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The key questions to ask yourself when starting a new marketplace in Africa

May 9, 2023 | Lessons Learned (the Hard Way)

By Enock Wangila

There are two big decisions that jobtech founders in Africa face when initially setting up or launching a platform. Firstly, how to sequence growth — whether to initially focus on the supply or demand side of the marketplace. Secondly, whether to seek intense network effects within specific verticals or geographies, or to build horizontally. 

In this blog post, we delve into the possible approaches to these, examining some of the most important lessons learned globally against the backdrop of African contexts.

Question 1: The Chicken and Egg

Founders setting up marketplaces have to grapple with a quintessential chicken and egg problem. Do you focus on demand first, then supply, or vice versa? The challenge in answering this question lies in the interdependencies between the transacting parties. For a ride hailing platform to take off, customers need drivers to be available to fulfill requests. Similarly, drivers want to join platforms that have an influx of customer requests coming in. You can’t have one without the other, but which one do you find first — the customer chicken or the service egg? 

Option one, start with the supply side. This makes sense when the marketplace is supply-side constrained and disruptive, challenging the status quo and changing consumer patterns. Often, marketplaces will have to initially do non-scalable things to attract and incentivize the initial supply stream to jump start the marketplace. Upwork, Uber, Airbnb and Etsy all used this approach:

  • Upwork had to individually review every freelancer who applied to join the platform to ensure quality and proper matching. It also offered freelancers rewards for referring others to the platform. 
  • Uber had to pay its first set of drivers an hourly rate to stay on the platform, regardless of their activity, so that new clients could easily find drivers. 
  • Airbnb enlisted photographers to help hosts market their properties more successfully. This set the standard for other property owners to match up to so as to compete favorably.
  • Etsy scouted craft fairs to source the best vendors for its platform —their customers followed and so did other craft vendors.

Once the initial supply is built in, marketplaces need liquidity to take off. The focus then shifts to the demand side.

Photo Credit: Artem Podre

In the African context, we’ve seen most platforms taking a similar approach, building huge user populations, but then struggling to find jobs for them. The challenge is that creating huge user pools doesn’t necessarily improve the service if the customer is using the platform to improve on quality. If and when the jobs do come, given the low level of previous engagement with the platform, workers are at greater risk of not turning up on time or delivering with quality, as they have less to lose from doing things wrong. Platforms can also focus on building quality of supply rather than quantity, which could be a smart move in the African context. Andela famously focused on training coders, focusing on quality of supply alongside quantity. While this enabled a core business to grow, even they pivoted when they realized that their model was constrained by the size of the demand for entry-level tech talent. 

Option two, start with the demand side. This makes sense when the marketplace is demand-side constrained and you have an abundance of supply. Taskrabbit followed this logic, as it had long waiting lists, resorting to charging taskers an application fee to reduce supply and drive quality. 

Africa is primarily demand-constrained. Most platforms with tens of thousands of users on the supply side have only created jobs for dozens or hundreds of them. The challenge is thus to find where the scaled demand can be and to figure out how to get these customers to interact with the platform. 

Regardless of the side of the marketplace you choose to initially focus on, the level of effort required in securing the first set of customers on the platforms is often daunting. As we have discussed previously, in Africa, founders have to further grapple with the operational complexity of marketplaces, solving for multiple challenges which may include: pricing, tooling, vetting and quality control.

One of the main questions that founders should ask themselves in choosing where to focus is  where the long-term market constraint for their marketplace lies. Pick this side and solve for it.

Question 2: Horizontal vs Vertical

Founders have the option to either go wide (horizontal), from the onset, or go deep (vertical). 

Option one is to prioritize horizontal growth. Going wide means a marketplace servicing multiple geographies and/or multiple products/service categories. Thumbtack, the US-based artisan gigmatching platform, built horizontally by launching service offerings across literally hundreds of categories. This aggregation of supply allowed it to appeal to a broader audience and cross-sell services to a single customer. However, going horizontal calls for delivering value across categories or geographies efficiently, and doing so well enough to wade off the competition. This can be challenging initially, with capacity and resource constraints. It potentially exposes the marketplace to the risk of unbundling, with new vertical marketplaces emerging as spinoffs of a particular horizontal category. Ebay is a classic example. 

Option two is to seek vertical growth. It affords founders two main benefits.

  1. A geographical constraint helps with cost management. This includes minimizing fulfillment costs, reducing customer support expenses, and optimizing marketing efforts. Additionally, a geographical constraint allows the marketplace to tailor its offerings and services to the specific needs and preferences of the targeted region, resulting in better customer engagement and satisfaction. 
  2. Product or service category constraints can boost reputation and demand-building. They help establish expertise and specialization within the marketplace, creating a focused and curated platform that caters to specific customer needs. By narrowing down the product or service categories, the marketplace can build a reputation as a trusted source for that particular niche, attracting both buyers and sellers who are looking for specialized offerings. Category constraints also enable demand-driven growth, allowing the marketplace to prioritize and optimize resources based on the most popular or profitable categories. This strategic approach ensures that the marketplace can focus on areas with high demand and better cater to customer preferences, ultimately driving growth and success in the long term. Most platforms for offline work — such as ride hailing — have used this approach, moving from city to city, building their reputation and then scaling. Uber famously did that, starting in San Francisco then expanding to other US markets with a very clear city playbook.
Photo Credit: Ron Lach

In the African context, some argue that going horizontal is imperative because of the limited TAM in any individual category, vertical, or geography. But given the operational challenges in facilitating matches in Africa, it can be extremely difficult to deliver with quality across multiple verticals. As we called out in an earlier article, we see an emerging vertical marketplace trend across the continent with examples such as  Fitted in Nigeria, Kandua in South Africa and HustleSasa in Kenya. To facilitate a successful match between supply and demand, it could make more sense to focus on an individual vertical, finding ways to monetize within it, and then expanding to more verticals from there. We’re excited about vertically integrated platforms for this very reason.  

To sum up, this blog provides perspective on two critical decisions for marketplaces: how to sequence growth and whether to build vertically or horizontally. While the article nudges towards starting with the demand side and focusing on individual verticals, often, it is the counterfactual that wins big, and success is in the details. As the saying goes, “for every rule, there’s an exception“.

The author is a Venture Builder with the Jobtech Alliance.


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