The Beginner’s Guide to Starting an Online Marketplace Business

multimerch beginners guide to starting an online marketplace business

As the founder of MultiMerch, I've seen my share of online marketplaces start with a promising idea, fail to generate traction and close down shortly after.

The reasons are all over the place – no market need, unsustainable business model, poor software choices, lack of marketing, you name it.

In this guide, you'll learn how to start a marketplace business – from doing market research and choosing the right business model to mastering operations, selecting software and building, launching and growing your marketplace platform.

But first...

...let's cover the basics.

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What are online marketplaces exactly?

Multi vendor marketplaces (also called two-sided, peer-to-peer or just online marketplaces) are online ecommerce platforms where:

  • third party vendors (or sellers) offer their products for sale
  • buyers purchase products from multiple vendors
  • the marketplace handles payments and generates revenue via fees

This makes marketplaces different from regular online stores where the buyer purchases products from the store owner directly.

This guide is organized in 11 different chapters to make it easier to digest:

Now, here's why you want to start your own marketplace business:

 

Why start an online marketplace in 2019?

multimerch marketplace guide why start online marketplace

Why not?

In 2017, customers have spent $1.47 TRILLION on online marketplaces. That's nearly half of all global online sales.

It's a lot of money spent!

There's a great chance you have bought, booked or sold stuff via a marketplace platform this month without giving it a second thought.

That's because they span all industries – from large traditional online malls like Amazon and AliExpress to booking and rental platforms like Airbnb or Eventbrite, from service marketplaces like Upwork and Taskrabbit to digital software and asset marketplaces, gaming and music platforms and everything in-between.

Why are marketplaces so popular?

The main reason is the network effect that's baked into the marketplace model that brings together the two sides of a transaction (it's also why they're called two-sided marketplaces).

The network effect is what allows you to grow a scalable business with multiple different revenue streams without having the downside of managing your own inventory and logistics.

This makes marketplaces inherently different from the traditional online stores.

Growing a traditional ecommerce business in a sustainable manner requires you to be in the "Goldilocks zone" where your free cash flow, operating expenses and inventory sync up. Otherwise, you can end up growing yourself out of business.

You'll have a different set of challenges as a marketplace owner, but growing too quickly won't usually be your primary problem.

For example, if you have an ecommerce business selling guitars online, you can grow more rapidly by switching to a marketplace model and allowing others to sell their guitar accessories on your platform. You have just expanded your business without having to hire a bunch of extra employees or buy tons of new inventory.

Another benefit of a marketplace business compared to a regular ecommerce business is the loyalty and sense of community baked into the platform thanks to the underlying network effects.

Often, the community will self-organize and create its own ecosystem around your marketplace – think of the hundreds of unofficial Amazon seller forums, Uber drivers groups and Aliexpress buyer forums.

To sum it up, starting a marketplace is a great way to tap into the network effects and start a thriving ecommerce ecosystem or rapidly expand your operations without requiring a ton of extra capital, workforce and inventory.

 

1. Research your target market

multimerch marketplace guide market research

Whether you're creating a marketplace website from scratch or switching from regular ecommerce to marketplace commerce, there's no way around doing your market research.

According to CBInsights, "no market need" is the #1 reason startups fail (42% of all cases examined).

Starting an online marketplace without clearly understanding the target market and the needs of your users is a great way to learn a painful lesson, but not a great way to start a business.

This is where market research comes in.

To build a viable marketplace business, you need a clear understanding of the market, your users, their needs and the solution they're looking for.

 

Assess the market

You need to understand what you're getting yourself into before getting yourself into it.

What does the industry look like?

Assess the market size and volume to better understand if the business model you have in mind makes sense. It may sound easier to get into a smaller market, but if you want to charge selling fees and there's not enough transaction volume, you'll need a different business model.

Are there clearly defined niches in your target market? The better you understand the market segments, the more likely you'll be to choose the most attractive niche.

Today's big marketplace businesses have grown from small niches:

  • Amazon was initially a small online bookstore
  • Etsy grew from a community forum for crafters
  • Eventbrite was focusing on the tech community first

No matter what industry you're in, you will have the competition – either direct or indirect. Find out who your competitors are and how long they have been around.

Researching the competition lets you gain insights into the marketing strategies and the business models common in your target market – as well as the strengths and weaknesses you can exploit.

Pay attention to market trends – is the market going up or down, growing or shrinking?

If you can spot big changes or trends like technology breakthroughs, regulation or the change in customer behavior, you can use them for your advantage.

 

Identify your users

You aren't building your marketplace for yourself – you're building it for the users. If you don't know who your users are, you can't solve their problems efficiently.

Kate Kendall
Kate KendallFounder at CloudPeeps

"Focus on identifying your target customers (including creating personas and looking at the market opportunity), then undertake a competitor analysis, and create a list of potential users (both supply and demand). Then, survey or interview these potential customers and look for the 'Blue Ocean' opportunity."

Start with the simple questions:

  • who are your target users and what are their main goals and challenges?
  • where do they buy, why do they buy and who do they buy from?
  • what are their motivations and what influences them?

At this stage, you can create a few simple buyer personas to better understand your audience.

Since you're building a two-sided marketplace, you'll have at least two distinct user groups:

Your buyers and sellers come with their own set of goals, challenges and motivations.

Make sure you understand both sides.

 

Understand the needs and solutions

Now when you understand the market and the users it's time to dig into their needs and the solutions that can solve their problems.

Here, you want to figure out the biggest pain points your target users have and how they alleviate them.

Do your target customers shop online? If so, where do they do it, how do they do it and why do they do it? Are they satisfied with their shopping experience? What could be better?

What about your sellers? By now you should have an idea about who will sell their items on your marketplace – go ahead and talk to them! Ask them how they sell their products right now, what other platforms they use and what they're happy and unhappy about. How can you make their experience better?

Asking these questions will help you better understand your user needs and the strengths and weaknesses of your competitors – and build a better solution as a result.

What you want to take away from your market research is a clear understanding of your target market and the audience you want to serve.

Doing it will allow you to select a suitable niche for your marketplace platform, design a solution that solves the problems of your users, draw up a business model that makes sense and prepare a marketing strategy that will make your new platform stand out from the competition.

