When looking to launch a new product or feature, every company has to decide whether to build it in-house or buy it (e.g., license/partner) from a third-party vendor. The choice you make can have an immense impact on the bottom line for your business. The considerations surrounding the decision to build or buy custom software for a developer-facing add-ons marketplace is a common question for us at Manifold.
Before discussing the primary considerations during the build vs. buy decision-making process, we should discuss why offering an add-ons marketplace to your users is right for your business. Offering your developers a marketplace of complementary products such as cloud infrastructure, managed services, and APIs can provide substantial benefits to your business. It essentially turns any product-based business (single product-line to multiple product-lines) into a platform business, where buyers and sellers can interact while you facilitate the matchmaking and gain a share of the transaction revenue in the process.
The benefits of providing an add-ons marketplace for developers don’t stop there. It also creates stickiness as you give developers more options and different ways to use the resources available on your platform. Offering users more value than your competition also sets you apart from the crowd, gives you a diversified revenue stream, and ultimately makes your customers happy to use your platform.
The issue is, do you want to invest the time, focus, and resources to build and maintain an add-ons marketplace, or would you prefer to focus on building your core product and outsource the development and maintenance to a company that specializes in building marketplaces and already has the technology and partnerships in place?
The decision to build versus buy a marketplace offering is no small task and is often more art than science, coming down to the particular needs of your business, appetite for risk vs. return, financial stability, team size, and your long term corporate strategy. Here are some things to consider during the decision-making process.
Core to product
Arguably the most critical consideration requires you to ask questions such as:
- Is a marketplace core to my business strategy and the product(s) I offer?
- Will a marketplace continue to sustain attention and focus from our executive and cross-functional teams?
- Will a marketplace be financed sufficiently to outlast the “chicken and egg” conundrum?
Building an add-ons marketplace will take a significant amount of time, focus, and resources away from your business. The development of the underlying marketplace functionality such as unified billing and provisioning, single sign-on, identity, and authentication usually take longer than expected. Business development is going to be a critical investment as well since numerous partnerships have to be developed, onboarded, nurtured, and supported to create a healthy ecosystem of add-on providers for your marketplace catalog.
Without thoroughly considering the upfront investments and risks, building a marketplace offering may also come with some unexpected consequences that could be detrimental to the health of your business long term, not just from a financial perspective but from a cultural perspective as well.
How much control does your business need over a marketplace product offering? Some things to consider are relationships and technical integrations with vendors, user support, payment collections, partner distributions, and security, to name a few.
When doing due diligence on a potential partner for your marketplace, ensure they are aligned with your values, and are flexible enough to bring your users the complete experience that you want to deliver them.
For example, you may want to only have a few complementary vendors in your add-ons marketplace, and you want these integrations tightly coupled with your core product. Find a partner that is willing to work with you and the vendors to ensure both parties are satisfied with the integration and that it gives your developers a superior experience than they would get with a competitor’s offering.
Costs (carrying costs and efficiency)
Run the numbers. Estimate development time and work required, followed by determining the number of dedicated employees needed to build and maintain a developer-facing marketplace. Remember, marketplaces have many different underlying product requirements, for example:
- A flexible billing model that is robust enough to handle different types of plans and business models (e.g., fixed monthly, metered, add-ons, anniversary billing, annual discounts, and more.)
- Provisioning flows to enable seamless self-serve experiences.
- Authentication and identity features, such as role-based access controls and single sign-on.
- Integrations with add-on providers for complete end-to-end workflows.
The costs associated with building a marketplace are not small due to the labor required to build and maintain such an offering. The carrying cost consideration comes down to if your business wants to consider the marketplace as a cost center with the lion’s share of the upside (build), or, as a complementary offering that can be up and running quickly with relatively minimal development resources required to build and maintain while sharing a portion of the revenue with a partner (buy).
Another way to think about it would be to consider fixed costs vs. variable costs, with labor as a relatively fixed cost when building a marketplace versus a variable cost structure with a revenue share allocated to a partner.
There may be a tremendous impact on the cost efficiency of your business as well. If you decide to build a marketplace on your own, will you be able to hire the best talent with experience building ecosystems and marketplace functionality? How long will it take your employees to get ramped up with proper architecture and designs? Deciding to buy/partner, you are choosing to work with experts who already have it figured out. They have uncovered all of the technical pitfalls associated with developing marketplace technology and have playbooks with established processes to manage all aspects of the solution.
Is your company the only competitor in your space, or are you finding it more challenging to stand out in a crowded market? Are your competitors launching additional features quicker than you can keep up? By working with a partner to provide your marketplace offering of complementary features, you can blow past your competition by getting to market quickly and surpass the number of product offerings with a pre-developed catalog of add-ons, giving you a differentiated position in the market.
If your marketplace partner is missing any specific products in their catalog that you would like to offer your users, ask them to initiate the partnership, onboard, and support the integration. It is much easier to convince a new provider to integrate with an ecosystem because they know they get access to a network of platforms rather than just a single product.
If you decide to go the ‘buy’ route, you must ensure your partner is aligned with your vision and committed to the long run. This choice is a long term business decision that should not be pursued without full commitment by both parties to share in the success of the marketplace. The details of the agreement and who shares in the upside are essential to get right.
Each party must have skin in the game, whether that includes intangibles like brand reputation or more tangible monetary aspects such as financial incentives. Including a revenue-sharing element in the agreement is one of the best methods for long term alignment between both parties as it ensures your partner is motivated to help make your marketplace successful. Your partner only wins if you win and vice versa.
A vendor that has a licensing model is great, too, if you want a more lightweight marketplace offering. If you are a smaller business, you want to avoid working with anyone asking for significant upfront costs. However, a reasonably sized implementation fee is fine as vendors have cash flow requirements in their business, as well.
Offering a marketplace of cloud infrastructure, managed services, and APIs to developers provides your business with numerous benefits. The decision to build it on your own versus buying it from an established partner includes many factors and can have substantial impacts on the long term success of your business. I hope these tips help you on your journey towards offering your users a superior marketplace experience.
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