Hyper Growth in Multi-Sided Marketplaces with Nima Gardideh
TL; DR
There are more multi-sided marketplaces than ever, and many entrepreneurs and investors are trying to create the next big platform. But what are multi-sided marketplaces, how do they work, and how can you create one?
Here are some of the things you need to know about multi-sided marketplaces:
- What are They? As the name suggests, multi-sided marketplaces are marketplaces with multiple sides, namely the service providers and the customers. Craigslist is one the most famous examples, but many brands use this business model, including Uber.
- How Do You Launch Them? To launch a thriving multi-sided marketplace, you need a lot of service providers from day one, but they won’t sign up if there are no customers, and customers won’t sign up without service providers. Some solutions include the Uber model, which involves planning a launch, creating a buzz, getting drivers signed up in advance, and then launching when ready.
- How Do You Grow Them? You can grow a multi-sided marketplace through word of mouth and offline and online marketing. Everything else will happen naturally if your platform is well-built and ready for growth.
- How Do You Manage Risk? In an increasingly uncertain world, it’s vital to protect your business. Keeping some of your capital aside, reducing risk in your supply chain, and investing frugally can all help with risk management.
Nima Gardideh finished the episode by offering his most remarkable insight into building and growing a multi-sided marketplace. If you’re thinking about starting your own “Uber for X” company or have a brand you’d like to grow, this is an unmissable video and guide.
How To Build And Grow A Multi-Sided Marketplace
Nima Gardideh co-founded Pearmill, a growth studio specializing in optimizing and scaling multi-sided marketplaces. These brands have dominated the worlds of tech and business over the last decade and will continue to play a significant role in our future.
But what are multi-sided marketplaces, how do you launch your marketplace, and what are the best strategies for growing and scaling such a business?
I asked Gardideh these questions, and he was happy to offer his advice and expertise, outlining some techniques he has used to scale multi-sided marketplaces.
What Are Multi-Sided Marketplaces?
Before we spoke about growth strategies for multi-sided marketplaces, I asked Gardideh to clarify what they are.
He used Craigslist as an example.
Craigslist is a marketplace that relies on multiple vectors or “sides.” It needs service providers to advertise their services and consumers to buy them.
If you answer a post selling a car and then purchase that car, you’re dealing directly with the seller and not involving Craigslist in the process. The platform connects you, but its role doesn’t go beyond that.
On the flip side, an online store offers a product directly and is responsible for packing and shipping it when an order is placed.
Of course, some multi-sided marketplaces take more of an active role.
It must assume some responsibility if the marketplace offers a specific service, such as connecting cleaners to homeowners, caregivers to patients, and nannies to parents.
Unlike Craigslist, it can’t just take a backseat and let the seller and customer hash things out. It must vet the service providers to ensure that dangerous and incompetent people don’t make it onto the platform. It may also provide a payment network and offer meditation, escrow, and other services that benefit both the buyer and seller.
This is where things get a little more complicated, but it also allows the platform to charge a higher fee for its service.
What Are The Two Types Of Multi-Sided Marketplaces?
As noted, there are two kinds of multi-sided marketplaces. You can either go wide or go short.
In other words, you can cover multiple categories and locations like Craigslist or stick with something regional or specific like food delivery, gardening, and cleaning.
The latter has also been referred to as “Uber for X,” which I have previously discussed with Bryan Clayton, who founded his multi-sided marketplace.
One option has more transactions. The other is more specific and focused. Both can be complicated to set up and scale and typically require a lot of capital and hard work.
How Do You Setup A Multi-Sided Marketplace?
It’s easier than ever to create a business, which is why more start-ups are out there than ever.
Just find your product, launch a website on Shopify or WooCommerce, and look to platforms like Google Ads and Facebook Ads for all your advertising needs.
With a multi-sided marketplace, it’s a different story entirely.
This is not the sort of business you launch on a shoestring budget. You can’t simply rely on your hard work and a growing list of freelancers as you can with a digital marketing agency, drop shipping brand, or e-commerce store.
