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Building Liquidity in Your Labor Marketplace
Excerpt from "Architecting an online labor marketplace" written in partnership with Everee.
Hi, it’s Colin from Take Rate. Welcome! I started this newsletter to share startup and marketplace advice for operators by operators. Content is best shared with others, so feel free to share, and if you have any questions, leave them in the comments below!
I was sure I wouldn’t find a job when I graduated college. It was the height of the Great Recession, and labor markets were rough. But by a small miracle, I was hired over a video call, which was rare back then, to work under Janet Yellen at the Federal Reserve Bank of San Francisco, doing economic analysis of US labor markets. What it offered me was a front-row seat studying changing labor markets and what would be a decade-plus rise of technology companies and tech-enabled employment.
Labor marketplaces are increasingly coming online, whether it is traditional for-hire marketplaces or the rise of gig marketplaces. The next generation of labor marketplaces will be (and are) tech-enabled, driving increased liquidity through better matching technology and user experiences. They will also be vertically focused, targeting certain industries to standardize complex offerings and embed deeper within employer and laborer workflows.
While the product experiences that will be successful will be 10X, the fundamentals still need to be solved. These marketplaces will still need to build supply and demand to drive liquidity. I am pleased to share an excerpt from "Architecting an online labor marketplace," written in partnership with Everee focusing on the broad strokes of building supply, demand, and liquidity in labor markets.
For those unfamiliar with Everee, it is a payroll technology company that makes it easy to pay workers instantly and launch payroll products to drive growth. Started in 2018 to disrupt the two-week pay cycle, they have played a critical role in enabling marketplaces and the gig economy.
The full guide has even more goodies with the following sections:
1. Building supply, demand, and liquidity
2. Leveraging network effects
3. Reducing search costs
4. Standardizing and commoditizing labor offerings
5. Embedding with your customers
6. Creating your supply
7. Leveraging technology
8. Staying ahead of the competition
Building Supply, Demand, and Liquidity in your Labor Marketplace
Founders and operators must balance supply and demand to succeed as an online labor marketplace. Your marketplace will be oversaturated if you have too many laborers with insufficient hiring demand. Your platform will stagnate if you have too many employers and few laborers. Balance and liquidity are required to succeed.
Liquidity refers to the ability of your marketplace to connect employers and labor effectively. In other words, the more employers, laborers, and transactions on your platform, the higher your liquidity. Liquidity is the key to a thriving online labor marketplace. Labor marketplaces need enough supply and demand to create a vibrant ecosystem where transactions can occur quickly, easily, and efficiently. To increase liquidity, you must build a network of active users ready to buy and sell services.
Here are some fundamental tips for building liquidity in your marketplace:
Start with a niche. Start with a specific niche market to build a critical mass of employers and workers. Constraining the market this way forms your ‘wedge,’ which is your entry point into a given market. Focusing on a narrow slice of a market early allows you to concentrate on fully aggregating those labor pools and offering more standardized services. It’s crucial to perfect this niche before expanding to other verticals.
Find and encourage early adopters. Go after those who are already doing what you want to be doing. Early adopters are essential for creating momentum and building your marketplace’s reputation. Reach out to potential employers and workers and offer incentives or technology solutions for them to join your platform.
Attract high-quality labor. To attract high-quality labor, offer them competitive fees and benefits, provide them with the tools they need to succeed, and communicate regularly with them. Know exactly what they look like and what qualifications they need. The high-quality labor will likely already have jobs, so don’t be afraid to lure them away.
Provide a seamless user experience. Start with your users and work backward. Make it easy for users to find what they want on your platform by providing a user-friendly interface, a robust search experience, and relevant recommendations. Focus on being so easy for workers and employers to find each other that they would never go anywhere else. Even better, make the matches so they don’t have to.
Make matching easy. Invest in efficient matching algorithms to reduce search costs and improve the user experience. Provide tools and resources to help workers and employers communicate and collaborate effectively so that they can match. Use data to inform your matching algorithms, such as user behavior, preferences, and job requirements. Whatever you can do as a marketplace to make matches is extremely valuable and allows for greater liquidity and take rates.
Offer testing and assessments. Offer testing and assessments to help laborers showcase their skills and qualifications and help employers find the right supply for their job. This approach will help you improve the quality of matches on your platform and commoditize and standardize the labor offerings.
Standardize and Commodititze. Standardization plays a crucial role in creating liquidity in the marketplace by reducing search costs for employers—it does this
by providing a common framework for comparison. Commoditization allows for services to be fairly interchangeable, creating a more liquid marketplace that benefits both employers and job seekers. It is important to note that commoditization can have a downside: it makes it easier for workers and employers to go to any other marketplace to transact, potentially leading to multi-homing.
