While it’s true that any form of entrepreneurship entails risk, any sane business person should try their utmost to minimise and manage the risks inherent in their chosen market. This holds especially true for complex digital projects like online marketplaces, which can very easily spiral out of control, resulting in significant losses. It is therefore of critical importance that an effective risk management approach – which covers all business phases – is built into your marketplace development process.
Let’s be honest, risk is a loaded word. It often carries negative connotations of inevitability, which negates human agency. Cinematic disasters like the Hindenburg and Titanic have entrenched this bias, by portraying them as the inevitable results of unforeseeable and unavoidable circumstances.
Sober analysis, though, shows that both catastrophes were preceded by a combination of human errors, technical failures, environmental factors, and poor decision-making. The Hindenburg’s designers did not properly assess the risk of hydrogen leakage and ignition, whereas the Titanic’s operators ignored several warnings about icebergs.
The lesson: don’t conflate risk with uncertainty. Unlike uncertainty, risk can be predicted, measured, quantified, and thus managed. It then follows that managed risk increases the predictability of potential outcomes, making it a prerequisite for success.
Take calculated risks. That is quite different from being rash.– George S Patton, one of the most effective Allied generals during WW2
Risk management basics for marketplace development
Okay, now that we’ve established that risk can be managed, the million dollar question remains – how do you manage risk? Especially when building an online marketplace, a multifaceted product with many layers of complexity. Let’s set the scene by looking at a few general risk management principles.
What is risk management?
In its simplest form, it’s the process of identifying, analysing, pre-empting, and responding to potential threats that could affect your project’s objectives.
Did you notice that it’s not just about reacting to issues, but also pro-actively influencing outcomes? In other words, it’s how you plan for the worst and create opportunities for the best.
It is important to differentiate between risks and issues. The difference is in the timing. A risk is a potential future event that could have a negative impact on your project, while an issue is an event that has already occurred and is currently causing problems for your project.
For example, building your marketplace with software that doesn’t scale properly would constitute a risk, while a website that crashes due to a technical glitch is an issue. It is important to distinguish between the two, because they require different responses and actions.
Why is risk management important for online marketplaces?
Because building a marketplace is not a simple or straightforward task. It involves many moving parts, such as technology, product design, market analysis, operations, and go-to-market strategies. Each of these aspects has its own risks and challenges that could derail your marketplace project.
Typical risks include:
Financial – How do you avoid budget overruns?
Operational performance – This includes scope creep, tracking the wrong metrics, or dealing with an unproductive team or sudden team changes.
Timeline – Especially when the task is more complex than expected.
Market – Includes the size of the market, regulatory risks, and geopolitical risks.
Universal risk management steps
There are some risk management steps that are applicable to all projects, whether they are digital or physical in nature. Use them as the foundation of your marketplace project’s risk management game plan.
- Identify potential risk events. Brainstorm all the possible things that could go wrong with your project. You can use different tools and techniques to do this, such as SWOT analysis (internal factors), PESTEL analysis (external factors), industry best practices, expert insights, and lessons from previous projects.
- Analyse and prioritise the risks. This involves estimating the likelihood and impact on your project of each risk event you have identified. You can use different methods to do this, such as qualitative or quantitative analysis, scoring matrices, or decision trees.The idea is to prioritise the most significant and probable risks that would require your attention.
- Prepare contingency plans for each risk event. These are the courses of action that you would take if a risk event occurs. They should include the trigger conditions, the response actions, the resources needed, and the expected outcomes.
- Assign a risk owner. For each risk event, you need to assign a person or a team who will be responsible for monitoring and managing it. This person or team should have the authority, expertise, and resources to deal with the risk effectively. They should also communicate regularly with the rest of the project team and stakeholders about the status and progress of the risk.
- Respond to risk events. When risk events materialise you need to act quickly and decisively to minimise and recover from any damage. You should follow your contingency plans as much as possible, but also be flexible and creative if needed. Document any lessons learned from the experience and use them to improve your future risk management practices.
- Monitor risks. Risk management is not a one-time activity. It is an ongoing process that requires constant vigilance and adaptation. You need to monitor the risks throughout the project lifecycle and update your analysis and plans accordingly.
Three umbrella principles for marketplace risk management
Now that you are familiar with the basics of risk management, let’s look at three important principles that apply to marketplace projects specifically:
Follow a Lean iterative approach
One of the best ways to reduce overall risk in your marketplace project is to use a Lean iterative process that makes use of MVPs (minimum viable products) and agile frameworks like Kanban and Scrum. This approach allows you to build your product in small increments through a build-measure-learn loop: test each iteration with real users, get feedback, and make improvements.