 

2. Choose the right business model

marketplace business models subscriptions fees.jpg

We've already learned that most startups fail trying to build stuff no one needs.

Do you know the failure reason #2?

Ran out of cash.

That's right – building a valuable product that people need isn't enough. You need a way to make it profitable – and keep it profitable in the long run.

Fun facts ahead. Amazon had its first quarterly profit in Q4 2001, more than 6 years after it was founded. It took Etsy 5 years to start turning a profit in 2010. eBay, on the other hand, has (apparently) been profitable from the start thanks to monetization via listing and selling fees.

My point is – no matter your industry and background, it's a good idea to design a viable business model BEFORE starting your online marketplace, not when you're already going full steam ahead.

Now, the exact way your marketplace will make money depends on a lot of things. However, here are a few marketplace business models for you to consider.

 

Sign up fees

A sign up fee is a flat payment you charge your sellers to sign up (well, duh!) on your marketplace platform.

The great thing about sign up fees is that you can charge them even before you have a thriving marketplace – as long as you can sell your vision to new sellers.

Sign up fees are also pretty straight-forward to collect as you can use any regular payment gateway or even request payments manually (e.g. via PayPal, bank transfer or in person).

The main drawback is – sign up fees don't scale and once you've gotten the seller on your platform you'll need other monetization ways.

John Doherty
John DohertyFounder at Credo

To grow a marketplace, you need to be in the middle of the transaction. As you grow your audience, inventory and volume, so will your business. If you don't do this, you don't have a sustainable marketplace – and will struggle to grow the platform.

You will also need a solid proof that your platform is worth it to charge sellers a sign up fee upfront.

Because of scalability reasons, you'll rarely see the big marketplace players use sign up fees for monetization purposes. However, you can also charge a sign up fee to weed out the less serious sellers.

For example, it costs $25 to sign up as a Google Play vendor – and Google clearly doesn't make a killing off Play Store sign up fees.

Subscriptions

Subscription is king – I don't have to tell you that. The global sharing economy is powered by subscription-based businesses generating recurring revenues.

Gartner predicts that by 2020, all new software industry entrants and 80% of historical vendors will offer subscription-based business models.

Charging your sellers a specific amount on a regular basis is a great way to generate recurring revenues that will keep your marketplace going.

Here's the #1 rule of subscriptions – make sure your sellers get more value out of your platform than it costs them to stay subscribed.

They won't mind paying $19.99 a month if they generate $199.99 a month in profit.

Subscriptions are more difficult from a technical perspective. You will also need a payment gateway like Stripe that supports subscription payments (you can do manual invoices while you're an MVP, but good luck scaling this approach).

It's worth it, though. Combine the idea with multiple different tiers that let sellers unlock more features (like advanced selling tools) or lower their selling fees and you've got yourself a steady recurring revenue stream.

For example, Amazon offers two plans – an Individual plan with an extra $0.99 per item selling fee and a Professional selling plan at $39.99/month for larger sellers.

 

Listing or insertion fees

marketplace business models etsy listing fee

You can collect a listing fee from yours sellers when they list their items for sale on your platform.

Listing fees can be flat or variable amounts based on the price of the product, the category the product is inserted into and other parameters.

Just like with subscriptions, sellers will usually be fine with a small insertion fee to list their item as long as they can generate a profit in return.

And just like sign up fees, listing fees are relatively easy to collect – but they are much more scalable.

To reduce friction, consider deferring the charge to after the product has been sold instead of doing it at publication.

For example, Etsy charges a $0.20 insertion fee, but collects the listing fee for multiple quantities of the item only after it's been sold.

 

Selling fees

Selling fees are everywhere – and for a reason. It's a great monetization strategy.

You'll charge your sellers a selling fee each time they receive and process a new order on your platform. The more orders your marketplace receives – the more revenue you get in sales fees.

Sounds great, doesn't it?

The drawback is, selling fees are far more difficult to implement than other types of fees.

For one, you need a payment gateway that can split buyer payments so you can get your fee at the time of sale (unless you want to collect sales fees manually, which you probably don't – for various reasons, including legal).

And you need a steady stream of new orders coming in to generate enough revenue from small sales fees. When you're just starting out, it can be a problem.

It does scale really well, though.

If your platform gets enough traction and you can collect selling fees automatically, you've got yourself a good business going.

You'll find examples of selling fees on most popular marketplaces today:

  • Amazon charges per-item category-based selling fees
  • Etsy has a 5% "transaction fee"
  • Envato chargers sellers 12.5% to 55% on sales
  • Airbnb charges hosts a "service fee" of 3%+

More business models and monetization examples

marketplace business models sponsored products

These are just the most common marketplace business models – you can do more than that, including:

  • collect payment processing fees
  • promote featured stores and sponsored products
  • manage your own ad system

I covered these and other monetization strategies in my other blog post: 10 Marketplace Business Models To Generate Revenue

 

3. Plan your marketplace operations

multimerch marketplace guide marketplace operations

Creating an online marketplace website is one thing. Successfully managing a marketplace business is something completely different.

Even a regular ecommerce business gets complex at times due to the amount of stuff you have to deal with on a regular basis.

Marketplace operations can get more difficult than that due to the nature of two-sided platforms.

Here are the challenges you will be tackling as a marketplace owner on a day-to-day basis:

 

Managing sellers

Sellers are the cornerstone of your marketplace so you will be dealing with them a lot.

This includes everything from acquiring new sellers and helping them get started to keeping existing sellers happy and successful.

First, you will need to convince your sellers to join your platform. Hopefully, you've outlined your unique value proposition during your market research and planning.

Now, you'll need to create a set of landing pages that explain how your marketplace works and why it makes sense for sellers to join you.

Here's how Amazon explains the process on its seller landing page:

multimerch marketplace guide amazon landing

Next, you will need a streamlined signup process. Decide who can apply and what information you need from them, then design your registration flow with this in mind.

Will you allow anyone to sign up or are you accepting vetted sellers only? Make sure you have a way to review the applications if you want to keep freeloaders out.

If you're collecting sign up fees or subscriptions, you'll need to make sure you can either build payment processing into the registration flow or have a way to collect the fees manually through direct communication with the sellers.

And while you're at it, you'll also need to decide how much control your sellers will have over their stores, what their stores should look like and how customers will discover them.

