How to Build Supply for Your Marketplace: Ultimate Step-by-Step Guide

When you run a marketplace, it’s your responsibility to balance the demand and supply on the platform. If you don’t, you risk losing potential customers because they can’t find what they’re looking for. Or, you may alienate your providers if they can’t acquire customers through your platform.

In the case of new marketplaces, it’s a sounder strategy to build supply first and approach attracting demand afterward. Unfortunately, many marketplaces fail because they don’t know how to do it from scratch and what common mistakes they should avoid.

Today, let us at Digital Suits share this detailed step-by-step guide on building supply for a marketplace. As an e-commerce web development company, we have helped multiple startups not just with developing an outstanding marketplace – but also with preparing it for launch.

1. Define and research your target audience

Before diving into the ins and outs of building supply for a marketplace, ensure you’ve done your homework on the fundamentals of creating a marketplace platform. Those fundamentals start with your target audience. Who are they?

To answer this seemingly easy question, create an ideal customer persona. It is a fictional character representing the customer you want to attract. You can use this ideal customer persona template to do so:

1. Demographics. How old are they? What’s their gender? Where do they live?
2. Occupation and finances. What do they do for a living? What’s their financial situation?
3. Personal life. What’s their background? Do they live alone? Do they have a family?
4. Behavior. What are their interests and hobbies? How do they spend their time?
5. Objectives. What are their goals and ambitions?
6. Pain points. What challenges and difficulties do they encounter? (Focus on the ones your marketplace can help solve.)
7. Your marketplace’s value. How can your marketplace address those pain points? (Be as specific as possible here.)
8. Ideal lead generation. How can they learn about your marketplace? What will push them to sign up and become your customer?

2. Determine your offering

Now, it’s time to pinpoint the scope of your marketplace. In other words, what products or services will it specialize in?

Be mindful: your marketplace has to solve real-life problems your prospective customers encounter. You can do it in one of the three main ways:

• Help them save money on a product
• Help them get a product of a better quality
• Make a particular process more convenient for them

If you lack ideas, here are three questions that can help you settle on your marketplace’s offering:

• Are there assets that are sitting idle in a certain market?
• Are there any fragmented markets you could unify on your platform?
• Is there an existing solution you could improve (e.g., with a reputation or verification system)?

When you decide on your marketplace’s offering, remember to:

• Keep your focus narrow. Your best chance at success is finding and cornering a niche – a specific segment of the market.
• Research potential competitors. See what niches they may underserved. If you want to take on big brands head-on, consider the gaps in their solution on both the customers’ and the providers’ sides.
• Run your idea by others. Talk to people who fit your ideal buyer persona and get their feedback on your idea. Discuss it with people who understand the marketplace business, too – they’ll help you improve it from the business standpoint.

3. Understand who your providers are

You know who your ideal customers are, but what about the sellers? Before answering this question, think about the type of your marketplace – it can tell you a lot about providers:

• B2B (business-to-business): you’ll need to look for providers specializing in B2B services or products
• B2C (business-to-consumer): your sellers are businesses specializing in consumer products or services
• C2C (consumer-to-consumer) or P2P (peer-to-peer): your users are both sellers and buyers that find one another on your platform

When you profile your providers who can help you build supply, you’ll also need to consider their:

• Location. Should they be bound to a specific geography? Or can they provide products or services without being present in your customers’ area?
• Size. Are they self-employed professionals, small stores, or big manufacturers?
• Offerings. What products or services should they provide? Does their product come with any constraints (e.g., expiry date)?
• Business model. What are their marginal costs, for example?
• Customer acquisition channels. How do they get their customers now? And how can you help them with it?

4. Choose your business model

How will your marketplace make money? That’s a question you should ask yourself before you think about marketplace supplies. There are five common marketplace business models you can choose from, as listed below.

But keep in mind: there’s no such thing as “the best business model for a marketplace.” Which model will work best for you depends on the specifics of your platform. Don’t hesitate to diversify your revenue sources and combine different types of fees as your marketplace grows, too.

1. Commission fees

You take a cut every time a customer pays a provider. Sellers don’t have any upfront costs under this model, making your marketplace more attractive. But it won’t work smoothly with large transaction sizes, complex invoicing, or diverse offering types.

2. Subscription fees

You charge some or all of your users a monthly fee in exchange for access to your platform. This model is suitable for marketplaces where no financial transactions occur (e.g., dating sites or recruiting platforms), but it can exacerbate the chicken-and-egg problem.

3. Listing fees

Your providers pay a fee every time they publish a new listing. It’s efficient when providers can get large value out of every listing. However, if they’re not certain they’ll acquire customers on your platform, convincing them to pay for a listing upfront will be next to impossible.