Validate each stage of the project
Another way to reduce risk in your marketplace development is to validate each stage of the business cycle before moving to the next one. This means that you should verify that your product solves a real problem for a large enough market, that your solution fits the needs and expectations of your target customers, and that your product has a competitive advantage and a sustainable business model.
Ensure technology and feature fit
A third way to reduce risk in your marketplace development is to ensure that your technology and features match the stage of your marketplace evolution. This means that you should choose the right platform, architecture, and tools for your product, and that you should prioritise the features that are most relevant and valuable for your customers at each stage. You can use different frameworks and models to do this, such as the marketplace maturity model, the marketplace feature matrix, etc.
Next we’ll look at specific risk management strategies for the main phases of marketplace development: discovery, development, and growth.
Risk management during the discovery phase of a marketplace project
If you are planning to launch a new marketplace platform, you might be wondering how to avoid wasting time and money on developing features that nobody wants or needs? How can you validate your assumptions and hypotheses before investing in full-scale development? This is where the discovery phase comes in.
The discovery phase is a crucial stage in software development, where you define the problem you are trying to solve, the value proposition of your product, and the key features and functionalities that will deliver that value. The discovery phase helps you to align your vision with your users’ needs, test your assumptions, and reduce uncertainty and risk.
However, the discovery phase is not without its own challenges and risks. One of the main risks during this phase is product risk, which refers to the possibility that your product does not solve a real problem, does not offer a compelling value proposition, or does not fit the market demand. Some of the common causes of product risk are:
- Overlooking critical user scenarios: You might miss some important use cases or user segments that have different needs or preferences than your assumed persona.
- Not taking into account conflicting user scenarios: You might design features that work well for one user group but create problems or dissatisfaction for another.
- A lack of product-market fit focus: You might get distracted by secondary or nice-to-have features and lose sight of the core value proposition and differentiation of your product.
To minimise product risk during the discovery phase, you need to adopt a systematic and rigorous approach that involves the following 5 key steps:
Look at previous projects
One of the best ways to learn from others’ successes and failures is to analyse existing marketplace platforms that use a similar business model (e.g. subscription revenue model) or target a similar market segment as yours.
Leverage a cross-functional team of experts
The discovery phase requires input and feedback from different perspectives and disciplines, such as senior software developers, UX/UI designers, business analysts, and product managers. A cross-functional team enhances your ability to define the scope, requirements, and feasibility of your product, as well as to generate and evaluate ideas and solutions.
Interrogate existing data
Data is your friend when it comes to validating your assumptions and hypotheses. You can use data from various sources, such as market research, user surveys, platform analytics, or competitor analysis, to understand the needs, preferences, behaviours, and pain points of your potential users and customers.
CobbleWeb designed a new shipping model for Affordable Art Fair by analysing the type of products that will be shipped and what shipping options offer the best cost-efficiency profile.
Keep it simple stupid (KISS)
The discovery phase is not about building a perfect or complete product, but about testing the core assumptions and value proposition of your product. Therefore, you should aim to simplify your features and functionalities as much as possible, to focus on the essential elements that deliver value to your users and customers. You can always add more advanced or complex features in later iterations, based on user feedback and data.
Test early and often
The ultimate goal of the discovery phase is to validate your product idea with real users and customers before investing in full-scale development. You can use low-fidelity MVPs such as prototypes, wireframes, mockups, or landing pages to test your product with a small sample of users and customers. You can then collect feedback and data from these tests, analyse the results, and iterate on your product accordingly.
Risk management during the development phase of a marketplace project
During the development phase the most important risks to a marketplace project are financial (includes budget control), performance (includes scope creep, tracking wrong metrics, unproductive team), schedule (e.g. task is more complex than expected), and operational (team changes).
The following strategies have proven their worth as risk management tools during the development phase:
Test driven development
Test-driven development is a way of writing software that makes sure it works as expected. It’s like baking a cake based on a draft recipe. First, you write down the steps and the ingredients you think would work. Next, you follow the steps and bake the cake. Finally, you taste the cake and see if it matches your expectations. If not, you go back and fix the mistakes or change the recipe. Test-driven development helps you avoid wasting time and resources, and ensures that your software meets the requirements and satisfies the users.
Pre-emptive scenario planning would be another way to look at test-driven development. By mapping out probable use cases before they crop up during a full version of your marketplace platform you can prevent user disaffection and revenue loss.
Utilise Alpha releases for complex epics
An Alpha release (aka private Beta) is an under-development version of software that is made available for initial testing by a small group of users. An alpha release is usually not feature-complete and may have many bugs and errors.
The main job of alpha testing is to find and fix any problems that weren’t caught during the previous (internal) tests. It is especially useful to illuminate unknown use cases and issues that effect more complex features or epics.
