Companies are constantly told that growth is all that matters. For start-ups, growth is priority #1. They are advised that the only thing that matters is the speed of growth. According to Paul Graham, a good growth rate during a startups time at YC is 5-7% a week! For marketplace startups, this speed of growth is dangerous and is the wrong metric to optimize for.
For marketplaces to be viable, you need to build enough liquidity with one side of your marketplace to make it compelling for the other side. Creating liquidity at scale can be daunting. Typically, one of the best metrics for product/market fit is repeat purchase ratio: people need to come back after making their first transaction on your platform. As a startup, you need to accomplish this with the limited resources at your disposal. Here’s why it’s best to have a narrow focus while trying to achieve product-market fit.
Acquiring users: Building a acquisition funnel, the content required to move prospects through the funnel and figuring out the right channel to reach these users requires a lot of experimentation. Which invariably leads to lots of failed tactics. This is easier to execute and learn from when you have a narrow focus. Keeping your efforts focused on one market or vertical also reduces the competition for organic search ranking and paid ads. This approach also allows you to use some unscalable, but extremely valuable local marketing tactics like going to local events and meetups, meet the local influencers to get them to spread the word.
Onboarding users: As you often need to onboard your first users manually, it’s useful if they are in the same city than you. You’ll get to control the quality of supply you bring on board – a critical component of driving flywheel – by curating the content users add. Manually onboarding improves the chances your early users become engaged with your platform. While onboarding early users, you also need to ensure you are matching your initial supply with demand. Staying focused in one city or vertical gives you a better chance of maintaining the supply/demand balance, thereby increasing the chances both your user groups find value in the platform.
Gathering feedback: Besides allowing for effective onboarding, meeting early users has several other benefits. Watching them engage with your product can provide invaluable learnings on what’s working, what isn’t. When there isn’t much product usage or engagement data, most feedback will come through direct conversations with your users or simply through observation.
Iterating to achieve Product-Market fit: And finally, focusing on a single market or a vertical helps you iterate faster, experiment and build the right product to fit the specific needs of your users.
There is no benefit to expanding into new markets without observing signals of network effects in one. If you do power your way through, like Homejoy, it becomes increasingly hard and expensive to undo changes or pivot. 75% of Homejoy’s bookings were from deal seeking customers cashing in a discount offer and only 15% of their customers booked again within a month. This should have been a clear indicator of the flywheel not spinning, and yet they plowed ahead to dozens of markets and paid a heavy price for it. One the other hand, if you get it right in one market, you can develop a playbook to launch many markets.
A good example of someone getting this right is AirBnB. In 2009, they decided to focus all their efforts on the New York market and all the co-founder spent time with AirBnB hosts. This helped them learn that hosts weren’t showcasing their listings with good photography, which led to poor conversion with bookers because they couldn’t see what you were paying for. They solved this in an unscalable way, that was only possible because they were focused on the one market. They bought a camera and went to as many NY AirBnB hosts as possible, offering to take professional pictures. This hack caused a 2x increase in bookings in New York.