The startup’s problem: We’re trying to create a marketplace for consumers (think: eBay, Etsy, or UrbanSitter — but a little more specialized). We’ve talked on the phone or in person to 100 buyers and 100 sellers who’ve told us they’d use the site. We’ve gotten 20 sellers to give us basic info on what they’re offering, and at what price. We’ve tested the idea by email, matching up two buyers with sellers; the transactions were completed, everyone had good experiences and was enthusiastic about using the service again, so we built a bare-bones site. But after having contacted 150 more potential buyers by email and after having run a Google ad to draw buyers from outside our own network, nobody is buying. Now what?
Eric Ries, entrepreneur and author of the New York Times bestseller The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Business, talks about testing two-sided markets and gets real about usability testing, too. His edited and condensed Q&A is below.
Sarah Milstein & Mercedes Kraus: What would be your first step here?
Eric Ries: We don’t have a lot of detail on this situation, so here’s what I going to assume: This entrepreneur thinks that they’re going to be able to replace eBay by creating a much better buying and selling experience for some kind of product category that they’re very passionate about. I’m going to make a further assumption that this is what we call a sticky engine of growth business. The idea here is that once you start using this product, you pretty much can’t stop. Products that have that character to them have a very specific kind of growth pattern.
In the case of a company like eBay, the network effect is that, once you start using it, you can’t stop because everybody else is there, and it becomes the de facto place where you buy or sell the product in question. So if you’re a Beanie Baby buyer, you can’t go anywhere else because all the product inventory is there. If you’re a Beanie Baby seller, then you can’t go anywhere else because all the customers are there. You’re stuck. But just because you buy your Beanie Babies on Ebay doesn’t mean you’re going to go tell your friends about it. You may be very private about the fact that you’re a Beanie Baby collector, and that’s fine. No problem. A Paypal or a Facebook is very different; it doesn’t work if people you know don’t participate. So I’m going to assume that the eBay model is the goal, this product is for people who are obsessively buying and selling a collectible, like anime collectibles and Star Wars dolls and stuff like that, those kind of collectibles. Classic two-sided market.
Now, here’s the issue. Rule number one in a situation like this is always: Have you facilitated a transaction to show it can be done? We have, so we know that we can create some value. Now, what I want to know is: Can we get someone to stick to this, whatever the experience is that we’re trying to create? We want someone who’s going to use our product to say, “This is my place to be.” So we have to ask ourselves, “OK, now, what do I have to accomplish in order to make that a reality?”
As soon as the words came out of my mouth, I’m thinking, “I’m screwed.” Because buyers want the maximum inventory, and of course they’re going to check a lot of sites. How can we make this the place they want to go? We might try to figure out how to create a massive amount of inventory, so that they don’t need to go anywhere else. Here’s a great example: Reverb.com is a company I’m an investor in (in Chicago) that sells musical equipment like vintage guitars and amps, pedals, and stuff. The founder of Reverb had a guitar store already. So when the site launched, it had unbelievable inventory that you couldn’t find anywhere else. But the best part is that the store also buys used equipment. So if you were a customer, and you listed something, he would buy it, and you’d have a great experience. If you were looking, you’d find cool stuff, and you’d have a great experience, too.
That actually might be a model we could do with this startup. We could say, “I want to be a general purpose collectible site, but I can’t corner the market in all collectibles. But maybe I could corner the market in some specific kind where I could build up an inventory. I personally could put my own capital to work buy my stuff.”
A lot of people who want to create two-sided markets are chicken. They want to do e-commerce, but they don’t want to hold inventory. So just get over it. Or you can try the Airbnb trick of finding existing inventory at Craigslist and porting it over. There are a million different ways to create that additional inventory, and you can go crazy with it. But what startups forget is the goal: We want one customer to feel like they have to stick to our product. This is the cool thing about network effects. Very few people, if any, in a network experience the whole network at once. My telephone has value for me because I can call the other people in the network. The larger the network, the more people I call, the more valuable it is. But, how many people do I actually call in a day as an individual customer? For me as a customer, the value of the network is the number of other nodes in the network that I actually interact with, which, in a lot of cases, can be very, very, very small.
It’s possible in the early days of a network-effects business to simulate the experience of network saturation for an individual customer, especially if you identify that customer in advance and cheat. You could imagine that we’re going to target this customer and try to make their life perfect. If you knew everyone I’m supposed to call tomorrow on a new phone network, and you went and signed them all up and made them available for me to call, I would have a great experience because everyone I need to call is there. I would be like, “Wow, this product is awesome.”
But most entrepreneurs are too chicken to actually do the work to create that good experience for the initial customer. If that’s your situation, you can cheat by penetrating an extremely dense network subnode [i.e., a small, tight-knit group within the larger population -Eds] and get all those people signed up at once. That’s why so many people love college-campus products like Facebook. It can be incredibly valuable with just one school signed up. So back to our case. We don’t want to start by going after all collectibles. We’re going to go after vintage Star Wars dolls. There’s only 25 people in the world who buy and sell those things because they’re psychotic collectors, and we’re going to go sign all 25 of them up and make this the place where they interact with each other.
For more of Ries’ Q&A and information about usability testing, Lean Startup methodologies, customer feedback, experimentation, metrics and so much more, read the article in its entirety here.
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