Functions of marketplaces

Marketplaces - like Uber, Amazon, Youtube, Thumbtack - connect demand and supply. They are brokers that make deals happen. Once established and scaled with positive unit economics, marketplaces can be lucrative and high-margin businesses. Here are some key steps for starting and scaling marketplaces: 
1. Curate the parties 
Define the purpose of the marketplace. Attract the parties that constitute supply and demand. For e.g., Airbnb needs to recruit and retain home renters and travelers. One main challenge is to get past the cold-start, chicken-and-egg problem. Even after you solve the that initially, you have to constantly maintain the balance between demand and supply. Users don't stick to marketplaces that only work some of the time. 

2. Connect the parties
Be an effective match-maker that connects parties with specific needs with the right supplier. Amazon invests heavily in product search that can understand intent and rank results. Uber auto-magically connects passengers to nearby drivers. Often, marketplaces are overrun with noise — spammers, scammers, low-quality parties — which come in the way of helpful connections. 

3. Enable smooth transactions
Remove friction and add delight for all parties in completing the transaction and eventually, in offering their services. This includes payment processing, service delivery, messaging, customer support etc. 

4. Increase trust, reduce risk
Develop and/or guarantee trust between parties. Trust is an essential lubricant for commerce. That’s why several shops have generous return policies — to stop customers from thinking twice before making a purchase. Marketplaces should enable trust before, during and after the transaction. They can do this by signaling reputation (ratings), pruning out bad or unsuitable players, by offering guarantees of easy and fair resolutions in case of disputes. This often requires marketplaces to take on risk and be willing to make good if one of the parties. Set and enforce policies, standards and rules of engagement.

5. Help the parties evolve and grow
Marketplaces can also be tastemakers. Help users discover better and more delightful products or services. Help suppliers evolve in quality with better tools and standards, and increase the diversity of their offerings.