4. Freemium model

Under this model, you offer the basic marketplace features or services for free, while others, more advanced, are accessible in exchange for a subscription fee. Here, you’ll need to strike a fine balance between a free platform version worth sticking around and a premium one worth paying for.

5. Ads

You can offer your providers to feature their listing at the top of search results or advertise it differently – in exchange for a fee, of course. However, advertising becomes a substantial revenue stream only if you have a lot of users on your platform.

5. Settle on your pricing strategy

The same goes for the pricing strategy: there’s no one “correct” strategy for calculating your take rate. Photo stocks can take as much as 60-85% in commission fees, while Uber charges 25%. Etsy, in its turn, takes a cut of only 6.5% in transaction fees.

Your best starting point is analyzing your competitors’ pricing strategy. Then:

• Consider your providers’ profit margins (if they’re low, you won’t be able to charge a large cut of it)
• Decide if you’ll differentiate pricing based on the providers’ performance
• Keep your take as low as possible to avoid alienating prospective sellers

6. Pinpoint what it’ll take for providers and customers to participate

What’s your unique selling proposition (USP) for buyers and sellers? What value does your platform offer? Without answering these questions, you’re unlikely to attract providers and customers to your marketplace.

If you struggle with formulating your USP, here’s a list of four tips for crafting a compelling one:

• Avoid generic phrases like “we offer the best quality at an affordable price.” Be specific – and don’t repeat after your competitors.
• Concentrate on what matters to your customers. If you don’t, your message won’t resonate with your target audience.
• Don’t make misleading claims or embellish the truth. Your USP has to be reflected throughout every part of your business.
• Create separate unique selling propositions for your customers and your providers. Their motivations for joining your marketplace will differ, and so should your sales pitch.

7. Select your supply-building strategy

There are three main strategies you can employ to build supply for a marketplace. Choose one before moving on to finding and attracting your first providers.

Comprehensiveness

This strategy focuses on bringing in as diverse and extensive a supply base as possible. Think of Netflix at the beginning of its journey as an example here. It positioned itself as the only subscription you’ll ever need to watch all your favorite TV shows and movies.

However, as enticing as this strategy may be, it takes time in execution. The inventory will be constantly changing, making it more difficult to keep track of it.

Another potential challenge is supplier power. In certain highly concentrated industries (e.g., air travel), providers can dictate the take rate for a marketplace.

Exclusivity

Let’s return to the example of Netflix. Once the company realized it would be next to impossible to offer every TV show and movie in streaming, it switched to the exclusive content strategy. Disney+ uses the same approach today: you can find your favorite Star Wars TV show only on this streaming service and no other.

The allure of this strategy is unmistakable: you can attract customers by offering products that they can’t find anywhere else.

However, this creates a challenge: multi-tenanting of the demand side. In simple terms, customers can participate in multiple marketplaces with similar offerings to reach the same goal. (This doesn’t mean customer retention is guaranteed to be complicated. Exclusive supply can drive demand.)

Another challenge is achieving and maintaining supply exclusivity, especially for a newly created multi-vendor platform.

Curation

Curating supply means you handpick which providers and listings end up on your marketplace. To do that, you must have clear-cut criteria in place. For example, you can verify that second-hand haute couture apparel items aren’t knockoffs before listing them on the platform.

On the one hand, this way to build supply for a marketplace can help you build trust with your potential customers. The vetting process alone plays significantly into it. Plus, it can help you stand apart from big competitors that have (at least seemingly) laxer supplier rules.

However, there are some challenges to this strategy, as well. It can inadvertently cause you to cut off all of your customer segments but one, for example. (That’s why it’s a better strategy for catering to various segments within one marketplace as Airbnb did with Airbnb Luxe.)

Curating is also a time-consuming and hard-to-scale process. And it can easily lose out to existing social proof on your competitors’ platforms.

8. Start building the supply side of your marketplace

Now, it’s time to build out your initial supply. Do it before you work on the demand side of your business. Attracting customers will be much easier when you have something to offer them.

But how do you convince providers to join your online marketplace before you have a substantial user base? And are there any workarounds? Let’s break down three common strategies for building the initial marketplace supply.

Create the initial supply yourself

If it’s in your power, creating the initial supply yourself is the surefire way to build supply fast and with minimum hiccups. For example, you can list your own services as a personal trainer if you create a virtual trainer marketplace.

You don’t have to limit yourself to your possessions or services. Ask your friends and family – they may want to help you by making the first listings.

You can also hire someone to create products for you. This goes well for content: e-books, reports, and so on. Or, you can buy certain products and resell them yourself. However, these two tactics will require more investment on your part.

