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.
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:
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:
If you lack ideas, here are three questions that can help you settle on your marketplace’s offering:
When you decide on your marketplace’s offering, remember to:
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:
When you profile your providers who can help you build supply, you’ll also need to consider their:
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.
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.
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.
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.
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.
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.
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:
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:
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.
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.
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.
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.
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.
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.
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.
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.
Here are several tactics for finding your initial supply:
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.
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:
When it comes to your outreach efforts, here are four steps you should take to maximize their efficiency:
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.
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:
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.
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.
If there is a mismatch between supply and demand, you can counteract it by working on the supply-side marketplace:
However, if the demand represents the root cause of the problem, you can stimulate it by:
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.
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.
This metric will illustrate how willing customers are to return to your marketplace. The higher it is, the more repeat buyers you have.
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.
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.
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.
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.
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.
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.
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:
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.
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There are three ways to build supply: find more providers, create some of the supply yourself, or bring in the existing supply from other sources.
To attract more suppliers to your platform, highlight the value of your marketplace, show your buyer potential, and offer incentives. You can also pay for the initial supply.
To increase the number of listings, reach out to your existing suppliers and support them in creating and optimizing their listings. Reward them for their loyalty, too – for example, by providing exposure for their brand on your social media pages.
There are multiple ways you can find your prospective suppliers:
There are six time-tested methods to attract potential providers to a new marketplace:
When you work on your sales pitch to build supply, create several versions of it and A/B test them. Based on the results, settle on the most efficient one and refine it.
First, you’ll need to understand what your ideal provider-to-customer ratio is (it depends on the type of your marketplace). Then, you can tweak your platform fees to increase demand and supply by indirectly lowering prices. You can also change your monetization strategy to stimulate the supply side of your business.
In a nutshell, creating a successful multi-vendor marketplace platform requires you to:
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