Now, once the new seller signs up you'll want to make it as easy as possible for them to get their product catalog into your platform.

 

Managing products

As a marketplace owner, you won't usually have to deal with your own inventory. However, you'll still need processes in place to manage products sold by your sellers.

There are two distinct ways to organize your product catalog:

  • on marketplaces like Etsy or eBay every product belongs to exactly one seller
  • on platforms like Amazon a single product can be sold by multiple individual sellers

The way you organize the catalog will affect your software selection, the layout of your marketplace pages and how your sellers publish and manage their products.

Now, you want to make it really easy for new sellers to get started on your platform. You can do it by either offering them a way to import their existing products in bulk or providing them with an onboarding service where you do it for them.

If most of your sellers are existing ecommerce business owners, it's a good idea to offer them a way to import their catalogs from other platforms they already sell on, like Amazon or Shopify.

To make it easier for your sellers to list items for sale, optimize your product listing forms by removing the unnecessary details. If you plan to carry different product categories, keep in mind that different products may require different sets of fields.

As you grow, you may need a product moderation system or a set of content to ensure the quality of your listings and keep scammers off your platform.

 

Payment processing

Marketplace payment processing is always more complex compared to processing payments in a regular online store.

First, you will need specialized marketplace payment gateways to allow customers to purchase from multiple sellers at once and split payments at checkout.

More payment solutions are offering support for marketplace payments today, but the implementation can be tricky.

Second, you will be processing different types of payments.

Just a few examples of payments on a typical marketplace platform:

  • order payments from customers to sellers
  • subscription and fee payments from the sellers to your platform
  • payouts from your platform to the sellers

Different payment flows have different implementation requirements.

So, make sure you know what payment gateways you'll use and how exactly you'll use them.

If you can't find a suitable gateway and make it work with your marketplace software, you're in trouble.

Finally, keep in mind that you may be responsible for payment taxation, invoicing and reporting as a marketplace platform owner. These requirements will depend on your region and your industry.

We will take a closer look at payment processing in the next chapter.

 

Logistics and shipping configuration

You don't have to deal with the inventory yourself, but your sellers do – and your platform has to support it.

The first question to ask is whether you want your sellers to ship items or you want to do it yourself (like Amazon FBA).

If you ship yourself, the logistics will be more complex as you'll need to get the inventory from your sellers, then store and dispatch it to the buyer. In this case, estimating shipping costs and times and tracking the item at every stage will be more difficult.

If you make sellers responsible for shipping, they'll need a convenient way of managing delivery rules and communicating them to customers. You can use flat rate, price- or weight-based rules or custom per-product shipping rules, but make sure your sellers can specify different shipping rules to different locations via different carriers easily.

Whatever shipping flow you use, there are more questions to ask yourself:

  • how will you handle tracking numbers?
  • do you need third party tools like shipping APIs?
  • how will you set and enforce shipping SLAs across the marketplace?

Shipping cost and speed affects marketplace conversions, so getting this part right is crucial.

 

Order management

Getting customers to buy from your platform is the first step. Actually making sure your sellers deliver is the next step.

The sooner the seller knows they've received a new order, the sooner they can dispatch it and keep the customer happy and willing to purchase again. So, your platform will need to notify sellers of new orders and make it easy for them to view, manage and process the orders.

And if you allow customers to buy from multiple sellers at once, you want to make it clear to everyone how different products within the same order are dispatched.

To keep the customer informed about the status of the order at all times, you can offer your sellers a way to share the tracking number with the customer.

Finally, delays and issues will inevitably arise – have a plan in place to handle them.

At the very least, you want to provide a communication channel between the customer and the seller so they can find a solution.

As you grow, you may want to create your own protection programs for buyers and sellers, like eBay's Money Back Guarantee or Airbnb's Host Protection Insurance.

If you don't do this, you risk getting entangled in disputes, refund requests and lawsuits yourself.

 

Marketing and content management

Your platform will get some traction thanks to the network effects, but you still need to actively promote it – especially in the early stages.

Where do you start?

The obvious first question is how will you get new sellers and customers to join you and stay with you when you're just starting out. We'll look at this later in this guide.

Then, once you get going, you'll need to figure out how to keep your marketplace growing in the long run. You'll do it through search engine optimization, organic and paid marketing campaigns and other business development initiatives.

Why SEO? Because over 50% of trackable traffic on average still comes from organic search.

To minimize the amount of work you yourself have to invest in optimizing your marketplace for search engines, make sure the software you use is built with SEO in mind. This means search engine friendly, optimized and shareable seller stores, product listings and other marketplace pages.

Most regular sellers won't be bothered optimizing every listing for search engines so you have to make it a no-brainer for them – or end up with poorly optimized platform.

Now, there's more user-generated content on a typical marketplace platform than just products. You'll have product reviews, user questions and answers, featured seller stores, blogs and more – and that's great for you, the platform owner!

Make it easy for your users to create great content on your platform, encourage it and feature it prominently.

However, you will also need systems in place to prevent low-quality UGC:

Patrik Frisk
Patrik FriskCEO at Besedo

"Content moderation plays a key role in everything – from user acquisition and conversion to retention. Studies we've carried out have shown that as many as 75% of users will not return to a site where they encountered a scam and 80% of users wouldn't convert if a listing had a poor description.

Low quality content also plays a negative role when you're trying to rank. Google doesn't like duplicate content and will penalize sites with too many identical pieces. It's a good idea remove duplicate listings, stock images and other content pieces users may upload that already exist on your site – both for SEO purposes and to improve the search experience for your users.

In general, you need to vet all UGC to ensure it is relevant, high quality and appropriate. The content users post to your marketplace make up your inventory and act as a store front. Much like you don't want rotten apples on display in a fruit stand, you don't want low quality content featured on your site."

Organic marketing is great in the long run, but don't forget about paid acquisition. The more content gets created every day, the more value you'll get out of paid marketing campaigns. Make sure you have a paid promotion strategy for your marketplace in place to attract new users and create brand awareness.

 

Seller and customer relationship management

Now, attracting new users is not enough – you need to keep them happy, loyal and using your marketplace on a regular basis.

You will be communicating with your users and helping them answer questions and solve problems daily, so have a plan for that in place.

