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The market-building dilemma

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Having a strong market-based business is great. You are a power broker and can often profit from both sides. But how do you get over the chicken and egg problem?

A market-based business brings together two parties to facilitate a transaction. Some examples:

  • Real estate agents and auction services like eBay – need sellers and buyers.
  • Trading Post – needs advertisers and readers.
  • Getprice.com.au comparison shopping – needs retailers and shoppers.

A market-based business is very different to a single-customer business (like a business selling products or services) where you have one supplier and one customer who buys from them. Single-customer businesses are generally easier to establish because you only have to convince one person/group to complete transactions.

Convincing two parties to transact is always much harder because you have to match them up at the right time, with the right offer. How do you start an auction site when you don’t have any sellers to attract buyers, and you don’t have any buyers to attract sellers? How do you get over the market-building hump?

From my experience working with more than 12 market-based businesses, there are two things you need to do.

1. Focus (of course!)

Instead of going after anyone and everything, going after a targeted segment will increase your chances of matching a transaction – i.e. a buyer wanting what a seller is offering. You only need to get ten people selling Star Wars figurines to attract people who want to buy them.

Focus will also make your limited resources more effective since they are focusing on a smaller segment.

In picking your first target segment, you have to think about a lot of things, but the important questions are:

  1. Can you reach both sides of the market cost-effectively?
  2. Can you blow them both away with your service?
  3. Will they lead you into more segments?

Many people underestimate the impact of minor refinements in final results. You might think that selling Star Wars figures and Star Trek figures are pretty much the same. However, simple things like who buys them, how much they pay, how big the boxes are, language, prices and timing can all be either supremely focused or diluted across two segments.

One way to think about the importance of focus on your ability to deliver is to consider learning to drive. After ten years, you can jump into almost any car and drive on the wrong side of the road on a holiday with the radio blaring (in Spanish) and a coffee in one hand. But, when you start learning how to drive, you drive just the one car, on a familiar section of road, in the quiet part of town. You need to keep it simple for yourself until you are nailing it, then grow.

2. Buy your way in

If you’ve got the budget, then you could pay to stimulate one side of the market. Often this is the seller-side since they are more likely to be somewhere in a list already. Finding someone willing to sell or rent a list who is non-competitive is the next challenge. Depending on the value of the list, you’ll pay per thousand or per listing. Sometimes you can get lucky and find lists, possibly even with automated feeds (sometimes referred to as APIs), that are available for free. Generally these lists are of low value and used by multiple other services but they could be all you need to get started.

Another way is to do the hard yards. Perkler.com did this by researching and manually data entering 1,800 loyalty programs and more than 200,000 entitlements for Australia and USA. Hard work, but it kick-starts the market.

You can also heavily incentivise one side to kick things off. This could include discounts, prizes and even cash. It’s important to try and match the incentive with the market dynamic you want to create, otherwise you can end up paying for the wrong customers.

Another way to buy-in is by building a base of one side with some other value and then turning on the market later. This could be a service; like consulting, events, a blog, forum or another application which you use to grow a base. MySpace did this by offering ‘indie’ music bands in LA their own website and then pulled the fans in by asking the bands to promote it themselves. Clever and cheap promotion to kick-start a market.

My advice is to think twice about building markets. No need to avoid altogether; just consider the chicken-and-egg challenge. How are you going to get over the hump? I suggest a combination of focus and buying your way in.

Mick Liubinskas is one of Australia’s leading web strategists, having served in head marketing roles at Kazaa, Zapr and Tangler. He now runs Pollenizer, the business incubator he co-founded with former-Kazaa colleague Phil Morle.

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