eCommerce Marketplace Growth: Solving the Chicken and Egg Problem

eCommerce Marketplace Growth: Solving the Chicken and Egg Problem

Stefan MancevskiStefan Mancevski

July 15, 2021

eCommerce marketplaces see a pretty serious growth obstacle that other businesses don’t. They have to serve both sides of the market – the supply side and the demand side.

This is a tricky situation to maneuver – you have to appease both sellers and buyers on your platform, meaning you don’t have the luxury of only dealing with one target audience.

Naturally, this leads to big issues when first starting out – which side of the marketplace should you target first? Targeting both simultaneously is expensive and a distracting division of resources.

One has to come before the other.

On the other hand, targeting just one side of the marketplace means you have to make a lot of promises about future performance – a tough sell from an up-and-coming company.

That’s where the “chicken & egg problem” comes into play. Which came first? Which should you build first?

Luckily there are a few best practices you can use to tackle this chicken & egg problem. They all stem from running small, targeted tests to validate your marketplace, generate transaction flow between suppliers and buyers, and double down when you find the right growth levers.

The first of those best practices? Target the supply side first.

Here’s why:

Supply Side Growth: Start Small

The reason the supply side should be your first target is obvious – as long as you’re being smart about it, suppliers have literally nothing to lose and everything to gain by entering your marketplace.

A second, even more obvious reason you need to start supply-side first is that acquiring customers without a product to sell is impossible. You need to be able to serve the needs and interests of your buyers, and without suppliers in your marketplace, that just won’t happen.

Part of this is doing your research. Who are your target suppliers? How can you reach them? Are you doing direct email outreach, or are you going to use targeted ads to get your brand in front of them? And how are you going to sell them on a small, growing marketplace that has yet to see major activity between buyers and sellers?

But research takes time, and you might want to have activity on your platform even faster. For that, you can go the “fake it ’til you make it” route and simulate supply so that you can drive in demand. Reddit, though not a marketplace, is a great example of a company that “faked it” in the early days.

As you can see in the video, that tactic ended up driving growth for them early on, validating the idea that people wanted a forum to share pictures, have discussions, and interact.

Tactic from the Ladder Playbook:

“Fake” Supply

If you’re starting a marketplace, you need to fill your supply side. But chances are, you’re not able to immediately get tons of suppliers on board. That’s ok! A good way to validate supply is to “fake” it. This doesn’t mean not having actual supply, but creating that supply yourself. So if you’re creating a marketplace for outdoor and hiking gear, buying up some small inventory (or using your own/your friends’) can be a good proxy for actual suppliers as a way to test value propositions, have activity on your marketplace, and entice new suppliers to get on board.

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But let’s go beyond the obvious – you’ve probably figured this out yourself.

Here’s what many marketplaces fail to understand:

You don’t need to grow AND scale your supply side before you work on demand generation.

Instead, you can validate a small number of suppliers using small, targeted demand generation.

Validate First, Then Scale

Marketplaces that fail try to eat the whole pie at once. Look at any marketplace that’s had difficulties scaling their business. You’ll often see that they went broad rather than narrow, trying to be everything for everyone.

On the other hand, successful marketplaces often start tiny, targeting specific geographies, providing limited product category offerings, and expanding only when they’ve proven their model for a specific market.

Tactic from the Ladder Playbook:

Narrow Geography Targeting

This tactic requires media budget

Targeting an audience at a more local level can help you better target your audience and avoid serving ads to businesses or consumers that you’re not trying to reach. Especially if your business is a retail store with locations in specific geographies or if you want to focus an ad campaign on audiences in specific states or countries, narrowing your ad’s geographic reach will focus your ad spending on the most relevant audiences.

Narrow Geography Targeting

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Why does this work? Because it allows the supply and demand side to begin transacting without an overly broad and expensive scope for the marketplace company. It’s a focused, targeted approach that can later be expanded based on what works and what doesn’t.

For example, if you’re creating a marketplace for renting outdoor camping gear, you can start with just the basics – tents, sleeping bags, etc… – target a high-volume area for that type of activity (i.e. Boulder, CO), get a few suppliers on your platform, and target camping enthusiasts with ads on Facebook, Twitter, etc…

Have some transactions roll through and judge the quality of your marketplace. Are your suppliers following through with sales? Are your buyers actually getting what they want? Where are things going wrong, and what could be improved?