Some of the challenges you'll be tackling:

  • onboarding new sellers and answering their questions
  • providing technical support and enforcing the rules
  • answering order-related questions
  • mediating disputes between the seller and the buyer

To reduce your own involvement, allow customers to ask sellers questions about products and communicate with them before and after the order. The more communication options you offer, the more likely the issues will be resolved without requiring your attention.

Some of our clients want a way to filter customer-seller conversations to make sure they don't try to bring the transaction offsite. Instead of worrying about it, I suggest focusing on providing the best possible experience to both parties on your platform so that going around isn't worth it.

Mass communication is important, too. You'll want to be able to notify your sellers about policy changes and new features available to them or tell your customers you're running a marketplace-wide discount campaign this month.

And don't forget post-transaction communication. Allow and encourage it to ensure repeat purchases, collect reviews and build trust between your platform, your buyers and your sellers.

This will help you turn your marketplace from a purely transactional platform into a sustainable business customers enjoy dealing with.

 

4. Outline the essential marketplace features

multimerch marketplace platform features overview

Let me tell you this one thing first:

The easiest way to waste time, budget and effort when building an online marketplace is to create features your users don't need.

I've seen a lot of marketplace projects that have spent way too long in the development stage to either never launch or to find out the users need a completely different set of features a week after launch.

I've also seen marketplace platforms launch in a matter of weeks with only the basic functionality in place – and evolve as they grow. This has usually worked much better in the long run.

My advice to marketplace entrepreneurs is to start with the essentials and launch an MVP early, then improve the platform as the business grows and the requirements get more clear.

And I'm not the only one saying this – here's one of our implementation partners:

Vladimir Kuzmenko
Vladimir KuzmenkoVP Sales at NIX Solutions

"The best approach is to start with a limited feature set and only build the main features your platform needs. After you have enough to make the platform work, launch it. If it gains traction with the users, you'll start to see the early benefits and will have more time and freedom to develop additional features and make your platform even better."

Now, what are the essential marketplace features exactly?

While some of this will depend on your industry, I like to group the functionality into three big categories – features for sellers, buyers and the platform itself:

 

Essential seller features

Your sellers want to sell their items and get paid. This means listing, selling and dispatching products efficiently.

To make it easy for your sellers to get started on your platform, focus on streamlining the onboarding process. The simpler the onboarding, the more likely new sellers will be to join you.

A great onboarding process includes clear seller terms and helpful landing pages, straightforward seller signup and an easy way to import and manage their product catalog.

What kinds of products will your marketplace carry? Optimize product management features for this particular product type – don't make your sellers do more work than absolutely needed to get the product published.

Next, your marketplace should make it dead simple for your sellers to receive and process orders. Notifications are a must to make sure orders don't go unnoticed.

To make selling and marketing easier, offer your sellers at least the basic sales and marketing tools – such as discount code management and product promotions.

Finally, make sure your sellers can freely communicate with you and the buyers. Public product questions and a private messaging system will be a good start.

 

Essential buyer features

What's your goal when shopping on Amazon? To find, purchase and receive the products you're looking for quickly and easily.

So, make it really easy for your buyers to search for products and browse categories. What makes it easy? A search bar that works (quite a low bar), faceted product filters and information-rich product pages are all a good start.

Simple checkout is the next step. The easier placing an order is on your platform, the more likely the buyer is to go through. A modern checkout process is a must – ideally one that makes it possible to purchase from multiple sellers with a single payment.

You want to offer payment methods that make sense for your users. Stripe is great and all, but it's useless if the shoppers in your region prefer to use cash on delivery. You should've answered this question during your market research as it will usually depend on your region and industry. In most cases, you will need a split payment gateway and/or a manual processor like cash on delivery.

Now, order management is as important to the buyer as it is to the seller. Make it simple for your buyers to view and track their orders, as well as get notified when the status changes.

Communication is crucial, too. Allow your customers to ask sellers pre-sales questions, get in touch with them if they have order-related questions and leave feedback. This will ensure your platform provides a great buyer experience and helps retention.

 

Essential marketplace platform features

The aim of your platform is to connect buyers with sellers – and generate revenue to keep your business going. So, you will need the right tools to support your marketplace operations and your business model.

In addition to everything I've outlined above, you will need a way to monitor, manage and moderate everything that happens on your platform.

Helping sellers set up and maintain their stores, approving and updating individual products, looking up and managing orders – all this will be part of your daily routine as a marketplace operator.

You also will want to customize the look and feel of the marketplace without digging into code. This will make it easier for you to make seasonal changes, introduce new products and categories, run marketplace-wide promotions and feature your best sellers and products.

Payment processing, of course – I mentioned this above. Depending on your business model, you may need to process not only buyer to seller payments, but also collect seller fees, do manual payouts to your vendors and handle other types of payments.

Jimmy Rodriguez
Jimmy RodriguezCo-Founder at 3dcart

"When it comes to payment gateways and payment providers you have to make sure your platform has options. Its important to not be locked down to one specific method because you will never know what you need as you scale. So when picking a platform, make sure options are an option."

The same goes for shipping and logistics. Your platform needs to offer sellers a way to manage shipping methods and make it clear to buyers where they ship to and what are the costs.

This doesn't necessarily mean you need a direct integration with third party shipping services and APIs – automation can come later. But at the very least your sellers need a way to specify their own delivery costs manually.

 

Advanced marketplace features

These are just the essentials to get your marketplace up and running.

There's much more you can offer your users down the road:

  • reporting tools
  • advanced selling and marketing features
  • integrations with third party ecommerce services
  • your own mobile apps and more

All of this is definitely possible (but not essential). I covered these and other marketplace features in a separate blog post: What features exactly does your marketplace platform need?

 

5. Choose a marketplace payment solution

marketplace payments overview

It's not a sustainable business if your marketplace platform can't process payments safely, securely and reliably.

The global digital commerce volume has exceeded $3 trillion in 2017 and is expected to more than double by 2022, according to McKinsey.

Your marketplace is part of the global payment ecosystem, but there are a few unique challenges marketplace businesses deal with compared to regular ecommerce businesses when it comes to payment processing.