Alpha users tend to be loyal existing users who are willing to give feedback even if the product or new features are not commercially ready. UK-based food delivery disruptor, MealMap, has expedited the development of its platform by several months by inviting carefully vetted sellers for alpha testing.
Create automated software tests
Automated software tests are scripts or programs that run your product and check for errors or bugs automatically. They can help you save time, money, and resources by reducing manual testing and human errors. They can also help you improve your product quality, performance, and reliability by detecting and fixing issues early and frequently. You should create automated software tests for different aspects of your product, such as functionality, usability, security, compatibility, performance, etc.
Track the right technical metrics
Technical metrics are quantitative measures that indicate how well your product is performing technically. They can help you monitor and optimise your product performance, reliability, availability, scalability, etc. You should track the right technical metrics for your product, such as response time, uptime, error rate, throughput, latency, etc.
Monitor key user journeys
Key user journeys are the steps or actions that your users take to achieve their goals or tasks on your product. They can help you understand and improve your user experience, satisfaction, retention, etc. You should monitor key user journeys for your product, such as registration, search, booking, payment, review, etc.
Implement a feature flag
A feature flag is a technique that allows you to enable or disable certain features or functionalities of your product without deploying new code or restarting your servers. It can help you test new features or functionalities with a subset of your users before rolling them out to everyone. It can also help you roll back faulty features or functionalities quickly if they cause any issues or problems. You can implement a feature flag for your product using tools like LaunchDarkly or Optimizely.
Maintain budget control
Budget control is the process of planning, monitoring, and managing your expenses and revenues for your product development and launch. It can help you avoid overspending or underspending on your product and ensure that you have enough resources to deliver your product successfully. It is important to understand the difference between the cost of building an online marketplace infrastructure and the budget required to establish product-market fit through iteration, as we explain in our article: Marketplace development – budget vs cost
You can protect your budget by using increasingly granular levels of estimation as the project progresses:
- An initial high-level estimate of epics based on previous projects with similar technology and functionality.
- Re-estimate epics at user level at the end of the discovery phase. This will usually be done by a cross-functional team including a Business Analyst and Tech Lead and result in a detailed storyboard that breaks each epic down into smaller user stories.
- A final estimate at the beginning of the development phase once specific developers have been assigned. Each user story is interrogated at technical level (sometimes with the help of a technical expert) to reach a more exact estimate of the time required to complete an epic.
Ensure client participation
Client participation in the development phase of a marketplace project is critical. Without it you run the danger of misalignment of product vision, goals, expectations, and requirements between stakeholders. Client feedback can and should thus be incorporated it into any product improvements. You can promote client participation via methods like client demos, user acceptance testing (UAT), and issue feedback mechanisms.
Risk management during the scaling stage of your online marketplace project
Once your online marketplace MVP has reached product-market fit it’s time to grow the platform at scale. Risk during this phase is often business-model related and generally falls into four categories:
Align your business model and revenue streams
One of the most important steps to a success online marketplace is the development of a viable business model and optimizing revenue streams. Without a great marketplace monetization strategy you aren’t going to last long.
As a marketplace entrepreneur you need to understand both the flow of value in your business and how to monetise the flow of that value between the various stakeholders.
Minimise platform leakage
Disintermediation, also known as platform leakage, has hurt the viability of many a marketplace concept. This happens when naughty users circumvent your payment systems and conduct transactions off-platform, resulting in a loss of platform revenue, such as commission or other transaction fees.
The holy grail for marketplace owners is to own as much of the procurement process as possible. This allows them to extract revenue from each transaction. However for this to work there have to be good incentives for users to stay and transact on your platform.
Liquidity in an online marketplace is a measure of how easily buyers and sellers can find and complete transactions on the platform. It indicates how well the supply and demand sides match and how satisfied the users are with the service. A high level of liquidity means that buyers can quickly find what they are looking for and sellers can sell their products or services efficiently. A low level of liquidity means that there are fewer transactions, longer waiting times, and higher costs for both parties.
Understanding the drivers of liquidity in your particular marketplace setup is the first step to maximise it, as we explain in this article: Why liquidity should be a burning priority for your marketplace startup
Have a detailed go-to-market strategy
Go-to-market strategy (aka market activation) outlines how you are going to use the resources at your disposal (team, budget, tools, skills) to sell your unique value proposition to a specific audience and in the process gain competitive advantages that will grow your marketplace.
A well thought through market activation plan will increase your chances of success and decrease your costs by minimising wasted resources. It also provides structure and focus for your team.
It should be clear that risk management is as much a mindset as it involves a checklist of technical items. Any marketplace project should therefore have a clear framework and/or action plan to minimise risk from the outset. This includes roping in the experts where necessary 🙂