Remember, at this point you should be in data-gathering mode, not seeking high revenue and high ROI on your marketing efforts. You’re running a smart, targeted test to see whether your marketplace actually adds value to both sides of the market.

From there, it’s your decision whether the data points to something that works or something that needs changes.

Validate + Double Down

Once your test concludes and you’ve judged it to have a positive impact on your business, it’s time to double down. That means sticking to the same parameters of the test you ran, but scaling it up on both the supply and demand side.

On the supply side, you’ll now be armed with crucial data that can convince further suppliers to come on board. Increase your ad spend to acquire more supplier leads. Create case studies, write about success stories, and build other pieces of high-value content that you can use to nurture those leads.

You can continue to provide a very limited number of product/service categories, or expand outwards if you’d like. Early on, the general best practice is to stick to the products/services that are working well, create a breadth and depth of suppliers, and then expand out.

Tactic from the Ladder Playbook:

Less Choice

Give a visitor less choice, instead of too many options. Too much choice can limit conversions: The more options you give a potential customer, the harder their decision-making process becomes. Barry Schwartz’s famous Ted Talk on the Paradox of Choice gives a great overview of how too much choice can lead to over-analysis and buyer’s remorse. There is an argument to be made that giving the customer a lot of choice can be freeing for them, but as with all solutions, the best approach is probably to rigorously test each hypothesis.

Less Choice

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On the demand side, you can start expanding your geographic targeting if you feel you’ve properly set up a system to scale your starting geography. Remember, it’s only worth going beyond your current geographical market if you’ve built a repeatable, scalable growth system.

Tactic from the Ladder Playbook:

Customer Lookalike Audience

This tactic requires media budget

Try targeting an audience that looks like your current customers with your advertising. Target them based on your current customers’ demographics, shared interests, geography, etc… You already know what kinds of customers your business draws and targeting people similar to them is a great way to expand your reach and increase ad performance.

Customer Lookalike Audience

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Repeatability & Scalability

The whole point of the process outlined above is to create a repeatable and scalable system for growth. That means building out a model that will allow you to expand into other areas of your marketplace step by step. Proving the value of your marketplace in a single section of your market gives you the firepower, data, and numbers you need to convince suppliers in another part (geography, item category, etc…) to come on board.

Once you get suppliers on board (especially bigger, more prominent ones), it gets a lot easier to pull growth levers that focus on demand generation. One such tactic might be to take the brand keywords of your suppliers and use them to run ads for your marketplace. To take the example mentioned in the first tactic above of an outdoor gear marketplace, you can run ads on supplier brand keywords like Patagonia, The North Face, etc… to grow demand.

Tactic from the Ladder Playbook:

Supplier Brand Keywords

This tactic requires media budget

Bidding on the brand keywords for the suppliers of the products you stock usually yields relatively cheap traffic. You do have to be careful as many supplier or affiliate relationships expressly forbid this and either way they may tell you to turn this off. However this tactic works so well that it’s common practice amongst aggregation sites.

Success Rate: 59%




Supplier Brand Keywords

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This approach lets you build on the success of your supplier growth efforts, enabling you to take advantage of the effort you put into growing your supplier base for long-tail demand growth.

From there, it’ll all be about ensuring happiness on both sides of the marketplace. On the demand side, enable your customers to report bad-actor suppliers, review transactions and purchases, and share and show their love for your platform and for the people that provide goods/services on it.

On the supply side, create protection systems that prevent your supplier partners from getting taken advantage of by abusive practices from potential malicious actors. SSL certificates, verified payment systems, and fraud monitoring can go a long way to building trust and keeping your suppliers happy and transacting.

Convert Your Site To SSL

This is a ranking signal that helps keep your user’s data secure. Display your SSL certification and customers will gain a piece of mind knowing that their credit card, personal information, and purchase history are safe. You can get your site secured for less than $50 a month.

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Conclusion: From Beta to Business

The goal of these tactics and the aim of solving the chicken & egg problem is to go from being a product in beta to a full-blown, scalable business. But for that, you need to start very small in the early days. Treat your marketplace as a beta. Build buzz for your demand-side by creating landing pages on tools like KickoffLabs. Get people excited to shop on your platform and interact with your sellers.

And once you’re ready — once you have validated your beta and you’re seeing repeatable growth — you can double down, start spending big budget for growth, and turn your beta into a business.

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