Atwo-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.
Aspect
Explanation
Two-Sided Marketplace
A Two-Sided Marketplace is a business model where a platform connects two distinct groups of users, often buyers and sellers, creating value by facilitating transactions or interactions between them. These platforms serve as intermediaries and enable exchanges, transactions, or interactions that benefit both sides of the market.
Characteristics
– Dual Customer Groups: Two distinct user groups, such as buyers and sellers, service providers and customers, or hosts and guests. – Intermediary Role: The platform acts as an intermediary, facilitating transactions or interactions. – Network Effects: The value of the marketplace increases as more users join, creating network effects. – Trust and Safety: Often includes mechanisms to establish trust and ensure safety in transactions. – Revenue Generation: May charge fees, commissions, or subscriptions from one or both sides.
Key Elements
1. User Segmentation: Identifying and understanding the needs and preferences of both user groups. 2. Platform Technology: Developing a robust and user-friendly platform for transactions. 3. Trust and Verification: Implementing trust-building measures, such as user reviews, ratings, and verification processes. 4. Pricing and Revenue Model: Defining pricing structures and revenue generation strategies. 5. Marketing and Growth: Attracting and retaining users on both sides of the marketplace.
Advantages
– Network Effects: As more users join, the marketplace becomes more valuable, creating a competitive advantage. – Revenue Opportunities: Multiple revenue streams, such as transaction fees or subscriptions. – Scalability: Can scale rapidly as it attracts more users. – Data Insights: Access to valuable data on user behavior and preferences. – Efficiency: Facilitates transactions efficiently, often reducing friction.
Challenges
– Balancing Act: Balancing the needs and interests of both user groups can be challenging. – Chicken and Egg Problem: Attracting one group depends on the presence of the other, creating an initial hurdle. – Trust and Safety: Ensuring trust and safety in transactions is crucial and requires ongoing efforts. – Competition: Facing competition from other marketplace platforms. – Regulatory Compliance: Adhering to relevant regulations and legal requirements.
Examples
– Airbnb: Connects hosts (sellers) with guests (buyers) for short-term lodging rentals. – Uber: Connects drivers (service providers) with passengers (customers) for transportation services. – Amazon: Provides a platform for third-party sellers (merchants) to reach buyers (shoppers). – Upwork: Matches freelancers (service providers) with clients (employers) for various freelance projects. – eBay: Connects individual sellers with buyers for a wide range of products.
Importance
Two-Sided Marketplaces have transformed various industries by creating efficient platforms that connect users, enabling transactions and interactions that were previously challenging. They play a significant role in the sharing economy, e-commerce, and the gig economy. The ability to harness network effects and generate revenue from multiple sources makes them a compelling business model.
Conclusion
Two-Sided Marketplaces are a dynamic business model that connects two distinct user groups through a platform, creating value for both sides. They rely on network effects, require careful balancing, and face unique challenges related to trust and safety. Successful marketplaces, such as Airbnb and Uber, have disrupted traditional industries and continue to shape the way people transact and interact in the digital age.
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
Uber
New Experience Test: Uber provided a new experience for users by offering a more convenient, on-demand, and transparent alternative to traditional taxi services.
Economic Advantage Test: Drivers could earn money during their free time, and passengers could get rides often cheaper than taxis.
Technological Advantage Test: The app’s seamless experience with map integration and payment processing was revolutionary.
Market Fragmentation Test: There was a fragmented supply base of drivers.
Supplier Signup Friction Test: Signing up as a driver was relatively straightforward.
TAM Test: The total available market for urban transportation is vast.
Market Expansion Test: Uber expanded into food delivery with Uber Eats.
Frequency Test: People need transportation frequently.
Payment Flow Test: Drivers see Uber as a profit center, a way to earn.
Network Effects Test: More drivers lead to shorter wait times, which attracts more users, which in turn attracts even more drivers.
Airbnb
New Experience Test: Airbnb allowed people to rent out their homes, rooms, or even shared spaces to travelers.
Economic Advantage Test: Homeowners could monetize their unused space. Travelers could find accommodations cheaper than hotels.
Technological Advantage Test: The platform facilitated trust through reviews, verifications, and secure payment methods.
Market Fragmentation Test: There was a vast, fragmented base of homeowners and travelers.
Supplier Signup Friction Test: Listing a property on Airbnb is user-friendly.
TAM Test: The market for accommodations is massive globally.
Market Expansion Test: Airbnb expanded to offer “Experiences” – local activities guided by hosts.
Frequency Test: While not as frequent as daily rides, people travel several times a year.
Payment Flow Test: Hosts view Airbnb as a profit center.
Network Effects Test: More listings attract more travelers, which in turn attracts more hosts.
Etsy
New Experience Test: Etsy provided a marketplace specifically for handmade, vintage, and craft supplies.
Economic Advantage Test: Artisans could reach a global audience without setting up their online stores.
Technological Advantage Test: Etsy offered tools tailored for independent sellers.
Market Fragmentation Test: Craftsmen and artisans are inherently fragmented.
Supplier Signup Friction Test: Setting up a shop on Etsy is easy.
TAM Test: The market for unique and handmade items is considerable.
Market Expansion Test: Etsy has consistently added tools, features, and promotional avenues for sellers.
Frequency Test: Buyers might not purchase daily, but artisans continuously list products.
Payment Flow Test: Sellers view Etsy as a profit center despite the fees, given the audience reach.
Network Effects Test: More sellers lead to a more extensive product range, attracting more buyers.
Examples of Two-Sided Platforms
Ride-Sharing:
Uber: Connects drivers with riders.