You already know the different payment types you'll be processing as a marketplace platform owner:

  • payments from customers (customers purchasing products)
  • payments from sellers (signup, listing, subscription fees, promotions)
  • payments to sellers (payouts)
  • other payments (third party advertisers)

Customer payment processing is arguably the biggest challenge for marketplace owners as it involves three different parties – the buyer, the seller and the platform.

There are three ways your marketplace can process order payments from your customers to your sellers:

 

Direct payments

With direct buyer to seller payments, your platform is not involved in the transaction at all.

Direct payments require the least amount of involvement by your platform, but have a few major drawbacks.

Since your platform doesn't own the transaction, you have limited options of collecting transaction fees and handling returns and refunds.

Additionally, direct payments will prevent your customers from purchasing products from multiple different sellers at once and will require them to go through the checkout process for every individual vendor.

They are also less safe for all parties involved and make it easier for untrustworthy buyers and sellers to exploit your platform for their own gain.

 

Aggregated payments

With aggregated payments, your platform aggregates buyers' funds to later redistribute them between sellers via payouts.

Aggregated payments make single checkout possible and allow you to own the transaction, but place an extra burden of tracking your sellers' finances and making regular payouts on your platform.

And with the payment industry becoming increasingly more regulated, payment aggregation as a marketplace payment flow will only be getting more complex.

 

Split or parallel payments

All this gives rise to parallel (or marketplace) payment processing, where customer's payment is instantly split at checkout and distributed between all sellers and your platform by the payment processor.

This eliminates all of the issues of direct and aggregated payments, while also shifting the liability and the compliance burden from your business to the payment processing company.

The biggest remaining problems of parallel payment processing are implementation complexity and the lack of marketplace processor availability.

It's getting better, though. A decade ago, PayPal Adaptive has been one of the only few marketplace payment solutions with support for split payments. Today, there are dozens of payment processors that support marketplace payments around the world, the most popular ones being Stripe Connect, PayPal for Marketplaces, Adyen Marketpay and Mangopay.

 

How do you choose a marketplace payment solution?

Selecting the right payment solution for your marketplace is crucial.

A few different factors to consider are the features you need, the availability of the payment provider in your region and, of course, the costs.

Here are a few helpful tips from Paybase, another popular marketplace payment solution:

Danielle Herndon
Danielle HerndonHead of Compliance at Paybase

"When choosing your payments provider, it's important to think about exactly what your business needs and what your priorities are. Each provider varies in what it can offer. Some offer a plug-in solution that is very easy to integrate but will struggle to handle anything that requires a certain degree of flexibility. Others can offer greater scope, but may involve you as a business having to build out your product/service further.

What's most important is to not underestimate the level of flexibility you will need. Think about what you'll need in the future and whether each given payments provider will enable you to do that.

Additionally, it is important to consider the level of financial crime prevention that the provider offers, as the last thing your business needs is high levels of financial crime on your platform due to an inadequate alerting system."

So, make sure to ask yourself these questions before getting to work building your marketplace:

  • What types of payments will I be dealing with as a marketplace platform owner?
  • What payment solutions are available in my region that meet my requirements?
  • What will payment processing cost me and how do I factor this into my business model?

The last question is as important as the first two.

While you don't want to end up with no payment processing at all, you also don't want to rely on a business model that charges your sellers a 5% selling fee only to realize it costs you as much in payment processing fees.

 

6. Select the right marketplace software

multimerch multi vendor marketplace platform

At this point, you have a valid business model and an operations plan and know which payment gateway you'll use and what features your marketplace platform needs.

Now is the time to select the software that will power your marketplace platform – no sooner than that!

I like to group marketplace platform software into 3 different groups – cloud or hosted platforms, standalone solutions and multi vendor CMS extensions.

Note that I don't mention building a marketplace website from scratch here. It's definitely possible, but not really viable for small to medium sized businesses in most cases due to the complexity involved.

 

Cloud or hosted marketplace solutions

multimerch marketplace guide saas marketplace platforms cloud

If you're a new marketplace entrepreneur, going with a popular marketplace SaaS is usually the first thing to consider.

Cloud marketplace solutions are the easiest to get started with and require little to no technical knowledge.

In most cases, they also offer free trials so you can spend a while playing with the platform to make sure the solution fits your requirements.

Here are the few popular marketplace SaaS solutions you can look into:

  • Sharetribe
  • Marketplacer
  • Near Me
  • Arcadier

The main drawback of cloud marketplace platforms is the limited customization possibility you'll get. If it doesn't suit you out of the box you won't be able to modify it since you don't have any code access.

If you're looking for something more customizable, standalone marketplace software is a better alternative.

 

Self hosted standalone marketplace software

multimerch marketplace guide standalone marketplace solutions

These are software solutions designed specifically for marketplace commerce, not just regular ecommerce.

Standalone marketplace software gives you much more customization and modification possibilities since you have complete access to the source code and own it outright.

In most cases, you will also host the platform yourself and will be able to control the whole marketplace experience from start to finish.

Some of the popular standalone marketplace solutions are:

The drawback? You will need at least some technical skill to build a marketplace platform using self hosted software. No matter how user-friendly, software is software – and has to be hosted, maintained and updated on a regular basis.

We always recommend having a developer on your team or working with an agency when working with self hosted software to make your life easier.

 

Multi vendor CMS extensions

multimerch marketplace guide ecommerce multi vendor extensions

Finally, you can take a regular CMS like WordPress, Magento or OpenCart and slap a multi vendor extension on top of it.

Sounds like a plan?

You might expect this to give you all of the benefits of free and open source CMS while also powering your marketplace. In reality, it rarely works out like this.

Content management systems are designed for regular websites or standard ecommerce. Two-sided marketplaces are inherently different and converting a regular CMS into a marketplace platform is a complex, time-consuming and error-prone process.

If you do decide to give it a try, here are some of the possible software combinations you can use:

  • WordPress + WooCommerce + Dokan, WC Marketplace, WCFM, WC Vendors or YITH
  • OpenCart + MultiMerch, PurpleTree or Waabay
  • PrestaShop + KnowBand or Advanced Marketplace
  • Magento + NextBits, CreativeMinds, Webkul or Apptha

In this case, you absolutely want to have a developer on your team who has experience working both with the underlying system and with two-sided marketplaces. I guarantee you will have much more technical work to do than with either SaaS or Standalone marketplace software.

