Exploring Marketplaces

Understanding How Marketplace Products Redefine Commerce

Feb 11, 2025

Digital marketplaces have transformed the way we buy and sell things. They enable a vast network of participants to efficiently discover, evaluate, and exchange products and services. Marketplaces such as Amazon, Airbnb, and Uber have demonstrated the incredible potential of this business model, inspiring startups around the world. Marketplace products have the potential to transform industries, empower people, and create unparalleled economic opportunities by facilitating commerce at scale.

What Is A Marketplace?

A marketplace connects demand (people who want something) with supply (people selling that thing). They have been a part of human society since the beginning of civilization. While what, how, and where we buy and sell have evolved, our basic need to exchange products and/or services has persisted.

Marketplaces remove friction between buyers and sellers.

Marketplaces serve customers on both sides of the market. Buyers and sellers participate in the marketplace because it makes exchanging products and/or services fast, simple, and easy. The marketplace takes away the friction from commerce. They do this in several ways, such as secure payments, reliable reviews, transparent pricing, etc. For example, Uber connects drivers with riders, allowing the drivers to earn money and the riders to reach their destination.

Marketplaces take advantage of network effects.

As more users participate in the platform, the marketplace becomes more valuable to buyers and sellers, which attracts more people to the marketplace. This creates a self-reinforcing cycle of growth. For buyers, this means a greater selection of product offerings and competitive pricing. For sellers, this means access to a bigger market and more opportunities to sell and cross-sell. The bigger network also means better matching and increased trust, making the marketplace more appealing to both sides.

Marketplaces are incredibly scalable.

Unlike traditional e-commerce platforms, marketplaces (typically) do not have to have their own inventory, making them highly scalable. The sellers are usually responsible for delivering the products and/or services to the buyers. This allows marketplaces to onboard new sellers quickly and expand rapidly into new categories and markets without the financial burden of sourcing and managing inventory. However, some marketplaces take on a more active role in logistics (storage, distribution, etc.) to improve customer experience.

Types of Marketplaces

Consumer-to-Consumer (C2C): Marketplaces that facilitate the exchange of products and/or services between individuals. Examples: eBay, Facebook Marketplace, Poshmark.
Business-to-Consumer (B2C): Marketplaces that facilitate the exchange of products and/or services between individuals and businesses. Examples: Airbnb, Amazon, Expedia.
Business-to-business (B2B): Marketplaces that facilitate the exchange of products and/or services between businesses. Examples: Alibaba, Amazon Business, Upwork.

The Marketplace Business Model

Marketplaces make money by removing friction between buyers and sellers. This helps customers save time, effort, and money. At scale, marketplaces can create and capture a huge amount of financial value by increasing the volume of transactions between participants. They generate revenues in a few different ways, depending on the nature of the products and services, such as:

They charge a listing fee to advertise products and/or services in the marketplace.
They charge a transaction/commission fee for transactions in the marketplace.
They charge a membership fee to participate in the marketplace.

How to Build a Marketplace Business

Select The Right Market

Marketplace businesses have to identify where they have a sustainable advantage in acquiring either supply or demand. This creates a strong incentive for people to join the marketplace. While there are many considerations when deciding which market to target, a good market has a few characteristics:

Range: Choose a market with a lot of sellers. Buyers like having more choices because it increases the likelihood of finding something that best meets their needs. Sellers want to be in competitive marketplaces because it gives them a shot at taking customers away from similar sellers. A broad selection makes your marketplace as a whole more attractive to customers.
Frequency: Sell things that customers are likely to buy frequently. Buyers want a one-stop shop to easily buy things they need repeatedly. Sellers like repeat business because it means more chances to sell to customers. High-frequency purchases also mean a higher volume of transactions occurring in the marketplace, resulting in greater revenue.

Optimize Supply And Demand

Starting a marketplace business is a challenge. You have to convince enough buyers and sellers to participate to make the marketplace attractive. However, buyers will resist joining if there are not enough sellers, and sellers will resist joining if there are not enough buyers. When you have neither supply nor demand, it’s challenging to get the flywheel going. Therefore, you have to start by convincing one side to commit before the other side. Often, the right move is first to secure the supply.

The main product you’re offering in a marketplace business is your supply — not your software. Therefore, building up supply is the priority for early-stage marketplaces. Initially, all your software needs to do is connect supply with demand and facilitate transactions. Many marketplaces have succeeded because they channeled their resources into growing supply early on. At a certain point, it gets a lot easier to convince sellers to join your marketplace, and you may even have an excess of sellers. That’s when it’s time to switch focus and invest in driving demand.

Some Tactics For Growing Supply And Demand

Highlight the value proposition: When people interact with your product, its benefits must be clear immediately. You have to get them to that “aha moment” where they recognize there is significant value in participating in your marketplace. It’s also important to address their concerns to diffuse resistance.
Leverage the power of referrals: You have to incentivize customers to bring people in their network into your marketplace. You can either directly compensate them or offer discounts. Potential users are more likely to trust people they know, making them more likely to join your marketplace.
Optimize retention: You have to retain as many customers as possible. If sellers don’t get enough transactions, they will leave. The decrease in options will then make buyers leave as well. Therefore, you have to address retention issues to ensure your product stays useful, valuable, and relevant to both sides.
Run direct sales: It’s important to engage people one-on-one when you first start your marketplace. You have to convince them to change how they currently behave and provide step-by-step guidance. While this can be tedious, it’s essential for building trust with early customers and understanding their challenges.

