two-sided-marketplace

The Framework To Build A Successful Two-Sided Marketplace

A two-sided marketplace is a platform business that connects two primary groups as it enables them to interact and transact within the platform. As an intermediary working to enable frictionless interactions and transactions on the platform, it will usually work as a government collecting a “tax” on both groups on the platform. 

A quick intro to two-sided marketplaces

In an essay entitled “All Markets Are Not Created Equal: 10 Factors To Consider When Evaluating Digital Marketplaces” Bill Gurley, general partner at Benchmark and early investor in Uber pointed out:

A true marketplace needs natural pull on both the consumer and supplier side of the market. Aggregating suppliers is a necessary, but insufficient step on its own. You must also organically aggregate demand. With each step, it should get easier to acquire the incremental consumer AS WELL AS the incremental supplier. Highly liquid marketplaces naturally “tip” towards becoming a clearinghouse where neither the consumer nor the supplier would favor an alternative. That only happens if your momentum is increasing, and both consumers and suppliers are sensing an increasing importance of your place in the world. Much easier said than done.

For that matter, he identified ten key factors to take into account when building up a two-sided marketplace. You find them listed below:

The new experience test

Does it offer a wholly unique experience? 

For this matter, it is critical that the two-sided marketplace offers a new experience compared to the established companies operating in a particular industry and marketplace.

As Bill Gurley points out, you need to create that “wow” moment that makes your platform unique. GrubHub business model is an example of that kind of experience.

The economic advantage test

Does it offer an economic advantage to both sides of the transaction?

When Airbnb disrupted the hospitality industry, it did so by creating an economic advantage for its both key partners: hosts and guests. Hosts could make additional income out of the platform.

Additional income which just wasn’t there before, as it was way harder for a host to start renting a room just like a hotel would do. On the other hand, guests could benefit from better experiences and prices.

Airbnb business model is a perfect example of the economic advantage created compared to traditional players.

The technological advantage test

Can technology create an obvious market advantage? 

In this respect, technology must be a key ingredient for the marketplace success.

Industries where there is a complete lack of transparency in prices and availability of data, technology can play a crucial role in making those processes available and visible.

One example that I like in this case is Google AdWords (now called Google Ads). Google took a market like advertising based on massive budgets managed by accounts, with a lack of transparency and trackability of actual results from those ad campaigns.

Google transformed it into a giant marketplace. In this marketplace, businesses bid on a keyword where they know exactly the price and clicks they will get from those campaigns.

Another critical element of the Google business model was the introduction of paid ads also based on relevance when technology creates this kind of advantage that is when network effects are triggered.

The market fragmentation test

Is there a fragmented supply base? 

In this case, if there is a fragmented supply, this means a higher chance of succeeding for a marketplace.

As it might encounter less resistance from the fragmented suppliers and even if they might resist the entrance of the two-sided marketplace, it will be hard in any case for the fragmented supply to stop its advance.

The suppliers’ sign-up friction test

Is it easy for suppliers to sign-up?

When launching a two-sided marketplace the chicken or the egg problem can be tackled by creating first enough supply to make the platform compelling enough for the demand side. 

However, the process of acquiring suppliers needs to be frictionless. For instance, in some marketplace that might require a substantial local presence or multiple touchpoints with suppliers, this might slow down the process of aggregating supply. 

The TAM test

Is the total available market big enough?

When building up a marketplace understanding what’s the potential of it starts from looking at its TAM or total available market. Indeed, not only a small TAM might reduce the likelihood of success of the marketplace.

It might also make it less compelling to investors. As pointed out in Blitzscaling by Reed Hoffman, investors want to see a TAM of billions of dollars.

The market expansion test

Can the marketplace features and enhancements expand the market?

When a marketplace becomes widely adopted, its features and enhancements can expand market opportunities for entire industries.

For instance, Airbnb trying to design the whole experience of its users, from the arrival to end of the trip (thus not just the stay) has expanded the entire set of services offered within the same industry.

The frequency test

Is the marketplace frequently relying on the marketplace? 

Booking a ride on Uber is a utility. Something that people might deal with so often that allows network effects and word-of-mouth easily.

Indeed, one of the reasons a marketplace might lose traction and thus might struggle to gain enough brand awareness is due to infrequent transactions.

The payment flow test

Is the marketplace perceived as a cost center or profit center by its suppliers?

According to the way the payment flow is designed it is easy to be perceived as a cost center rather than a profit center by the suppliers on the marketplace.

For instance, in the case in which the supplier gains revenues net of fee right away from the platform, this means that the marketplace is itself a critical element for the supplier bottom line.

In the opposite scenario, the marketplace might be perceived as a cost center, which makes it less appealing in the long run.

The network effects test

Is each additional user making the overall service better for the next users joining the platform?

Network effects are a vital ingredient for any company’s success; this applies even more to marketplaces.

Network effects usually happen when each additional user makes the platform better for those joining next.

Did your marketplace pass all the tests? 

Case studies

Airbnb

airbnb-business-model
Airbnb is a platform business model making money by charging guests a service fee between 5% and 15% of the reservation, while the commission from hosts is generally 3%. Due to the pandemic, Airbnb is stretching its business model and experimenting with new formats like online experiences to transition toward fully digital experiences.

Etsy

etsy-business-model
Etsy is a two-sided marketplace for unique and creative goods. As a marketplace, it makes money via transaction fees on the items sold on the platform. Etsy’s key partner is comprised of sellers providing unique listings, and a wide organic reach across several marketing channels.

Linkedin

linkedin-multi-sided-platform
LinkedIn is a two-sided platform running on a freemium model, where to unlock unlimited search and other features, you need to switch to a paid account. Acquired by Microsoft for $27 billion in 2016, LinkedIn made $5.2 billion in revenues in 2018 and had nearly 630M members by October 2019.

Related Business Model Types

Platform Business Model

platform-business-models
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.

Marketplace Business Model

marketplace-business-models
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.

Network Effects

network-effects
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

Asymmetric Business Models

asymmetric-business-models
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.

Attention Merchant Business Model

attention-business-models-compared
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.

Wholesale Business Model

wholesale-business-model
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.

Retail Business Model

retail-business-model
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.

B2B2C

b2b2c
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.

Crowdsourcing Business Model

crowdsourcing
The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.

Open-Core Business Model

open-core
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.

Open Source vs. Freemium

open-source-business-model
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.

Freemium Business Model

freemium-business-model
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.

Freeterprise Business Model

freeterprise-business-model
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.

Franchising Business Model

franchained-business-model
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.

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