We've been offering the MultiMerch multi vendor extension for OpenCart for years and overcoming the limitations of the CMS itself and the compatibility issues with third party themes and plugins has been a constant struggle. You will deal the same problems with any CMS.

 

How do you choose the right marketplace software?

The possibilities are endless, right?

When selecting your new marketplace software, I suggest first figuring out what kind you want to go with – cloud, standalone or CMS.

Here are my rules of thumb for picking one of the 3 solution groups:

  • Start with a cloud/SaaS marketplace platform if you want to launch your marketplace as soon as possible and don't have the technical knowledge.
  • Go with standalone marketplace software if you want the biggest bang for your buck and want to own your platform outright.
  • Try multi vendor CMS extensions if you're already using the underlying system (e.g. running a Magento store) or are willing to invest heavily in custom development and have a team capable of doing it.

Now, here are the factors to consider when picking the software solution:

Start with the type of the marketplace you're building. Are you selling products, services or bookings? Software designed for products won't be a great fit for a service marketplace and vice versa.

Know the features your platform needs. Make sure the solution fits your business requirements – not just in terms of the basics, but also payment processing, logistics and other crucial features. And if it doesn't offer the feature you need, can your team modify it to support this?

Take a good look at user experience and reliability. This is often overlooked by new marketplace owners, but it's as important as everything else. Make sure the solution not only provides the features you need, but also offers a great user experience. If your marketplace feels clunky to use, the rest doesn't matter – your users will jump ship as soon as there's a better alternative.

Get to know the team behind the solution. Who are the people in charge and what can you expect in terms of technical support and code quality? Growing a marketplace business will take you a lot of time and effort – so you want to make sure you get all the support and software updates you need over the years. Can you treat the company as your partner, not just a software provider?

Finally, there's your budget. In my experience, budget shouldn't be a top priority when selecting marketplace software. You will spend thousands of hours building your marketplace over the years – saving a few hundred bucks on software that powers your entire business isn't worth it.

For a more detailed overview of marketplace software solutions available out there, check out my other blog post: Online Marketplace Software: The Complete List

 

7. Assemble a great team

multimerch marketplace guide assemble great marketplace team

You'd think software is all it takes to start a marketplace platform.

Nope. You will (generally) need a great team to help you pull it off.

These are just some of the crucial skills you'll need to run an online marketplace business:

 

Development and design skills

No matter what software you use, you will need at least some technical skill to set up, configure, customize and maintain your marketplace platform.

Here's how much technical skill you will need with different kinds of marketplace software:

  • cloud platforms will require almost no development experience
  • self hosted marketplace platforms will quite at least some technical skill
  • multi vendor CMS extensions will require A WHOLE LOT of custom development

Do you have to be a developer to build a marketplace website? No, but having a developer at hand will make your life immensely easier.

When it comes to design, things aren't as difficult.

A modern, responsive platform is a must in 2019, but fortunately most marketplace solutions will offer you ready-made templates you can use instead of designing everything from scratch.

Still, at the very least you will need some design skills and tools to customize your platform and create appealing marketing materials.

In the long run, investing in a UX designer will allow your marketplace to stand out in terms of user experience and aid your acquisition, retention and conversion.

 

Marketing and sales skills

Neither customers nor sellers will join your new marketplace by themselves.

You will need to actively promote your new marketplace platform to get the business off the ground.

That's where sales and marketing comes in.

First, you will need to find the first sellers and customers and convince them to join you to get your marketplace going. Then, you will need to generate brand awareness to gain traction and grow your new platform.

At the very least, this means mastering the basics of user acquisition and growth, including:

  • organic and paid acquisition
  • social media and community management
  • email marketing
  • partnerships and promotions

As a side note, copywriting is another great marketing skill to have. You will need to be persuasive on your website and in your advertising to convince people to join you. Additionally, you may also need copywriting skills to help your sellers create product descriptions that sell.

In reality, this means learning whatever you need to do to keep your business alive and growing.

 

Operations skills

By now, you've seen what it takes to run a marketplace on a day-to-day basis – we covered this in the operations section earlier.

Stuff like:

  • managing sellers and keeping them happy
  • monitoring users, products and orders
  • resolving customer support questions and technical issues
  • managing payments, doing the paperwork, managing your team....

As a marketplace founder, you will be dealing with the operations yourself from the start.

While you can delegate most of design and development and some marketing to others, you are the one responsible for actually running your marketplace. So, the operations are up to you.

That's a lot of skills you need to run a marketplace! How do you manage it?

There are a few ways:

Doing it yourself

Unless you have an existing team, DIY will be the most obvious approach – especially when you're just starting out.

This approach works best with fully hosted and managed marketplace solutions. If you run your marketplace in the cloud, you have most of your technical and design requirements covered – and can focus on marketing and operations.

If you go DIY, make sure you have the time and the grit to handle everything it takes to run a marketplace. It's a lot of work, so use whatever help you can get – from tools and services to mentorship and consulting.

 

Hiring individual freelancers

Hiring a freelancer is a great way to complement your own skill set without a huge investment and a long-term commitment.

The great thing about freelancers is there are all kinds of them. You'll find people for long term collaboration and one-time gigs, experts and interns, teams and individuals.

When you need a specific thing done quickly without having to learn the skill yourself, hiring a freelancer is the way to go.

And they're scalable. Business going well? Hire more freelancers. Caught in a downturn? Scale back.

Look for freelancers on:

  • large freelance websites like Upwork and Fiverr
  • smaller niche platforms like CloudPeeps
  • groups and communities on Slack, Facebook and LinkedIn.

The drawback with freelancers is you need to very clearly understand and define your requirements – or risk wasting a lot of time and money. The bigger the project you want to delegate, the more detailed specification you need.

 

Working with an agency

If you have a little more budget, consider working with software development and marketing agencies to offload a whole chunk of work at once.

Going with an agency will let you focus on your marketplace operations without having to spend that extra time managing individual freelancers.

Hiring a software agency will cover all of your technical requirements and a marketing agency can handle most of your marketing initiatives.

The drawbacks of working with an agency are higher upfront and ongoing costs and a bigger commitment. Switching agencies is more difficult than swapping freelancers if you realize you're not a good fit for each other or have to scale your budget back.