Bring existing supply to your marketplace

Sometimes, you don’t necessarily need to build supply from scratch – instead, you can aggregate the existing offerings. That’s exactly what Udemy did: the company grew the platform by adding existing online courses (distributed under the Creative Commons license).

With this approach, you can scale your marketplace fast with minimal investment. However, keep in mind: it can’t be your only solution. There are two reasons for that: If your website serves as an aggregator, your supply won’t be unique. Why would customers stay on your marketplace instead of going to the source of the supply, then? Instead of becoming a marketplace with a high engagement rate, your website risks becoming a cross-platform utility.

Go where your potential suppliers are

First, you need to understand where your platform-building supplies are, both online and offline. Then, reach out to them using their preferred communication channels – and use the tips below to convince them to join your marketplace.

Where to look for your first providers

Here are several tactics for finding your initial supply:

• Check other marketplaces and reach out to providers who are already present there (that’s what Airbnb did)
• Google your potential providers or look for them on sites like Yelp and Trustpilot
• Scout for providers on relevant online forums and Facebook groups (they can be an effective online marketplace for building supplies)
• Use your personal network, if applicable

As for communication channels, use the ones that are at your disposal. Social media can sometimes be the best way to pitch your marketplace to a potential provider. In others, they may be accessible only via email.

How to convince providers to join your platform

So, you have a list of potential suppliers. How do you sell them on the idea of entering your marketplace? Here are the five most efficient tactics:

• Highlight your strengths compared to other marketplaces (if the provider is already active elsewhere). They can include a better user experience, lower fees, a reliable trust mechanism, or even a stake in your company.
• Market your platform as an exclusive club. For some platforms, building supplies can be done through a rigorous vetting process to highlight their exclusivity. Advertise your marketplace as the place for “the best of the best” among providers. When you reach out to potential suppliers, tell them they fit the bill in specific ways.
• Convince providers you have buyer potential. To do it, you need access to the communities of your potential customers. You can gain it by striking partnerships with influencers. Then, you can list these communities as your buyer potential.
• Offer incentives or pay for the initial supply. Uber used to pay its drivers for their time, for example, even if they were sitting idle. You can choose a similar route – or offer lower fees (or no fees at all) for the first month, for example.
• Offer something more than a customer acquisition channel. Instead of promising access to potential customers, make it a nice bonus – and highlight the marketplace features providers can find useful instead. For example, sell your platform as an inventory management system first and a marketplace – second.

When it comes to your outreach efforts, here are four steps you should take to maximize their efficiency:

• Craft several outreach messages
• A/B test them
• Select the one that works best
• Refine it to perfection

How to get your providers to stay

Once the supplier signs up on your online marketplace, make sure to track their activity. If they don’t create any listings, you can reach out to them and offer help with creating one. (Remember to make your messages personalized.)

The key to minimizing the bounce rate among providers is comprehensive support – and fast ROI.

First, you’ll want to build a strong relationship with your early users to enhance trust and loyalty. You can do it by helping them optimize their listings and asking for their feedback on the platform features.

What about ROI? You need to reward your early adopters with a tangible win as fast as possible. This bonus doesn’t have to be a sale, necessarily. For example, tagging them on social media is a quick way to promote their product and build brand awareness.

9. Understand what supply and demand balance is

Many marketplaces fail because they can’t maintain the equilibrium between supply and demand. But this equilibrium doesn’t refer only to the number of customers and providers, however.

The match between the products on your website and what your customers are looking for is called marketplace liquidity. And it is much more critical for your success than the raw numbers of customers and providers.

Without this match, sellers won’t generate enough sales to keep them interested in your platform. Potential buyers, in their turn, will be less likely to turn into your actual, loyal customers.

Four main factors determine the probability of a transaction taking place on your marketplace:

• Intent – what the customer is looking for
• Budget – how much they can afford to spend
• Availability – whether your marketplace has the product they’re looking for
• Trust – whether the customer trusts your marketplace enough to make a transaction

In a marketplace setting, you have several ways to find and maintain this sweet spot of balance between supply and demand, as listed below. However, keep in mind: to make a wise choice, you need to track specific supply and demand metrics, such as provider-to-customer ratio.

The exact provider-to-customer ratio you should aim for depends on the type of products or services in your marketplace. It can be anywhere between 1:10,000 for photo stocks and 1:5 for second-hand buying-and-selling platforms like eBay.

Tweak the platform fees

The basic rule of supply and demand for most products is “the lower the price, the more people will buy it.” But you can’t outright dictate prices on your marketplace. However, you can provide incentives for your sellers to lower their prices if they attract more buyers of these products.

These incentives come in the form of decreasing platform fees. This won’t just make the products more affordable for customers. Your providers can also see it as an incentive to create more listings.

