellers will help customers make informed purchasing decisions which can drastically affect their experience on your online marketplace.

Best Practices for Launching Online Marketplaces

When it comes to bringing your online marketplace to life, your launch will play a role in how your marketplace continues to progress over the course of its lifetime. Utilizing promotion channels like an email list, advertising, press, influencers and online communities such as Product Hunt to get the attention of people who might be interested in what your marketplace has to offer.

No matter how you choose to draw attention to your online marketplace when it launches, it’s arguably most important to build trust within each and every user that enters your website as soon as you launch. No matter how many people your promotion tactics bring to your website on launch day, focus on building trust within them as they experience your online marketplace.

Tactics to instill trust in visitors to your online marketplace include:

• Create a Good First Impression: How your website looks, the types of products you sell, the quality of your merchants and their products, your FAQ Page, and your About Page can all affect a visitor’s first impression so put in the work to make it a great impression.
• Have Inventory Ready to Sell: Make sure there are products ready for your customers to purchase. You don’t want to be driving visitors all the way to your website with nothing for them to actually buy.
• Be Transparent: If there is still room for improvement on your marketplace, let customers know that you’re working to make things run more efficiently and that you’re putting in effort behind the scenes to make it the best possible online marketplace experience for them. Customers appreciate transparency, so if you experience any hiccups throughout your launch, be sure to let customers know what’s going on.
• Be Honest: No matter what your online marketplace promises customers, make sure you deliver on it. Don’t make claims you can’t fully commit to.
• Allow Reviews: Customer reviews help all websites build credibility, so leave a place on your online marketplace for customers to leave their thoughts and feedback. Customer reviews are generally non-biased in favor of the brand, so other customers are more likely to trust what they have to say. You may not have any reviews when you first launch but as your brand grows you’ll be able to accept reviews as they come.

Note: Need more help with launching your online marketplace? Check out our downloadable Ecommerce Launch Checklist to ensure that you cover all your bases.

Conclusion

You’re now well-equipped with the knowledge to start your own online marketplace. Remember that choosing the right niche will be what sets your website apart from other marketplaces in the industry. Focus on getting suppliers for your marketplace first and then instill trust into every visitor that lands on your online marketplace after launch day. Have a good online marketplace idea? Get started!