Finding a trusted agency is a challenge. To make life easier for our clients, we have a list of vetted MultiMerch implementation partners who can take up any custom marketplace project and get it done – on time and under budget.

 

Hiring full time employees

Hiring is hard. You probably won't start hiring full time staff right away, but will get to it eventually as your business grows.

The good thing about employees: they are part of your team and will provide consistency, which is especially important for customer-facing roles and operations. Not only you can expect them to devote 40+ hours a week to the business, they'll also become ingrained in your company culture and future success.

The drawbacks are the cost, the effort required to manage your staff and the trade-off in flexibility. Full time staff is hard to scale and the recruitment process can be real tricky and very time consuming, especially for technical roles.

If you have a limited budget, it's a good idea to hire a few generalist employees such as a versatile marketer or a business developer, then add expert freelancers or agencies to the mix for specific tasks and projects.

 

What to look for when hiring people?

You're running a marketplace business – so, look for experience with two-sided platforms and marketplace commerce when hiring.

This applies to freelancers, employees and agencies alike. The more experience they have working with businesses and platforms similar to yours, the more useful they'll be to your project.

Generic hires might sound more affordable, but will usually perform worse than people who specialize in marketplaces.

And make sure people you work with really believe in your idea and aren't there just for the money.

 

8. Build your marketplace platform

multimerch marketplace guide build marketplace platform

Now you have everything ready to start building your marketplace website. How do you actually get from purchasing software to launching your marketplace?

In my experience, getting a marketplace platform ready can take anywhere from a day (for hosted SaaS platforms) to a few months and longer for custom builds.

Here are some things you can do to make the process easier:

 

Create a specification

The more complex the project, the more difficult the implementation. Marketplace platforms are as complex as ecommerce gets.

To avoid disaster (e.g. going broke too soon due to cost and time overruns), prepare at least a rough functional specification that outlines your project goals, requirements and the implementation timeline.

The more technical work your project needs, the more detailed you want your specification to be. If you plan to work with freelance developers or agencies, having a detailed specification in place may save you months of wasted effort in the long run.

Keep yourself and everyone involved accountable by splitting the project into milestones and tracking progress regularly.

Don't forget to define your MVP and your launch prerequisites in the specification. This includes the features you absolutely need for launch and an approximate deployment and launch dates.

The more specific your timeline, the better. "We need the initial MVP ready and deployed on staging by June 1, do a soft launch with early users by July 1 and launch for everyone on September 1" is more helpful than "We would like to go live with our marketplace in the next 6 to 12 months."

Make sure everyone involved in your project clearly understands the requirements and the timeline – and adheres to it.

 

Master project management

You will need at least basic project management skills to get your marketplace from idea to launch successfully.

This doesn't mean you have to be a project manager, but understanding the basic principles will help you stay on top of things.

If you work with an agency, you will usually have a project manager available to you to keep you informed. If you work with freelancers, you will be your own project manager.

Always consult your technical specification and your timeline when making changes to the project and discuss changes with all parties involved.

Understand that changing one milestone affects the whole timeline down the road.

Do have a backup plan for when things don't go as you expect – because they will. The more people are involved in your project, the more likely it is that something will go wrong, from freelancers going unresponsive to complex features taking longer to implement than planned.

 

Follow the best development practices

Adhering to good development and operations practices will save your team time and ensure the project gets delivered.

You don't have to assemble the top development team, but do pay attention to the basics – use tests, version control and issue tracking extensively throughout the development process.

Use different server instances for development, staging, and production and don't roll out new software updates directly on top of your live marketplace without testing. It's easier not to break things than it is to fix them later.

Keep fresh, automatic backups at all times – and a way to restore them. If something goes wrong (it will), you want to get the operations back up as quickly as possible.

A good principle to follow when building your platform is KISS. Keep it simple stupid when designing, implementing and deploying your marketplace software.

 

Know when to launch

Finally, understand that marketplaces take a while to get right. Rome wasn't built in a day, neither was Amazon. However, you will need real users and real feedback to keep iterating and improving your new marketplace.

Two common mistakes I see among new marketplace owners are launching too soon and not launching soon enough, the latter arguably being the worse one.

So, make sure you start testing with the real users early and use the feedback to iron out all of the early glitches by the time your marketplace is ready for the official grand opening.

 

9. Launch your marketplace

multimerch marketplace guide launch marketplace

It's not enough to create a marketplace website – launching it successfully is as crucial.

How do you launch your marketplace?

A good idea is to launch the new marketplace in two phases – soft and hard launch.

 

Start planning your launch early

The sooner you begin planning your launch, the more time you'll have to talk to people, gather feedback and improve your product and messaging.

Prepare a launch plan by defining your launch timeline, your marketing messaging and the primary channels you'll use. Different industries, regions and marketplace types will require different launch strategies – try and pick the most suitable one.

So, start building anticipation for your marketplace among your target customers and sellers while it's still in development.

If you've done your market research (and by this point, you definitely have), you already know who your users are. Now, go and talk to them – directly, on social media and via ads.

Start gathering a mailing list way before the initial launch – this will let you gauge interest and provide you with a user base of early adopters to reach out to first.

By the time you have your MVP ready for testing, you should have a set of users who know about you and are willing to take part in your project.

 

Roll out a limited beta version first

No matter how detailed your specification and well-designed your solution, you will run into all kinds of issues at first – from software glitches to usability problems to missing or lacking features.

That's why it's a great idea to do a limited release before your grand opening to test things out and make sure everything works just as expected.

Don't wait too long to introduce your solution to your early beta users – do a soft launch when you have your MVP ready, possibly even sooner.

Use your mailing list and talk to users directly to line up a few of the most devoted sellers, then help them get their stores set up on your platform and see how well it works for them.

When your beta marketplace doesn't have look like a ghost town with tumbleweeds, invite a few early customers and see how they like it.

 

Gather feedback, iterate and improve

Now, gather as much feedback as you can – in any way you can.

Talk to your early customers and sellers and write down everything they have to say about their experience.

If possible, arrange meetings in person or record and transcribe interviews with your users.

Most importantly, listen, don't talk. This will give you a whole lot of improvement ideas you can use to make your platform even better.

