Successful Marketplaces Begin With Understanding Value
Heads the COE team at Torry Harris (THIS). Assisting telcos, banks and large enterprises define integration strategies.
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This is the second blog in a series looking at how digital transformation makes it possible for all companies to benefit from platform business models and network effects. We started by looking at marketplace opportunities and why network effects are important. This blog looks at what makes marketplaces successful—and why many fail. Next time, we’ll explain how to use a pilot to create a 5G-enabled marketplace.
Launching A Marketplace
The powerful combination of 5G, cloud technology and open application programming interfaces, or APIs, is enabling companies with traditional business models to transform into platform providers and marketplace operators. The biggest benefits of this kind of modernization are the ability to tap new revenue, strengthen relationships with existing customers and increase the value of a company’s core assets.
But figuring out how to launch a marketplace can seem like a daunting challenge. It doesn’t have to be if companies think big but start small. The first and most important step in the process is understanding what makes a marketplace successful and why they often fail.
A marketplace should be viewed as a catalyst for generating value for all its participants. A platform provider can, of course, expect to earn new revenue from the marketplace, and that’s an important reason for building one. However, much of the value comes from enabling the success of customers and partners and increasing traffic to the core business.
For example, communications service providers are developing platforms not only to provide new offers to customers through partners but also to sell more of their core connectivity services. As they deploy 5G, they are creating digital ecosystems in many vertical sectors to deliver exciting new capabilities. Vodafone, for example, is working on a marketplace for drones, where it will sell not only its own connectivity services but also the devices themselves and other capabilities such as management and location services.
Building Trust—And Keeping It
Marketplace success depends greatly on a company’s ability to monetize the trust it has with customers. As Rob Chesnut, formerly chief ethics officer and general counsel at Airbnb, notes, “I think if you are operating a platform, you are in the trust business…you’re in the business of helping people trust each other on your platform.”
It is also important to define the business KPIs of the marketplace and its success parameters. This will ensure repeat business transactions through the platform. Generating repeat business can be a big challenge if partners and customers use the platform as a meet-and-match or glorified Yellow Pages, meaning they meet on the platform but then leave it after the first transaction to conduct business one-on-one.
The platform provider needs to deliver value that partners cannot independently provide. Consider a healthcare ecosystem as an example. A marketplace might connect pharmacies, doctors, hospitals, diagnostic labs and emergency services. To deliver added value and “stickiness,” the platform provider could offer an appointment booking service that empowers all the players.
Why Marketplaces Fail
The nascent platform economy is already littered with failures. Content site failory.com has even made a business out of tracking failed startups. Its Startup Cemetery covers the demise of more than 120 companies.
Sidecar is a good example of a failed platform. It pioneered the ridesharing model before Uber and Lyft but failed to gain traction. Its “fatal flaw,” according to a study published in Harvard Business Review, was not recognizing the importance of attracting both sides of the platform.
In our work helping companies create marketplaces, we’ve found that the biggest reasons companies fail are the following.
Not finding a market fit: If the platform provider does not understand the market it’s trying to serve, it may not be able to attract enough consumers for the products or services offered by producers, or there may not be enough producers to meet customers’ requirements.
Lack of trust in the marketplace: This can happen with both producers and consumers. Both must trust the platform provider.
Poor business model: If the platform provider does not have a good monetization strategy that benefits everyone in the value chain, it will not be able to attract enough producers or consumers.
Inability to prevent out-of-platform transactions: As noted, it is critical for platform providers to deliver value that is unique.
Not conducting a pilot: Many companies try to launch marketplaces in a “Big Bang” fashion rather than starting small. This is a mistake that we’ll look at in much more detail in my next blog.
Final Thoughts
Companies should not let fear of failure stand in the way of creating platform business models and marketplaces. An easy, low-risk way to get started is by implementing a pilot project to test the concept. In my next article, we’ll look at how to do this.
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