Analysis
Why It’s So Hard to Build a Peer to Peer Marketplace
On 29 March 2013 by Connor McEwen

Increasingly, peer to peer services have been pivoting their model or even shutting down due to the challenges they face. While it’s true that many startups fail, there are a few unique challenges for p2p startups. By keeping them in mind, we can build towards the next phase of the Sharing Economy.

There’s been a few notable changes in the landscape of Collaborative Consumption recently. Whipcar (p2p carsharing), Liquid (formerly Spinlister, a bikesharing service), and Loosecubes (a coworking service) have all shut down. There have been various pivots, including Zaarly ( a “reverse craigslist”), Skillshare (a site where anyone can teach a class), Milk.ly (originally a TaskRabbit competitor), and ThredUP (originally p2p clothing sales). While there are various factors at play, (see an interview with Campbell McKellar, founder of Loosecubes) the truth remains that’s it’s just plain hard to build a successful p2p service. A marketplace must change behavior, achieve liquidity, and create a high transaction volume to build a sustainable business.

Behavior Change

All new products and services require some sort of change in behavior. For example, using Amazon requires you to click and type from your computer as opposed to walking to a bookstore to purchase a book. But in order to truly drive behavior change and convert people to a service, the experience must be an order of magnitude better than whatever existing solution people have. In Amazon’s case, it was the fact that one could never leave the house but have access to a huge inventory of books at a better price than your local store that really drove adoption.

For many of the early adopters in the sharing economy, the experience of a peer to peer interaction is significantly better due to their unique characteristics. They like meeting a new person, or the fact that they’re reducing their environmental footprint, and therefore are willing to use a new platform.

However, for the mainstream user, these issues aren’t often a factor in motivation. To get the mainstream, P2P services need to offer something much better than the current solution. New users must have way to make (a significant amount of) money where none existed before, a much cheaper alternative to a current product or service, or a much more convenient solution to an existing problem. The big names in the space fit at least one of these categories.

To convince the mainstream, P2P services need to offer something much better than the current solution.

The challenge is that it’s very difficult to create a situation in which the experience is an order of magnitude better for the mainstream. Making a few extra dollars just isn’t worth it for many people, especially if the P2P method is equally convenient or potentially even less convenient than how people are currently behaving. It’s even harder at the start, because new marketplaces lack…

Liquidity

Liquidity is the answer to the question “When I try to use a P2P service, can I find what I’m looking for?” For new two-sided services, it’s often no. The chance that someone in your geographical area has exactly what you want on the day/time you want it is just pretty slim if there are only 100 or 1000 users on a service. It’s known as the “double coincidence of wants”. Bo Fishback of Zaarly talks about how this was a problem for them in their original model here.

It’s possible to “hack” your way to liquidity with either a huge marketing budget, by focusing on single user utility, or by starting with a local or very targeted niche. If you don’t have a huge marketing budget (like every startup I can think of), your service has to be valuable to those first few users who sign up, so that they will continue to use it and even recruit more. If you decide to focus on a local niche too, you need some way of spreading beyond that locality. That’s an even harder challenge than picking something which will give your users a much better experience at scale.

On top of getting to liquidity, there’s an additional problem of competing with existing liquid services like eBay and Craigslist. Once a service reaches liquidity (most people showing up get what they want), it’s very hard to “beat” them. Your users aren’t likely to spend any effort on a new “risky” service when they know they can get exactly what they want somewhere else.

Transaction Volume

All of the services mentioned in the first paragraph happen to have some sort of venture funding. While some may debate the merits of this choice, the fact is that they all had plans to make a large amount of money.

Since most of the peer to peer services we’ve seen use a simple transaction fee as a way to make money, let’s do a little math (see more here). Let’s say you have 5 people on your team, and everyone makes $60,000 a year. That’s $300,000 a year you need to make, and since you only get to keep 10% of the value of transactions, there has to be $3 million going through your platform every year. Unless you’re dealing with high value assets (cars and houses), or very frequent transactions (shared transportation), it’s pretty tough to get to that number.

You need many more users than a company who makes $300 a year each off of 1,000 customers on a one time sale, for example. So while some marketplaces may see some traction and have a small core of users, they can’t return money to their investors unless they hit that “hockey-stick” growth.

So What?

I don’t believe that Collaborative Consumption is dead, but it’s not a walk in the park. You can’t just slap an “Airbnb for this” label on your company and expect to rule the world.

We’re definitely moving towards an era of access over ownership due to major steps forward in technology, but it will take time and dedication. So in short: learn from the successes and mistakes of others, focus on what will really get people to use collaborative consumption services, and build for the future.

Special thanks to Juho Makkonen from Sharetribe for putting some great resources together on sharing economy startups that have failed and how to create a lively p2p marketplace.


Picture courtesy of flickr user compujeramey

Connor McEwen Co-Founder of Credport and working to build trust online. Focus on trust, startups, and the business side of the collaborative economy. Profile →

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