Why marketplace startup founders need to learn the simple rule that a butcher’s customer is not the cow

I was reminded of an important analogy in a first mentoring session with prototype-stage startup.

They’re building a two-sided marketplace in a smartphone app. They couldn’t wait to show me the app and were surprised and initially a little miffed that I wasn’t interested in seeing a demo.

From my background notes I could guess how the app would probably work but I wanted to dig into something much more important — whether they had customers lined up to pay to reach these users they were so focused on.

Argh. They hadn’t spoken to a single customer, and worse still, had spent no time on researching their customer to learn whether the problem they were hoping to solve was the best (aka the most valuable) problem to solve for their customer. They were thinking they’d have to build a great app first, and acquire a large user base, before they even began approaching customers.

Oh dear. Time for the butcher analogy. Which is…

A butcher knows who their customer is and it’s not the cow. They want to provide good quality meat at affordable prices to their customers. And let’s be clear — neither the customer nor the butcher wants the cow to have been treated inhumanely. But the butcher’s customer is the steak buyer, not the cow.

Two-sided marketplaces: a primer

A lot of startup business models are what are referred to as “two-sided marketplaces”. In a two-sided marketplace, one side is the ‘user’ and one side is the ‘customer’.

Users are most commonly the ‘demand’ side of the market place and customers are the ‘supply’ side. Customers with idle assets or services experiencing insufficient demand will hopefully pay you to increase their utilisation rate.

If you’re not clear on which is which, think of it this way: who’s going to pay you money for this? Customers are the ones who pay you. Users are those who (as the label suggests) make use of the marketplace.

AirBnB’s customer is the property owner. Uber’s customer is the driver.

Even big companies make this mistake

If you’ve made the same mistake, you’re not alone — I’ve seen it happen to some of the biggest companies in tech.

Centuries ago when Apple launched the iTunes Music Store and began selling music online to iPod users, I happened to be the head of a record label.

Excited about the potential for iTunes Music, I pushed my team as hard as possible to get all our catalogue on iTunes and all our artists featured as heavily as we could. I wanted to be as big on iTunes as our tiny little label could possibly be, to get a jump on our competitors.

What I didn’t understand until it was too late to do anything but gasp in horror was that while that Apple had been obsessing about the iTunes Store experience for users, it had done almost nothing to make selling music online easily and painless for Apple’s customers — the record labels like us.

The app Apple shipped for us to upload and manage our catalogue on iTunes was painful, manual, buggy and came with partial, confusing and sometimes contradictory documentation.

And as for helping us manage the complicated book keeping and accounting involved in calculating payments of money owed to artists and publishers? For that, Apple just provided a monthly email with a link to a CSV file of every individual transaction on our account.

Figuring out who was owed how much for what track or album was a colossal pain in the bum that threatened to paralyse our label and must have been an enormous problem for bigger labels. It was almost worth taking most of the catalogue back off iTunes — to stop selling most of our catalogue.

Ultimately, the music industry’s desperate need to make up for lost physical sales with online sales in the previous decade — combined with Apple’s total platform lock-in of the largest online music-buying customer base through the iPod and then the iPhone—meant the music industry had to suck it up and put up with a shitty customer experience for many years.

But you are not Apple.

Don’t confuse your user experience with your customer experience

We can easily get confused when we think we’re obsessed about ‘improving the customer experience’ of our marketplace when in fact we’re improving the user experience.

If I’m the head of product at Uber and my team ships a new feature that makes it easier for you to book and ride with a driver, that’s awesome for you as an Uber user. You might feel like you’re a customer (after all, you’ve paid for the ride, and you paid Uber for it) but actually, you’re the user not the customer.

A two-sided marketplace full of customers just waiting for you to acquire users might well become a viable startup in time. But a marketplace with users and no customers won’t.

If you haven’t done the work necessary to learn whether you’re solving a valuable problem for your customers, no amount of delightful user experience will make your startup viable.

Figure out who your true customers are and obsess about solving their most valuable problems.