Build a strong reputation system. A strong reputation system is one of the most critical elements of a successful online labor marketplace. A reputation system provides feedback and ratings from previous employers or workers, which gives users a clear understanding of the labor quality. To build a strong reputation system, it’s critical to encourage users to leave feedback and ratings after each job or project. This feedback not only helps users but also helps the marketplace identify high-quality workers and employers. By featuring high-quality workers and employers, the marketplace can help build trust with new users and create a virtuous cycle of high-quality matches, which leads to greater liquidity and take rates.
A strong reputation system can mean the difference between a successful and unsuccessful marketplace. Employers need to trust the platform to deliver high-quality labor, and a reputation system can provide the necessary transparency to build that trust. Users may hesitate to use the marketplace without a reputation system, leading to lower liquidity.
Monitor and optimize your marketplace. In the famous words of Peter Drucker: “What gets measured gets managed.” Use your analytics to carefully track user behavior, identify bottlenecks, and continually optimize your marketplace’s performance. Marketplaces are inherently complex but data-rich. Make data a competitive advantage by using it to understand the market better than your competition. This will pay dividends when it comes to growth and customer acquisition.
Reduce transaction costs and account for liability and risk. The more expensive, difficult, or risky it is to buy and sell services on your platform, the lower your liquidity will be. Reduce transaction costs by offering features like escrow services, dispute resolution, automated invoicing, instant payouts, and easy payment processing to improve financial friction.
Risk can be reduced by providing insurance for workers to create liquidity and meet employer requirements. Overall, insurance should be viewed as a liquidity enabler, e.g., a way to make the marketplace function more smoothly.
Use efficient and targeted marketing tactics. Marketing and growth are critical and often the most challenging components of any marketplace. Finding low-cost acquisition channels is essential for long-term business growth, and this often requires a significant investment in organic search, referrals, branding, and product-led growth.
Product-led growth involves focusing on making the product the primary marketing engine. In other words, the product should be designed to sell itself. For example, a product that allows workers to send quotes to employers who are not yet in the marketplace can bring these employers on board when they respond. By prioritizing the development of the product and making it user-friendly, the company can attract new customers and increase growth.
In addition to product-led growth, there are many other strategies that marketplace companies can use to drive growth. These include developing partnerships with other businesses, investing in targeted advertising campaigns, and leveraging social media to reach new customers. By taking a multifaceted approach to marketing and growth, companies can increase their chances of success and build a thriving business over time.
Offer incentive or referral programs. Encourage users to refer their colleagues to your marketplace by offering referral incentives. This approach will help you attract new users at a lower cost but is more likely to be high quality. Be sure to incentivize them with double-sided rewards for each party. This tactic typically works for bringing on high-quality supply and demand in the early stages.
Partner with complementary businesses. Partner with complementary businesses to reach new audiences and attract high-quality supply and demand. For example, if your marketplace specializes in graphic design, you could partner with printing or web development firms to reach the right audience. Within every niche, some potential partners can help to build both the supply and demand sides of the business while also helping their business.
Leverage existing hiring platforms. Sometimes it is best not to reinvent the wheel and to go where people are already looking for jobs. Websites like Indeed are fertile ground for job postings to acquire labor supply. Many niches will also have job boards that offer an opportunity to acquire supply and demand.
Build Community. Creating a vibrant and engaged community can be extremely advantageous for the supply side of a marketplace. Community fosters trust, collaboration, and long-term success. To build such a community, it is crucial to establish clear communication channels that allow suppliers to connect, share insights, and address common challenges.
Regularly organizing webinars, workshops, and networking events can further enhance the sense of belonging and enable suppliers to learn from industry experts. A dedicated forum or online platform encourages knowledge sharing, allows suppliers to showcase their expertise, and facilitates peer-to-peer support. By fostering a sense of community among suppliers, marketplace operators can create an environment that encourages growth, innovation, and meaningful relationships, ultimately contributing to the overall success and sustainability of the marketplace.
The list could go on! I promise further deep dives into some of these areas in the future.
Wrapping this post up: growing an online labor marketplace may seem daunting, but it can also be gratifying if you follow the right strategies. The key is to focus on creating a great user experience, building a strong reputation system, harnessing the power of network effects, leveraging technology, adapting to changes in the industry, scaling your marketplace, and staying ahead of the competition. By doing so, you can create a thriving online labor marketplace that meets the needs of workers and employers in a user-friendly and accessible way.
Have questions about building a labor marketplace? Post them in the comments below, and I will respond.
Lastly, if you want to read more of the guide, head to Everee to download the full report. It won’t disappoint!