Have you ever seen the movie Field of Dreams? In this movie, Kevin Costner’s character is told, “If you build it, they will come.”
At Near Me, a software company I cofounded that powers peer-to-peer marketplaces and private communities, we experience this philosophy every day with our prospects. We call it the “Field of Dreams” myth.
We hear elevator pitches like, “I’m going to be the eBay of Soccer jerseys, I’m going to build the Airbnb of boats, or we will create the Taskrabbit of food delivery.”
And then we ask, “How are you going to attract customers and marketplace participants?”
And then the crickets start chirping.
Entrepreneurs see the $172 billion of dollars in VC capital invested into peer-to-peer marketplace deals over the last 12 years. They see the trillions of transactions in eBay, Amazon, and Airbnb. They see push notifications on their smartphones from Taskrabbit and Uber. And they are attracted to the idea of not having to invest in inventory.
And they want a piece of the gold rush. So they come up with a big idea and think, “If I build it, they will come.” What are they missing?
The Truth About Marketplaces
At a fundamental level, peer-to-peer is e-commerce. And for a successful e-commerce business you need three things:
- A target market with a large problem or unmet need
- A target market that is actively searching to solve that problem or need
- A target market that is spending money to solve that problem or need
In other words, you need traffic and you need to convert that traffic.
Going Deep on KPIs
Before starting a peep-to-peer marketplace, you’ll need to know the following key performance indicators.
- Estimated organic, paid, and social traffic
- Conversion rate per traffic channel
- Customer acquisition cost per traffic channel
- Average transaction value per traffic channel
- Lifetime value of each customer
Going through this exercise helps you fully understand the unit level economics of your business idea.
The Organic Traffic Fallacy
While we are smashing one myth, we might as well smash another, right?
Often we hear that organic traffic is free, and this is just not true. To create organic traffic, you need to generate a lot of content. And content takes time, and time has value. And if you don’t have time, you’ll need to hire third-party content creators to do it for you.
For example, a high-quality, researched 500-word article can cost between $50-100 on Elance-oDesk. That’s not a big deal, but what if you need 50 of these articles to rank for one keyword term. Those numbers can add up quickly.
The Inventory Fallacy
Another bling spot is that many entrepreneurs want to start a marketplace because they don’t have to buy inventory.
Although they won’t be buying traditional inventory per se, they still will be buying another type of inventory — marketplace vendors.
If you review Airbnb and Uber’s display advertising strategy, you will see that they allocate a significant portion of their budget to recruiting marketplace vendors.
So, all you marketplace entrepreneurs out there, before you jump into peer-to-peer, do your homework. Think about traffic and conversion. Think about how much it will cost you to buy a customer. Think about when you will break even and then profit on your customer acquisition. If you think about these things, you can build a business that will stand the test of time.
Michelle Regner is the CEO and cofounder of Near Me, a ‘platform-as-a-service’ for brands and entrepreneurs to build their own peer-to-peer marketplace.