My Marketplace Strategy: Go Niche

The a16z Marketplace 100 series explores the startups and trends behind largest and fastest-growing marketplace companies. See the complete ranking at a16z.com/marketplace-100

There’s a well-known crop of marketplaces that have achieved global scale and become household names in a relatively short time frame—the Amazons and the Ubers of the world.  But increasingly—more than ever over the past year—we’ve seen the emergence of a narrower, fast-growing type of marketplace: verticalized marketplaces that succeed by better serving an industry niche

Since founding Chowbus in 2015, I’ve come to believe that finding your niche is one of the most important things a marketplace can do to drive long-term success. What started as a personal fixation—a late-night food craving—has since informed my entire marketplace business philosophy. 

Six years ago, I was a grad student studying public administration in Chicago and I was hungry. Specifically, I was hungry for high-quality, authentic Chinese food, like what I’d grown up with in China. And because it was winter in Chicago, I really wanted it delivered to my apartment. But though Chicago has a vibrant Chinatown with lots of independently-owned restaurants, all I could find on delivery apps was American-style Chinese food.

In my homesickness, I realized I was looking at an opportunity.

So I decided to build a marketplace to cater to that need. What I envisioned wasn’t a Grubhub competitor—it was something much narrower. In the beginning, my intention was simply to introduce people to authentic Chinese food and drive more customers to the mom-and-pop restaurants that were making it. That vision has since grown into an online marketplace that delivers homestyle Asian dishes from indie restaurants and markets to people in more than 25 cities.

Building a vertical marketplace shares many of the dynamics of more generalized marketplace companies—the challenge of the cold start, the pursuit of network effects—but it diverges from the standard playbook in ways that are fundamental and often inherently personal. Here are the things I’ve learned (sometimes the hard way) about building a successful niche marketplace.

Tackling the Cold Start Problem

Deciding to build the marketplace that would eventually become Chowbus was one thing. Figuring out how to make it work was another. I faced the first challenge right away: trying to get restaurants to sign up to be on the platform. It was a hard sell. I had no credibility, no success stories to share, no name recognition. All I could do was to visit Chinese restaurants, one by one, door-to-door, and hope a restaurant would give me a chance. After pitching around 30 restaurants, one owner finally agreed to give Chowbus a try. I was thrilled; I launched the platform immediately. 

That first day, I asked as many friends as possible to order from this particular restaurant to make sure it received a high number of orders. That first day in business taught me the main principle behind our success: Provide tangible, personalized value to partners. After the restaurant owner saw the volume of orders and recognized my efforts, he became my advocate, helping me sign up more nearby restaurants. I started out with just a few restaurants and a handful of core users, mostly my friends and classmates. But by dialing in the process early on and making sure those first few restaurants and diners had a great experience right away, I developed advocates for my business. That sparked a cycle of recommendations within the community. 

Niche Marketplaces Depend on Strong Supply-Side Partnerships

As we’ve grown, we’ve kept the principle of offering demonstrable, often highly personalized value to our restaurant partners at our core. It’s what sets us apart from the existing food delivery giants, for both restaurateurs and customers. For example, we help restaurant owners rework their menus to feature their best dishes at the top with attractive photographs. If some restaurants don’t have enough people to fill Chowbus orders on extremely busy days, we send out our employees to help them to pack the food to make sure customers can get their food on-time. We boost their marketing efforts, highlighting individual restaurants when we advertise on social media. On occasion, we’ve even helped restaurants that don’t have a digital point-of-sale system to set up online sales. This enables restaurant owners to not only sell in a new way, but reach an entirely new set of customers. And it’s a much more individualized form of service than large, horizontal platforms that are simply scanning and importing menus. 

