Buyers define marketplaces

A marketplace business connects buyers and sellers in exchange for a cut of the revenue. Some of today's biggest companies, such as Amazon, Uber, and Airbnb, are marketplaces. Yes, these companies changed how millions of people work and earn money. However, the core innovation of these businesses is how they use technology to solve customer problems.

In 2017, I struggled to hire full-time software developers but found many that were willing to work nights and weekends for extra money. So, I started Moonlight as a marketplace to connect developers with weekend work. Thousands of software engineers quickly signed up, but hiring managers showed less eagerness to join. It turned out that you cannot kickstart a marketplace with sellers alone. I learned a valuable lesson: buyers define the market.

Marketplace businesses connect supply and demand as a platform

Startups seek to build something that people want. Finding this product/market fit once is hard - but in a marketplace, you must do it twice. Buyers and sellers on a marketplace have separate wants and needs, each with a distinct set of quirks. The critical insight is that these challenges are not equal - because you are dealing with money.

The demand from buyers will inevitably attract a supply of sellers. There are more professional drivers today than there were ten years ago because Uber and Lyft expanded the market. When there are new ways to earn money, labor will follow. Fair pay gets sellers on a marketplace.

Aggregating sellers does not make a marketplace. Marketplaces earn their cut of revenue by being able to find buyers better than the suppliers alone. Personal shoppers existed long before Instacart, but it was hard for them to find customers. If sellers can find enough customers on their own, they don't need the platform - leading to disintermediation. Disintermediation killed marketplaces such as Homejoy and Handy.

Marketplaces justify their existence by solving a buyer's problems in a novel way. They identify some business transaction where the buyer is under-served by an existing seller, and where technology can transform the relationship. People couldn't reliably get transported by taxis and were happy to spend more money on Uber. Hotels were expensive and conventional, so travelers spent money on Airbnb instead. Searching for a particular product at stores was hard, so Amazon built a product search engine. Technological innovations such as the internet and smartphones meant that these businesses could not have existed sooner.

Marketplaces must create demand, then that demand attracts sellers. After the initial influx of developers to Moonlight, we spent most of the next few years changing the product and pricing to attract hiring managers as buyers. The business grew and was ultimately acquired earlier this year. We thought that Moonlight found a new way for developers to work, but its real innovation was changing how software teams hired.

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by Philip I. Thomas