Build Trust

Marketplaces are social businesses. The relationship between buyers, sellers, and the marketplace requires trust. Buyers and sellers have to make decisions based on the limited information they can get on your platform. Without trust, they hesitate to make transactions, which limits the marketplace’s growth. Beyond the basic security features (identity verification, secure payments, etc.), people are really looking for reasons to feel more comfortable using the marketplace.

There are a few ways in which marketplaces can build trust:

Ratings and reviews: All marketplaces need systems to help buyers and sellers evaluate each other. Ratings and reviews build trust between both sides and inform purchasing decisions. Marketplaces also have to continuously weed out bad users (For example, those who fail to pay or deliver) to improve the experience, ensuring that buyer and seller expectations will be met.
Leverage social proof: We trust people we can relate to. Leveraging elements like user profiles, testimonials, quotes, etc., can be really powerful because they humanize the purchasing experience. People are more likely to try out a platform when they can see how real people are using the platform, what they love about it, and how they benefit from it. This is true for both buyers and sellers.
Deliver on your promises: Marketplaces must ensure that transactions are completed as expected. This includes reliable fulfillment, secure payments, and effective dispute resolution. When people know they will receive what they paid for—or have support if something goes wrong—they are more likely to engage with the platform repeatedly.

Marketplace Considerations

Expanding your marketplace strategically.

Marketplaces leverage network effects to scale — the more people who use the marketplace, the more valuable it becomes. Therefore, most marketplaces want to make their network as big as possible because this increases the number of transactions and, subsequently, the marketplace’s revenue. However, expansion is resource-intensive. It requires substantial time, effort, and capital. Poorly planned or poorly executed expansion can be disastrous for a marketplace business. A better strategy, especially for geographically constrained marketplaces, is to first secure a foothold in individual markets before expanding to new regions.

Marketplace businesses should prioritize succeeding in their existing markets. This means either capturing a significant market share or generating healthy revenues. When they build their network in new markets, they can take advantage of what they have learned previously about what does and doesn’t work when entering a market. A phased approach allows them to replicate their previous success more effectively. For example, ridesharing companies (like Uber) focused on establishing a strong presence in individual cities before scaling regionally, nationally, and globally. Additionally, profitable operations in existing markets can support and fuel expansion efforts. Strategic expansion ensures that the marketplace can survive long enough in new places for the investments to pay off.

Achieving scaled liquidity in your marketplace.

Scaled liquidity refers to the marketplace’s ability to maintain or improve transaction efficiency as more buyers and sellers join. As the marketplace grows, it needs to continue to effectively match supply and demand without increasing friction. The increase in buyers and sellers should lead to better matching, increased trust, and more transactions—reinforcing a flywheel effect that fuels growth. Therefore, reaching scaled liquidity is a crucial milestone for marketplace products.

It’s critical to ensure scaled liquidity on both sides of the platform — Supply needs to keep up with demand. For example, as more users join Uber, both drivers and riders should be able to complete rides with the same, if not greater, ease. If a marketplace does not scale its liquidity properly, it can become harder for people to use. Sellers may leave because they aren’t making money, or buyers may stop coming because they can’t find what they want. Good marketplaces solve this by making sure things stay efficient as they grow.

Continuously improving your marketplace.

All products have to keep evolving with their customers. As the marketplace grows, analytics have to be embedded across the platform to hone in on the biggest, highest friction problems. Data insight can help optimize almost every aspect of the user experience for buyers and sellers. For marketplace products, search is perhaps the most important feature to refine because that’s how people find what they need. When a buyer describes what they are looking for, they should see the best possible matches. The faster they realize the platform’s value (get to their “aha” moment), the more satisfied they will be with the experience.

The marketplace also needs to keep improving its supply — the main reason buyers are on the platform. They have to use what they learn to raise supply standards over time. Improving the supply ensures that buyers get the best matches, raising the marketplace’s trustworthiness and reliability. They also have to ensure sellers understand what customers want (”Customers prefer sellers who provide XYZ”) and then rank those who meet these expectations higher when buyers search for sellers. This ensures the marketplace experience is successful for both sides.

The Future of Marketplace Products

AI promises to disrupt how we interact with marketplaces.

Marketplaces have always been designed around people making decisions to buy things from other people. As AI becomes more integrated into our lives, we have to consider what happens when AI agents are buying things on our behalf. While this might make the process easier for us, it also fundamentally changes how purchasing decisions are made. While AI may eventually have a lot of information about us, allowing it to make "better" choices, it uses different logic than we do However, it’s worth considering where it can really evaluate the options in the same ways we would.

AI’s ability to identify our intent and motivations will only continue to improve with time. Maybe it can find us the best deal, but it does change how we engage in commerce. Marketplaces might have to start optimizing their selection for AI rather than people. While this already happens with SEO, the keywords we look for might be different from what an AI agent may look for. We may even have AI agents on both the buyer and seller sides interacting with each other. While marketplaces will certainly get better, the experience may be very different than it is now.

You might also like: Exploring Strategy For AI Products, AI Agents

Conclusion

Building a marketplace is challenging. There’s no guaranteed path to massive commercial success. You will have to experiment to figure out what works and keep building on small wins. It all really comes down to solving difficult problems in ways that reduce friction and enhance trust. While it’s not easy doing all of this, the rewards of building a successful marketplace at scale are substantial. If you can concentrate your efforts on building the right things, you can create a thriving, valuable marketplace that can change how we engage with the world.

Priank’s Newsletter

Discussion about this post