Some online marketplaces that have a local services component on one side of the marketplace carry an extra burden that “pure” online marketplaces don’t have. Such marketplaces can’t immediately gain broad geographic coverage for their offering. Examples, include transportation network companies (ie – Uber, Lyft), food delivery services (ie – GrubHub, Postmates), in-home cooking services, on demand photography services and many other types of services that aren’t easily on-boarded into the marketplace and activated without some local presence by the marketplace company itself.
This phenomenon creates an extra burden when trying to scale after initial business model validation and that, in turn, creates an extra burden when trying to convince investors to put their money into the company. If you have such a company, read on because in this article I describe some key things to consider and possible approaches to take when devising your market expansion plan.
Is a Local Presence Required?
Just because a local services component is involved on one side of the marketplace doesn’t mean you also need a local presence in order to enter each new market. So your first step is to figure that out. Using the list below, assess how possible each activity is to accomplish without a local representative in each geographic market (which is usually a city or major metropolitan area). The assumption here is that the service provider represents the supply side of your marketplace (versus the demand side).
- Service provider identification
- Service provider engagement
- Service provider on-boarding
- Service provider support
- Customer (demand side) support
I guess it is possible that other aspects of the customer (demand side) lifecycle requires your local representation but that’s not usually the case for the dilemma I’m addressing. If you require local representation for any/all of the activities in the list, then you have two additional things to figure out. First, must the local representation be an employee of your company or could it be some form of business partner? Second, is your local representation needed forever or only until you reach some level of penetration and traction in the local market? In fact, maybe you have (or could have) things on your product roadmap or company roadmap that eliminates or reduces the need for local representation in the future.
Initial Validation in Your Home Market
Almost always, your own home market is where you launch first. With this, the founding team and first employees are able to handle everything in the list above. But that’s simply a matter of convenience. What’s most critical is to determine how much of your complete business plan can be validated in your home market. For example:
- Can you build the product?
- Can you get both the supply side and demand side on-boarded onto the platform?
- Which side of the marketplace (maybe both) should be charged and how much are they willing to pay?
- What level of support is required for each side of the marketplace?
The list could continue through just about every aspect of your business plan and you can use a Business Model Canvas for guidance. The more you’re able to fully validate in your home market the better. But if you’re the type of marketplace company I’m referring to in this article, there will definitely be things you won’t be able to fully validate in your home market. Using that list of things, let’s move to the next step.
The Importance of Selecting Your Second Market
Entering your second market will be one of the biggest risks you take because the stakes are really high. With success you could/should be able to unlock additional funding to continue your journey. But screw it up and you might not survive long enough to get a second chance.
There is a critical trade-off when selecting your second market. You want it to be “easy” enough and low risk enough to have high odds of success. But, on the other hand, you want to make sure it is representative enough of your continued market expansion plan to gain the needed validation. In other words, if it’s too easy and not representative of future expansion, you won’t get sufficient credit from investors and that puts your additional expansion funding at risk.
One thing I commonly recommend is finding a second market that has important attributes of what you communicate in your business plan but is close enough for the founders and first employees to have reasonable access, if/when needed. For example, if your home market has a small or spread out population and your solution is optimized for larger cities with downtown density or some form of population concentration, seek such a city that is a 3-4 hour drive away. You will be able to validate things in a more ideal market but can be there in person with a somewhat reasonable delay for inevitable emergencies or scheduled validation trips with minimal cost.
If you pick a city that is only 1-2 hours away, it will seem too much like a geographic extension of your home market. But if you pick one that is a plane flight away, you can’t be very responsive to emergencies and your costs for scheduled validation trips will be high.
For the types of marketplaces we’re talking about in this article, one key objective of the second market experience is validating the local presence that is needed. I’m talking about answering questions like the ones listed below:
- How many?
- What type(s)?
- What role(s)?
- Where do you find them?
- How do you measure their success?
- What support do they need from your HQ operation?
With success and solid additional validation, congratulations – you get to keep playing the game!
The Importance of Metrics
After you launched in your home market, you collected (hopefully) various financial and operational metrics and trended them over time to gauge progress and identify what’s working and what’s not. The issue is that until you enter your second market you don’t have anything to compare your results to. The full expectation from investors is that your second market will be considerably (maybe significantly) better in this context. That’s because your product, processes and tools are more mature. Basically, you figured a bunch of things out to the point where you were ready to enter your second market. So the results and trend lines for it should easily surpass your home market.
- See my related article titled “You Never Know What Operational Metrics You’ll Need – So Instrument Everything“
Think about this ahead of time and be ready to directly compare your second market to your home market from the moment you enter it. The slope of any trend curve should be more positive, allowing you to reach various milestones in half of the time as compared to your home market, for example. Think of this just like a cohort analysis with each geographic market being a cohort.
With success in the second market and subsequent funding, each additional market gets less and less risky. Make sure to leverage what you learned from your second market to pick the best third, fourth, etc. markets while introducing any yet-to-be tested elements of your business plan for continued validation. For example, the moment you enter a market that can’t be reached easily by the founders you will be fully dependent on your local reps to do their job. Their only “life line” is phone and email.
Additionally, my comments above about metrics and trends continues to be critical through your next several new markets. You need to show that you’re getting better and better at new market entry, activation and optimization. That success will be a cornerstone of your future fundraising efforts.
Your HQ Operation
Most of this article has focused on the local resources required for certain types of online marketplaces. But I want to stress the importance of your headquarter operation and related org structure in supporting your market expansion strategy. Many of your programs, processes and tools should be optimized to support your local resources and continued market expansion. Seek out inefficiencies and challenges as reported by your local resources and prioritize various activities to address them. Do this just like you do for your product roadmap. In fact, you can use some of the same techniques I describe in my article titled “Prioritizing Your Product Roadmap“.
In order for online marketplace startups to be viable and successfully raise money, they must demonstrate scalability (see related article titled “The Difference Between Growth and Scalability“). If you’re running a marketplace of the type described in this article, you have an extra burden over most online marketplaces due to the requirement for local resources. As such, you can’t just “shoot from the hip” and take it one day at a time when it comes to market expansion. Be thoughtful and calculated in your approach. I hope you found this article helpful and I wish you success in your journey.
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