You need service providers before customers, but service providers will be reluctant to join if you don’t have customers.
It’s a catch-22.
In a chicken and egg scenario, most businesses get the egg and slowly hatch the chicken. They have time to think, plan, nurture, and grow. With a multi-sided marketplace, you need both the chicken and the egg to be present simultaneously.
You can’t start small, either. It might seem logical to assume that people will use your site if you have just one or two service providers, after which you can add more and gradually scale. But that’s simply not the case.
If you need to hire a cleaner, mechanic, or electrician, and you stumble across a multi-sided marketplace, would you be happy with a choice of just one or two in your area?
Probably not.
You’re using that site to give yourself a wide variety of options and to compare and contrast.
If your only option were an unrated cleaner 20 miles away, you’d just use Craigslist instead. After all, no matter how niche your focus is, there’s always an alternative out there, so it’s never easy to convince people to join your platform.
By the same token, the service providers won’t stick around if the consumers aren’t using your marketplace. And if there are no service providers, you have nothing to offer those consumers.
You must ensure that both sides have enough pull and reason to stick around. You also need to make sure that all areas/categories are covered.
Suppose we use children’s care as an example. In that case, consumers will be looking for nannies in their area, as well as ones that have relevant experience, work with kids of a specific age, and can meet requirements regarding working hours, pay, travel time, and more.
There are many vectors on which you need liquidity. So, how do you cover such a broad range?
Well, it’s not easy, and there’s no single solution.
In Gardideh’s experience, each company has had its way of solving this problem.
The first option is to high full-time workers.
For instance, let’s assume that your multi-sided marketplace offers cleaning services. You need lots of service providers in each region, so you stick with a single region to begin with, and hire cleaners to offer their services in that region.
They’re not using the platform as freelance providers hoping someone will hire them. They’re getting paid for their time and their work, and you’re getting the guarantee that they will be available when customers need them.
Once the marketplace grows and has the required reputation and exposure, others will join, and the marketplace can grow organically from there.
By scaling regionally, you can plan for each city/town in advance and ensure adequate interest before you commit to a full-scale launch.
Of course, that requires a lot of capital, and it’s very risky. You could find yourself with a colossal payroll and not enough customers or commission to cover it. You might attract some interest from investors, but there’s no guarantee, and if it’s not done correctly, this is a surefire way to lose a lot of money in a short time.
Another path is to build the demand, create the buzz, and then launch. It’s a model used by Uber, which means that your service can be launched region-by-region without the need for full-time employers.
The idea is that you lay the foundation before making any serious commitment. You advertise and line up enough service providers and customers to ensure you’re ready to go from day one.
Not only will this give you the service providers you need on launch, but it also means you can spend the interim period vetting and training them.
In the cleaning example, you could spend a few weeks advertising the service in local media via billboards, flyers, and targeted social media ads. You’ll create a buzz among professional cleaners and hard-working freelancers and let customers know who you are.
As cleaners sign up for your services, you can perform the necessary background checks to ensure they are a good fit.
Of course, this option still requires a lot of planning and investment, but that’s usually the case with multi-sided marketplaces.
Regulation, Legislation, And Control
Regulation is critical when running a multi-sided marketplace, valid on the legal side of things and concerning your business structure and pricing models.
Uber and Lyft are great examples. Without legislation and control, consumers would just drive the cost of the rides down to the price of gas. These services have already been driven out of some cities, and if there were no controls, they would have faded into obscurity long ago.
The same is true for services like Upwork, which serves as a platform for freelance creators and those seeking to hire them.
Many years ago, before it adopted its current name, this platform was overrun by freelancers from countries like India and Bangladesh undercutting everyone.
Somebody would offer a job, US/European freelancers would apply for upwards of $10 an hour, and freelancers from cheaper countries would offer their services for $1 or less per hour.
Sometimes, these freelancers weren’t completing the jobs and creating the content. There were many incidents of them using spinning software to auto-generate text or stealing images from other creators.