If it’s the supply side that’s lagging, consider ramping up your outreach efforts to attract more providers.

You can also reassess your monetization approach. For example, if you currently charge a listing fee, consider switching to a commission fee instead. This can be a great incentive for providers to create more listings since they don’t pay anything until a transaction occurs.

Use operational tactics to attract more supply or demand

If there is a mismatch between supply and demand, you can counteract it by working on the supply-side marketplace:

• Offering incentives for new providers to join your platform
• Reaching out to more potential providers
• Offering incentives to existing suppliers for creating more listings (a lower take rate, “first ten listings free,” etc.)
• Providing support for existing suppliers in creating listings and selling

However, if the demand represents the root cause of the problem, you can stimulate it by:

• Offering discounts for new or repeat customers
• Organizing sales
• Offering free shipping
• Ramping up or adjusting your content marketing efforts
• Optimizing your website for search engines

Make sure to outline the tactics you will use in various scenarios when planning your marketplace’s launch and growth. Otherwise, you risk making unreasonable decisions that may cost you a lot – and have little effect on your marketplace’s performance.

10. Track your supply and demand metrics – and act accordingly

As mentioned above, the provider-to-customer (or seller-to-buyer) ratio is the key metric you should track to understand the state of the supply and demand on your platform.

However, it’s not the only metric you should track on your marketplace. Make sure you also keep an eye on the following six indicators.

1. Transactions per buyer

This metric will illustrate how willing customers are to return to your marketplace. The higher it is, the more repeat buyers you have.

2. Transactions per seller

There’s no one correct rate you should aim for here: it depends on the type of products exchanged on your platform. However, this metric should demonstrate steady growth at the beginning of your marketplace’s life.

3. Provider liquidity

This is the probability of a listing leading to a transaction on your platform. Essentially, it’s the ratio of the stock sold to the stock present on the platform. It can be measured monthly, daily, or hourly, depending on the product type.

4. Customer liquidity

This is the probability of a visitor making a transaction on your online marketplace. (Users that bounced don’t count as visitors here.) You can roughly estimate it by dividing the number of transactions by the total visits. It’s better to filter out visits from providers to get a more accurate result, however.

5. Gross merchandise volume

This is the best metric to measure the rate of growth of your online marketplace. It represents the total value of products sold on your platform within a given time. Gross merchandise volume is a better metric to understand your growth rate than the number of customers, users, or listings.

However, to understand the health of your business, calculate your total revenue instead. You can do it by multiplying the gross merchandise value by your take rate.

Customer conversion funnel

You can – and should – measure the conversion rate at key points in the customer journey. The conversion rate refers to the share of visitors who proceed to the next step in the funnel among all visitors. The overall customer conversion rate is the share of users that become your customers.

Tracking the conversion rates throughout the whole funnel will allow you to identify the main bottlenecks. Those are the points where visitors decide to bounce instead of following through with the customer journey.

For example, if the bounce rate isn’t a problem and your visitors stick around on your website but don’t visit any listing pages, you need to improve your customer liquidity. You can do it by adding more supply or refining it to match the customer’s needs.

11. Diversify your offering and monetization strategy

At the very beginning, you’ll have to keep your take rate extremely low – enough to get by, essentially. You’ll also need to choose the platform monetization strategy wisely to attract providers. Most new marketplaces opt for commission fees or the freemium model.

Based on the data you gather, you may see the need to change your pricing or monetization strategy – or both. Once the value of your marketplace grows – and only then – you can add other monetization models, like ads or listing fees.

If your marketplace grows steadily, you should also start segmenting your customer base. You can cater to their particular needs by diversifying your offering, like attracting suppliers that provide new types of products and launching new features and services on your end.

In conclusion

Building supply for a marketplace is a continuous process. While you should concentrate on it before the launch of your platform, you can’t forget about it after your marketplace goes live. You have to track your supply and demand and act based on the data you collect.

But even before you can build supply, you need to do some preparations. Let’s recap them:

• Define and research your target audience
• Determine your marketplace’s offering
• Understand who your providers are
• Define your business model
• Settle on the pricing strategy
• Determine your unique selling proposition, both for providers and customers
• Select your supply-building strategy

Don’t hesitate to create the initial supply yourself when your marketplace is in its newborn stage – or aggregate existing supply if possible. However, remember that to be sustainable, you need third-party providers.

Once you bring in your suppliers and launch the marketplace, track the crucial metrics and take action to balance and match the supply and demand on the platform.

Have you found this guide helpful? If so, we have more guides on marketplace development in stock. Subscribe to our newsletter – and we’ll keep you updated on the latest insights from DigitalSuits.