As COVID spread, this operating principle became even more important. All restaurants were impacted, but Asian restaurants were some of the hardest hit because of xenophobia about the virus’s origins. Delivering custom value to our suppliers will always be integral to how we operate, from having Chowbus employees who speak their language that frequently visit the restaurants to demonstrating that we can bring not only a new volume of orders, but a more tailored service compared to other platforms. For independent Asian restaurants, it’s about the relationship—it’s a major reason that half of the restaurants we work with are exclusive to our platform

Answering the “Market Size” Question

When starting a niche business, the most common question is the market size. But when I started Chowbus, that wasn’t a driving concern. In the beginning, my main focus was on delivering a needed service to customers and offering value to restaurant partners. After all, many great businesses set out to solve a narrow problem and found a bigger opportunity later on: Amazon started out solely selling books before building its global empire. Netflix originally offered DVD rentals, then transitioned to video streaming. 

While these growth stories are extraordinary, the fact that the companies pivoted is not. Pivots are inevitable for a business that’s around for any length of time. We’ve recently expanded to offer same-day delivery from Asian grocery stores, as well. Both services align with our original aim: to connect purveyors of authentic Asian food with those who crave it, whether that’s a specialty dish or a hard-to-find snack. The important thing is to start from a deep understanding of both your suppliers and users—in our case, Asian restaurant owners and avid customers—and continue to add value on both sides of the equation. As we grow, we continue to hone our niche. In our case, a customized experience can often better serve those owners and customers than existing comprehensive food delivery marketplaces.  

When to Scale?

While we’ve grown quickly as a company, one common mistake niche marketplaces make is attempting to scale too soon. It’s a lesson we learned firsthand. In the beginning, Chowbus originally offered a “shuttle” delivery model: customers could pre-order food from various Chinese restaurants for a $1 delivery fee and a shuttle bus would drop off their orders at designated pick-up locations. When we attempted to expand that model from Chicago to Champaign, Illinois too soon, it failed to generate enough demand. While the shuttle concept had been successful in a big city with lots of office buildings, it had built-in limitations: users needed to choose a nearby pick-up location, select their food from a curated daily menu, and order before 11am. Those requirements proved to be too much of a burden for students with flexible schedules. When we later relaunched in Champaign with on-demand delivery, our numbers improved. 

Scaling by expanding into more markets may seem like the easiest way to increase revenue, especially in a niche marketplace, but It’s more important to make sure the product is ready—to spend limited resources on honing and improving the product. If the product doesn’t come first, then expanding to new markets can only bring short-term growth. At that point, underlying problems become more difficult and costly to fix; we eventually diagnosed flaws in the shuttle delivery model and shifted to offer on-demand delivery and pick-up instead. Expanding your business faster than your product is a recipe for failure. Figuring out product-market fit comes before growth

Pursue the Thing You Can Do Best

Silicon Valley thought leaders and investors talk a lot about product-market fit, but less often about founder-startup fit or team-startup fit. In a crowded space like food delivery marketplaces, that core team matters a lot. 

As a Chinese immigrant, I’m ideally positioned to connect with the restaurant owners we serve; I know how to communicate with them properly to get them online. And as a foodie who knows Chinese food well, I share our customers’ desire to have really delicious, authentic Asian food delivered. 

We’ve made Chowbus’s niche work financially by leaning into that specialization. By building a service specifically tailored for lovers of Asian food and Asian restaurants, we were able to better serve our users and restaurant partners than existing broad, horizontal food delivery platforms. As a result, we found customers and restaurants were more likely to recommend Chowbus to others, resulting in very low customer acquisition costs. 

A big part of dialing in a niche is ensuring that you have the right team to make it happen. My own food-obsessed ethos extends across our team: we’re all patrons of these restaurants. We work closely with restaurants joining the platform to curate the menu for diners. We’ve all done deliveries; as we grow, experiencing the driver delivery process will be required of new hires. We survey every new customer about their experience and follow up directly with customers who have bad experiences.

I’m passionate about connecting the two groups we serve, independent restaurant owners and Asian food enthusiasts. The idea of serving that niche permeates the business and influences both large- and small-scale decisions. When creating a marketplace, build your business on the core thing that your target user wants or needs—ideally, you’re one of them—and the thing you’re uniquely suited to deliver.

 

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