Customer Development and Marketplaces

I had a brief email conversation with a startup founder struggling with how to tackle customer development in marketplace business models.  I thought I'd share a bit about what we discussed, in case others have a similar dilemma.

Customer Development does not equal User Acquisition

Customer development is a method for discovering, testing and validating user acquisition and conversion methods.  So that a marketplace suffers from the "Chicken and Egg" problem, i.e., there's only a true market when they're both there doesn't affect Customer Discovery and some amount of Customer Validation.  In other words, you can interview both sides of the market place, show them solution ideas, validate MVP features all without the other side of the marketplace being involved at all.

The pre-development signal you are trying to hone in on is "What will it take minimally for each side of the equation to come to the market?"  In most marketplaces, what you will discover is that one side of the market is actually the product, and the other side is the consumer of the product.

Product vs Consumer

In truth, the "Chicken and Egg" problem doesn't exist.  I hate to burst your object impermanence bubble, but your local weekend farmer's market exists even when you don't go.  ; )  Marketplaces can exist with products, but no customers -- just not for long.  One side creates the marketplace, i.e., is the "product"; the other side creates the market, i.e., is the consumer of the product.

To put it another way, the business doesn't exist without product, but doesn't succeed without customers.  (Exists, but fails.)   In the groupon example, clearly coupons are the product.  (Groupon doesn't exist without coupons, Groupon doesn't succeed without consumers.)  A client of mine had photographers on one side of a marketplace business model and people who need custom photos on the other.  The business doesn't exist without photographers; doesn't succeed without people buying photos.

Marketplace User Acquisition

The "Chicken and Egg" dilemma does (potentially) exist, when it comes to converting prospects into customers or users.  "Network Effect" businesses have a great potential to grow virally  if they nail their value prop, but need the effect to get the effect!  Some marketplaces suffer from the same dilemma: there's no value to either side until both sides are there and engaged.

BTW, Customer Development doesn't have a specific process that will instruct you how to get both sides to your product and get them engaged.  Customer Discovery will not tell you how to solve the acquisition and retention chicken/egg problem.  Is this the much-ballyhooed Customer Development "Fallacy?"  (I don't get what the fallacy is supposed to be.) Like most aspects of building a business, you won't find an answer in a book.  You actually have to try methods others have used or think up some new ones and SEE WHAT WORKS.

  • Namesake has done a good job using a velvet-rope strategy to test, validate and grow its network effect.  They carefully invite early-adopter types to ensure that site activity is consistent and of decent quality so that there is something for new users to engage with;
  • Use a tight geographic approach to control environment;
  • You have to get product to market, so make it dead simple for the product side of your marketplace to engage.  Not just cheap (or free, initially), but simple. Do the work for them if you must.

I hope you find this helpful!

6 COMMENTS ON THIS POST To “Customer Development and Marketplaces”

  1. Scott Hurff January 12, 2011 at 1:54 pm

    Thanks for the Namesake shout-out, Brant.

  2. Alex K January 12, 2011 at 2:25 pm

    I too have a marketplace startup, although the dynamics are slightly different than a two sided buyer seller market. We were able to find a way to provide value even without a lot of other members. We did this by not treating it as a marketplace from day one, but as a one on one experience through email. The most important part was defining a clear target user and a way to bring value from day 1. For us this meant targeting a niche industry that we already had close ties with and a service that could validate some key assumptions without thousands of users.

    Cust dev still applies to building a marketplace. It’s super important to find a way to learn fast and validate your assumptions. You can’t approach it by saying the only way this will work and validate our vision is if we have 1 million users because on day 0 you have no users.

    Brant, would love to share more about how we are tackling validated learning in a startup that is a marketplace and get some feedback!

    • brantcooper January 12, 2011 at 2:34 pm

      Right on, Alex. Easy to get fixated on the “market” being the only value prop. Feel free to email: brant at…

  3. Tim Latham January 13, 2011 at 1:35 am

    Thanks, a useful post. However, it generated more questions in my mind. I agree that it is perfectly feasible to approach both sides of the multi-sided business model and to show them mockups etc of what the offering will look like etc. However, surely the problem comes when looking to relieve then of some cash for your MVP. Only having either side of the model equipped with that small number of customers you have interviewed doesn’t have real value yet to either side of the equation.

    An interesting topic for much further debate I think!

    • brantcooper January 13, 2011 at 8:46 am

      Hi Tim,
      Thanks for the comment. I agree that if the objective of your MVP is to make money, then if you don’t have enough of either side of the market to create value, you have a problem. Couple of points: as I wrote in the “Customer Development Whiteboard” section of our book, there are other objectives you might want to test with your MVP. The other point is that what is “minimally viable” may differ for each constituent in your business model ecosystem. So one needs to question whether in fact an MVP has been satisfactorily built for each constituent. If your particular marketplace can be thought of in the product/consumer model I discussed in the post, then, for example, a required feature for one side of the market might be “a sufficient amount of product,” i.e., the other side of the market.

      Interesting discussion! (Though not sure what I’m “debating.”) : )

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