Then, iterate and improve – spend as much time as you need to improve your MVP based on your soft launch feedback.

And one more thing – don't just use your early adopters as test subjects, but try to establish real relationships and build trust with them. This trust will help you promote and grow your marketplace in the early stages of your business.

 

Launch your improved platform

By now, people are aware of your new marketplace website – it's time to make it officially public.

Run a final set of tests beforehand to make sure everything is working just as expected. Have your team ready for launch – things tend to break down when you least expect them to.

Whatever your marketplace type, try and make an event out of your launch. Go out to where your target users are and bring your launch to them through a webinar, a Q&A session or an AmA post.

Finally, keep the momentum going – your launch isn't the end, it's just the beginning.

 

10. Grow your marketplace business

multimerch marketplace guide grow marketplace business

Hopefully you've launched your new marketplace successfully and new people are starting to use it. Now, it's time to focus on user growth and retention.

Growing a marketplace is somewhat different from regular ecommerce businesses, but they do have many things in common.

Online marketplaces are two-sided, which means you need to focus on growing both your seller and your customer base.

Growing your supply side will be your primary goal in the early days of your new marketplace business, so it's critical to build your pipeline of new sellers and ensure they stick around.

 

Getting your first sellers

Ever visited an online store that has exactly 50 empty categories, 4 dusty products and a single blog post from months ago?

That's not what you want your marketplace to look like when new customers and sellers start coming in.

So, finding new sellers will be your first priority in the early stages of your marketplace business, both while you're preparing for launch and immediately after launch.

You have two main ways of getting new sellers on board – talking to them and inviting them personally and raising awareness via paid advertisement.

Since you've done your market research and picked a niche, you know who your sellers are and where they are – it's time to reach out to them!

Get in touch with every single seller who might be interested in your marketplace because you will get rejected:

Rayan Almuslem
Rayan AlmuslemFounder at Adderah Marketplace

"I had a really hard time convincing vendors to join Adderah. They told me my platform will never take off. They told me I'll just waste their time because my platform is new and nobody would use it. I've been told that people in Qatif don't like to shop online anyways. So I got rejected A LOT."

Don't spam, but try establishing a relationship and offering value instead.

For example, offer them feedback about their products and a free onboarding service to get them started on your platform. You can also offer your first sellers a way to sell their products for free so they can test your platform and get excited about it. Don't focus on fees – you'll start applying them later.

Paid advertising through Facebook, Instagram or Google Ads is another great option to get first sellers on board. It works even if you haven't launched your platform yet – you can run ads against a landing page that explains your project and invites sellers to join.

Make sure to keep your ads hyper-targeted to your niche when doing paid ads – if you're building a local marketplace, run ads to sellers within your city.

Finally, combine regular ads with remarketing and personal outreach to make your system of getting new sellers more efficient.

 

Generating brand awareness and growing the customer base

Now when you have sellers and a decent product catalog, it's time to start attracting customers. This part is similar to growing a regular ecommerce business, but you have a few extra opportunities as a marketplace owner.

Just like with the sellers, social media and paid ads will be your primary channels of attracting new customer traffic.

Set up shop on Instagram or Facebook. While organic social media reach is going down, it's still an important channel for ecommerce brands to use.

Now, set aside a small budget for paid advertising and test a few different channels to see which work best. Instagram is a great channel for highly visual ads. If you're running a handmade marketplace with unique products – show them off!

Additionally, keep search engine optimization in mind – SEO will be your growth driver in the long run. You're a wise marketplace owner and have picked a SEO-friendly platform software, right? If so, your categories, product pages and seller stores should start ranking shortly after launch and bringing new traffic in.

Don't forget your mailing list – use it when introducing new sellers, products and features. Invite new customers and sellers to sign up for your newsletter and keep the list healthy and growing.

Make sure you have a way to measure your efforts – use a free tool like Google Analytics or something more fancy like Ahrefs to judge the performance of your marketing initiatives.

 

Focusing on retention by keeping your users happy

After you've successfully launched your marketplace and have new user acquisition processes in place, it's time to focus on retention.

Why spend effort and budget to acquire new users only to have them never return to your website the next day?

So, you will need to make sure your sellers and customers are happy with the platform and willing to keep using it.

Keep gathering feedback and improving your marketplace. Identify the most active users and schedule personal interviews with them in exchange for a discount code or other offers. Fix issues as soon as they arise.

To make your marketplace easier to use, create a knowledge base for your buyers and sellers that answers the most commonly asked questions. You can also create a guide or a set of tutorials for your sellers that will help them be more successful selling on your platform.

Feature and promote your best sellers by creating case studies and success stories together with them. For example, Etsy's content team does a great job at promoting the stories of their users on their blog:

multimerch marketplace guide etsy featured stores

This will keep them happy and bring new customers in while also helping your SEO efforts.

When you have time, learn more about advanced analytics and conversion rate optimization to make your improvement efforts driven by real data.

Don't forget to keep your marketplace software up to date to make sure your marketplace is secure and efficient at all times.

 

Experimenting with strategic partnerships and competitive advantages

You'll need more than just a regular growth and marketing strategy to beat your existing competition, especially if you're a newcomer to the market.

Think strategically and try offering new, unexpected benefits to your users that your competition doesn't even think about. Do it by constantly experimenting and improving your value proposition through new tools, services, content and strategic partnerships.

If you've just started a new marketplace for handmade items, consider partnering with a local photography business to offer professional photography services to your sellers to make their creations stand out.

Talk to local and regional magazines and trade shows specific to your industry to get the word about your marketplace out.

Partner with adjacent businesses to create additional value for your sellers and your customers and make it an easy decision for them to join and stay with you.

No matter what you do – never stop learning, experimenting and getting better.

 

Over to you now

Hopefully, this guide has made the idea of starting your own marketplace business a little less scary.

Now, I'd like to hear what you think of all this:

If you run a successful online marketplace today, how did you get to it?

Those of you who are just starting out – what stage are you at and how does it feel?

And if you offer services to marketplace entrepreneurs, I'd like to hear from you as well!

In any case, let me know what you think in the comments below.

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Martin Boss

Martin Boss

I'm the founder of MultiMerch, a fan of great software and a marketplace ecommerce enthusiast. Hit me up on Twitter and LinkedIn!

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