How Much Does It Cost To Start A Marketplace Business - Marketplace Academy by Sharetribe

19/7/2020 How much does it cost to start a marketplace business?
- Marketplace Academy by Sharetribe
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How much does it cost to start
a marketplace business?
S T A R T I N G A M A R K E T P L A C E · 1 0 M I N U T E R E A D · B y J u h o M a k k o n e n · L a s t u p d a t e d o n M a y 07
2020
https://www.sharetribe.com/academy/how-much-does-it-cost-to-start-a-marketplace-business/ 1/22
19/7/2020 How much does it cost to start a marketplace business? - Marketplace Academy by Sharetribe
You’re an aspiring marketplace entrepreneur. You’ve read
the Practical guide for building an online marketplace
business and are ready to get started. This article helps you
define your initial budget for getting your business off the
ground.
Naturally, there’s no single answer to what is an ideal first-year budget for a

marketplace. Different industries require different levels of investment. In
this article, we will assume that your concept does not require industry-
specific functionality from the platform and that you are not going head-to-
head against a marketplace giant like Uber—one with billions of dollars in
their war chest.
Instead, you are tackling a fragmented market of small providers with a

typical marketplace value proposition: offer the small providers an online
presence, a solid invoicing tool, and more leads through the marketplace
model. Meanwhile, your customers benefit from the ability to find all the
providers from one place and easily compare them.
It’s safe to assume that you will get zero revenue from your marketplace
during its first year. Marketplace businesses are unpredictable, especially in
their early days. Relying on potential future revenue will lead to problems.
The main goal of your first year is to validate your business idea. If there is
revenue, great—it means you have more resources and can move faster.
However, if the concept ends up not working, you should be prepared to
lose your initial investment.
Your first year’s budget
When you are assessing the cost of doing something, you should always
evaluate both the amount of time and money that is required. You can
usually compensate for the lack of one by investing more of the other. If you
have lots of money to spend, less time is needed, and vice versa.
We assume that your goal is to build a profitable marketplace business that

will, eventually, provide a full-time income for the founder(s), and
preferably for others as well. To be able to achieve this goal, we estimate

that the following investment is required for the first year:
$2,000 (around $165 per month, with some costs upfront)
20 hours of work per week.
This scenario assumes that you have a relatively small amount of money to
spend, but a lot of time. 20 hours of work a week for a year—about 1000
hours in total—would, of course, be worth quite a bit of money in wages.
This is not an insignificant investment. But at the same time, it is something

that we believe most people in western countries with full-time jobs should
be able to achieve.
Let’s now break down this budget.
Where to spend your money
During your first year, your money will be spent on two main things:
building the platform, and getting the word out.
Naturally, when you start making money with your marketplace, you will
need to establish a legal company, get an accountant, and so forth. The cost
of this process varies greatly by country, so we have left it out of this
equation. Our general advice is to only spend time and money setting up the
company when you have to, and when you can be sure that the business is
really taking off. During the early days, acting on a freelance basis and
having some sort of arrangement for accepting small amounts of money
should be enough.
As a general rule of thumb, you should spend money on things that would
take you a huge amount of time when compared to the money invested. For
instance, the cost of learning to program and building a marketplace
platform from scratch is an extremely large time investment, and probably
not worth it. You could spend your entire time budget on it and not get it
done. Buying a ready-made marketplace platform thus makes sense.
Building the platform
Even if you know how to code, developing a marketplace platform from

scratch is likely not be the best use of your time. You want to launch your
marketplace as quickly as possible, which is why we recommend using an
off-the-shelf platform to build the first version of your marketplace.
The fastest and easiest way to start is with a Software-as-a-Service platform

that allows you to create your site without your own server. The platform
needs to satisfy the requirements of your minimum viable platform. Using a
self-hosted platform might, at first glance, seem cheaper, but the costs that
come from monitoring, logging, software updates, security certificates, and
other technical tasks can be surprisingly high. This article by open-source
developer Dan Moore explains how the costs of a self-hosted server can
easily exceed those of a SaaS platform.
You can get the best of both worlds by using a hosted solution that also
offers you a clear path to develop your platform further. This allows you to
invest more in building custom-features once you start scaling your
business. For instance, Sharetribe offers two marketplace solutions that are
designed for starting and growing your business. Sharetribe Go is ideal for
launching your MVP, and is also offered as a source-available software.
Sharetribe Flex is a powerful, API-based solution that allows you to build a
fully unique solution. If you decide to take the Saas-enabled route, check
out this article on choosing the right marketplace software.
For the example, let’s assume you start with Sharetribe Go’s Pro plan. It
allows for up to 1000 users, which is a good goal for your first year. If you
end up attracting even more members, upgrading plans is simple. The plan
also allows you to use your own domain name, which can be bought
separately from a provider such as Hover. Domains cost around $10 per
year.
In terms of design, the standard Sharetribe Go template is enough for your