Upwork couldn’t ban entire countries, primarily when these bad actors only constituted a small percentage, but they also ran the risk of a freelancer exodus. After all, US/EU freelancers just couldn’t compete with such low prices.
Upwork began charging a 20% commission on earnings of $500 or less to counteract this. They knew that the bulk of these bad actors was only looking for a quick buck, so they would never exceed $500 with a single client.
They also banned certain undercutting practices and cut down on scammers. It worked, and Upwork is now the biggest platform of its type.
Think about how genuine service providers use your platform and how scammers abuse it. If you can cater to the former and make life difficult for the latter, you could have another Upwork or Uber on your hands. If not, you’ll end up with a platform with a reputation for delivering low-quality services and being filled with scammers.
No company can survive that.
Dealing With Market Disruptions On A Multi-Sided Marketplace
The world can change in a heartbeat, and if your business is not prepared for those changes, it may not survive.
Before 2020, we were all a little guilty of being ignorant of how quickly and drastically things could change. Except for the 2008 recession, we had been living in a veritable golden age without really realizing it.
Then we were hit with a global pandemic followed by a major war in Europe. The last couple of years have been insane, and while the worst of the pandemic might be over, we still have some dark days ahead as far as the global economy is concerned.
So, how do you prepare for all of these? How do you keep all of those service providers on board and ensure that customers keep coming?
Well, there is no natural way to predict these life-changing events, but you can practice risk management and soften the blow when it comes.
Nima Gardideh recommends keeping some of your capital back, watching the markets, paying attention to the trends, and being prepared.
Reducing the risk of supply chain issues is also vital. Don’t put all of your eggs in one basket because if you’re cut off due to sanctions, trade issues, or lockdowns, your entire business will grind to a halt.
And when times are tough, as they are now, be more frugal with your money and careful with your investments.
You can still grow, but now is not the time to take significant risks.
We could have months and even years of austerity ahead. Things aren’t as bad here in the US as elsewhere, but we’re still part of the global economy, so we’ll still feel the effects.
The $100,000 Question
At the end of my chat with Nima Gardideh, I asked him the question that I ask all of my guests on This Week With Sabir: What is your best piece of advice?
After a bit of consideration, Nima offered some insights into the best marketing platforms.
He noted that paid social and paid search are still number 1 and 2.
But that doesn’t mean you should throw all your money at Facebook/Meta and Google Ads. As effective as these solutions are, they won’t work for everyone.
You should invest some money in these platforms to test the waters, but don’t throw everything at them and wait for the customers to roll in.
If you’re offering a service that only appeals to customers under 20, you probably won’t get many customers on Facebook. If you have something that is hyper-local, Google Ads might not be the best option.
Try to walk through the customer’s day and think about where they go and what they see.
Where are they spending their time, what are they doing, and how can you be seen for the lowest cost?
Are they spending much time on the road in their cars in specific areas? If so, billboards or radio might be the way to go. Are they heavy readers? Then consider releasing helpful books and advertising in book groups. Are they spending all of their time on Facebook or Instagram? Then invest in social media ads.
There is no one-size-fits-all solution.
And don’t underestimate the power of word-of-mouth and good reviews.
If your service providers aren’t good enough, your launch will be bogged down by complaints and issues. If customers are given too much power or your fees are too high, those providers will take their business elsewhere.
Professionals communicate. They attend conferences. They share information. If your platform lets one of them down, they won’t recommend it to others.
If you let the consumer down because you didn’t vet the service providers, they will tell their family and friends to avoid it. You’ll also be inundated with bad reviews.
Multi-sided marketplaces are not something you can launch and leave. You’re not simply a noticeboard that allows providers to acquire new clients. You have a level of responsibility and a reputation to uphold.
About Nima Gardideh
Nima Gardideh is the Co-Founder of Pearmill, a tech-powered growth studio that combines the power of artful creativity with precision targeting on major digital platforms. He is an expert in growth experimentation, organizational design, operating systems, agile software engineering, funnel optimization, and UX. Visit Nima on the web at https://pearmill.com.