validation phase. However, adding a personal touch is important. This
includes getting a unique logo. We recommend getting a logo from the
design marketplace 99designs for $299. If your business scales, you might
want to hire a professional logo designer and spend a bit more for your logo
and brand identity, but during the validation stage, it’s better to keep costs
down.
In addition to a logo, you might want to spice up the design with photos
relevant to your industry. After all, your users’ first impressions really
count. Since you are on a tight budget, Unsplash is a stock photo site with
free photos from professional photographers. If you have a bigger budget,

Stocksy is a great option.
Breakdown of the platform costs for the first year:
Sharetribe Pro subscription for 12 months – $1428
Custom domain for 12 months – $10
Security certificate – included with Sharetribe
Logo – $299
Stock images – free
Total cost: $1737
Getting the word out
Aside from building the platform, the other area where you need to spend
money is marketing. Out of the original $2000 dollar budget, we only have
$263 left. This is, however, not a problem. With marketing, there are many
ways to compensate for the lack of money by putting in some manual work.
Since you didn’t spend much of your time budget on building the platform,
you have plenty of time left.
Some things do require money, though. A common way to do marketing

with a limited budget is via content marketing—blogging. To do this, you
need a blog. You will want to use a blogging platform that you can white-
label completely, with your own domain and no third-party ads. One good
option is WordPress.com. WordPress is a flexible and powerful platform
that allows you to move your blog to your own server later on if you wish to
customize it further. As of this writing, a white-label blog on
WordPress.com costs $36 per year.
Another content marketing essential is a mailing list service. MailChimp,

for instance, is free for up to 2000 subscribers. It integrates nicely with
WordPress, letting your users sign up for your mailing list straight from
your blog.
Before you launch your marketplace, you should set up a simple landing
page to create initial buzz and collect email addresses. The landing page
should live in the same domain where your marketplace will eventually be.
Launchrock is a great tool for building a landing page. It allows you to easily
import the collected email addresses into MailChimp. A white-label version

of Launchrock costs $9 per month, and you will likely only need it for
around three months.
You also need to track your marketing efforts. Are people actually visiting
your site? Where do those visitors come from? A good, free tool to answer
these questions is Google Analytics. It should cover your needs for the first
year.
If you have a bigger budget and less time to spend on marketing, you could
spend some money on Google Ads to buy demand or supply. If, however,
you only have around $200 left in your marketing budget, this option
makes no sense. $200 will not buy you a meaningful amount of traffic.
Instead, you should do things that don’t scale. Organize meetups for your
early adopters, and use the money on refreshments. Print posters of your
site and spread them around the neighborhoods you initially want to target.
Pay a local publicist to get your site featured in local media—preferably
online, so you can track the results of your investment. The right strategy
really depends on the type of marketplace and the initial target audience.
How to spend your time
All successful marketplaces have required a significant time investment

from their founder(s). This does not, however, mean that simply putting in
lots of hours is all that is needed. You should aim for quality, not quantity.
Try to identify the most important things you can do, and focus on those.
The first year’s goal is not to become a big business, but to validate your
concept as you go and gather an initial passionate audience. If you manage
to find 100 fully engaged users, that’s a great achievement.
You need to be patient. While you do want to validate your concept quickly,
you should not give up too easily. Marketplaces are slow: it can take three
years for them to really get going. The number one reason for startup failure
is founders giving up. If you simply refuse to quit, you’re way more likely to
achieve your goal.
Start by validating your idea. Write down your assumptions, and spend the
first month talking to people in your target group and gauging their
interest.
If you get initial validation, build the Minimum Viable Platform. With
Sharetribe Go, this can literally be done in one day. You will also want to
buy a domain, order a logo, and set up a blog, mailing list, and social media
sites. Once you have decided your idea is worth trying out, it makes sense to
start blogging and being active on social media. This way you can start
building an initial audience even before launching your site. This “setup”
stage should take no longer than a month.
Next up, it’s time to start building supply. Depending on your idea, it makes
sense to spend between one to three months in this phase. You need to have
enough supply when your first customers come in. Remember to collect
feedback constantly from providers as you onboard them, and make
adjustments as needed.
At the same time, keep blogging, tweeting, and building your initial
audience. It might also make sense to attend local events during this period,
spreading the word and collecting email addresses.
Once you have enough supply, it’s time to start inviting customers. Don’t go
for a big-bang launch. Instead, invite a small number of beta testers from
your mailing list, and ask them to provide feedback. Alternatively, you could
go to an event and entice attendees to join your site. Be creative in figuring
out how to find your early adopters. Pinterest founders went to random
people in coffee shops and asked them to use the site in exchange for free
coffee. If you notice most users hitting certain snags that prevent them from
going through with transactions, fix them before launching.
When you launch, doing it locally at first is usually a good idea. Local
positioning makes your concept more interesting to local media. This initial
press helps your marketing launch.
After the launch, the rest of the year should mostly be spent talking to
users. Figure out why they’re using—or not using—your site. Find out what
their problems are, and how well their stories match your initial
assumptions. Send them emails, set up Skype calls, and meet them in
person whenever possible. As you learn something new, update your
platform or marketing message accordingly.
Beyond the first year: Getting to
ramen profitability
After the first year, you should have achieved a basic level of liquidity in
your marketplace: transactions occur constantly, and you have a small but
loyal group of users who keep coming back and getting value from what
you’re building. The marketplace, while not necessarily growing fast, is

“running on its own”.
If you have not reached this state, it does not mean you should quit. You
might not have found the right angle and need to continue trying out
different things. But one thing is sure: something needs to be changed. You
should examine your concept critically, asking yourself “Am I really solving
a big enough problem“?
Once you reach liquidity, it might be time to take things to the next level. If
you are working alone, bringing on another person can be tremendously
helpful. In the long term, running the business alone can be emotionally
taxing. If you still have your day job, you should consider quitting to focus
full-time on your marketplace. The question of outside funding—through
crowdfunding or private investment—might also be on the table if you’re
not committed to bootstrapping.
Before giving up your day job, be sure to understand what kind of revenue
is needed in order to support yourself. Even if you plan on raising money
from investors, you should first try to achieve what startup guru Paul
Graham calls ramen profitability: the smallest possible level of revenue that
keeps you afloat financially. Of course, this level depends on your situation.
If you are a student living in a college dorm, you can get by with less than if
you have three kids and a mortgage. Nevertheless, reaching ramen
profitability greatly increases your negotiation power as you are no longer
forced to take an investment.
What does it take to reach ramen profitability with your marketplace

business? Let’s perform a simple example calculation using the figure
Graham used in his article: $1500 a month. If we look at all Sharetribe-
hosted marketplaces, the average order value is $70, and the average
commission 13.4%. If we use these figures as a basis, it means you would get
$9.40 from each transaction, and would thus need 160 transactions per
month to reach a monthly revenue of $1500. That’s just over 5 transactions

per day. It may not sound like a lot, but a lot of work is needed before you
can maintain this transaction amount week after week.
To quickly calculate how many transactions you need to achieve your goal
and how different variables (such as average order value and the size of
your commission) affect the situation, you can use this handy calculator. It’s
a good idea to perform such calculations early on to understand the
challenge you are up against.
Final thoughts
At Sharetribe, one of our three main purposes is to democratize platform

ownership. In other words, we want to make it easy and affordable for
anyone to build and run their marketplace. While not everyone on the
planet is able to invest $2,000 and 20 hours per week, far more people have
the possibility to start their own online marketplace business than ever
before. In fact, if you are reading this, chances are that you have all the
required resources to build a marketplace.
If you have enough money, you can take certain shortcuts and you might
not need to invest as much time. If you are short on money, you can
compensate for it by investing more time.
Most marketplace businesses don’t fail because they lack the resources to
keep going. Most of them fail because the founders lose faith. In some cases,
this is warranted; not every marketplace idea is a good one. However, in
many cases, those who patiently keep trying and iterating will eventually
succeed.
We hope this article gives you a good overview on how to get started with
limited resources, and how to spend them wisely. Good luck building your
business!
A R T I C L E B Y :
Juho Makkonen
Juho has been building marketplace websites since 2008. He is a Co-Founder of Sharetribe and currently
serves as the CEO of the company. He’s also a OuiShare connector in Helsinki and a long time advocate of
the sharing economy.
All of Juho’s articles Follow Juho on Twitter
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19/7/2020 How much does it cost to start a marketplace business?

- Marketplace Academy by Sharetribe

All articles Guide Create your own marketplace Subscribe