Lyft: Another platform connecting drivers with riders.
Accommodation Sharing:
Airbnb: Links property owners or renters with travelers looking for a place to stay.
Vrbo (Vacation Rental By Owner): Connects property owners with travelers.
E-commerce:
eBay: Allows sellers to list items for auction or direct sale, and buyers can bid or buy them.
Etsy: Connects crafters and artisans with buyers interested in handmade or vintage items.
Food Delivery:
GrubHub: Links restaurants with customers wanting food delivery.
DoorDash: Another platform connecting eateries with customers.
Freelancing:
Upwork: Connects freelancers with clients seeking professional services, from writing to web development.
Fiverr: Links service providers offering tasks starting at $5 with potential clients.
Crowdfunding:
Kickstarter: Connects project creators with backers willing to fund them.
Indiegogo: Another platform where inventors and creators can find supporters.
Education & Tutoring:
Udemy: Connects educators or subject matter experts with learners.
Skillshare: Links professionals and experts offering classes with individuals keen to learn.
Fashion & Reselling:
Poshmark: Allows users to sell and buy second-hand clothes.
Depop: Connects sellers and buyers of vintage or second-hand clothing and accessories.
Rental Services:
Turo: Connects car owners with individuals looking to rent a car.
GetAround: Another platform where car owners can rent out their vehicles.
Local Services:
TaskRabbit: Links individuals offering services (like handyman work, moving help) with locals in need.
Thumbtack: Connects professionals in various fields (from photography to home repair) with clients.
Key Highlights on Two-Sided Marketplaces:
Definition: A two-sided marketplace is a platform business that facilitates interactions and transactions between two primary user groups. The platform acts as an intermediary, typically collecting a fee from both sides.
Bill Gurley on Marketplaces: A successful marketplace needs to attract both consumers and suppliers. As the platform grows, it should become increasingly easier to onboard both groups, leading to a highly liquid marketplace that’s indispensable to both parties.
Ten Key Factors for Evaluating Two-Sided Marketplaces:
New Experience Test: The platform should offer a unique experience compared to existing alternatives, creating a “wow” moment. Example: GrubHub.
Economic Advantage Test: Both sides of the transaction should perceive a clear economic benefit. Example: Airbnb provides hosts with additional income opportunities and guests with better prices.
Technological Advantage Test: The platform should leverage technology to offer a clear market advantage, especially in industries where transparency and data availability are lacking. Example: Google Ads transformed the opaque advertising market.
Market Fragmentation Test: A fragmented supply base can be advantageous for a marketplace as it might face less resistance.
Suppliers’ Sign-up Friction Test: Onboarding suppliers should be easy and frictionless.
TAM Test: The total available market (TAM) should be substantial, preferably in the billions, to attract investors.
Market Expansion Test: As the platform evolves, its features should have the potential to expand market opportunities. Example: Airbnb expanded its services to cover the entire travel experience.
Frequency Test: Users should frequently rely on the marketplace, ensuring sustained traction and brand awareness. Example: Uber rides are a frequent utility for many.
Payment Flow Test: Suppliers should perceive the platform as a profit center, not a cost center, based on the payment flow design.
Network Effects Test: Each new user should enhance the platform’s value for future users.
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.
In 2022, Etsy had 88.3 million active buyers, over 35 million repeat buyers, and 7.6 million habitual buyers. Etsy’s funnel is skewed toward enabling active buyers to become habitual buyers, which is critical for long-term sustained growth in a two-sided digital marketplace.
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. In addition, LinkedIn is the most successful B2B advertising platform. In fact, by 2022, with over 850 million members, LinkedIn generated over $6 billion in revenues through its Talent Solutions and over $5 billion through its Marketing Solutions (B2B advertising platform). Acquired by Microsoft for $27 billion in 2016, LinkedIn might now be worth anywhere between $100-150 billion.
Bill Gurley’s 10 Key Factors for Building a Two-Sided Marketplace
The New Experience Test: The marketplace must offer a unique and compelling experience compared to established players in the industry. Creating a “wow” moment for users is crucial, as seen in GrubHub’s business model.
The Economic Advantage Test: The marketplace should provide an economic advantage to both sides of the transaction. Airbnb’s disruption of the hospitality industry is an example of creating economic benefits for hosts and guests.
The Technological Advantage Test: Utilizing technology effectively can give the marketplace a clear market advantage. Google AdWords transformed the advertising industry by introducing transparency and trackability.
The Market Fragmentation Test: A fragmented supply base increases the marketplace’s chances of success as it encounters less resistance from suppliers.
The Suppliers’ Sign-Up Friction Test: Acquiring suppliers should be frictionless to address the chicken-and-egg problem and make the platform compelling for demand.
The TAM Test: The total available market must be sufficiently large to attract investors and ensure the marketplace’s success.
The Market Expansion Test: The marketplace’s features and enhancements should expand opportunities for entire industries. Airbnb’s comprehensive trip experience is an example.
The Frequency Test: The marketplace’s success relies on frequent transactions, leading to network effects and word-of-mouth marketing. Uber’s ride bookings demonstrate this utility.
The Payment Flow Test: The way payments are handled can influence suppliers’ perception of the marketplace. A profit center perception is more appealing than a cost center perception.
The Network Effects Test: Network effects are crucial for marketplaces, as each additional user improves the overall service for new users joining the platform.
An effective business model has to focus on two dimensions: the people dimension and the financial dimension. The people dimension will allow you to build a product or service that is 10X better than existing ones and a solid brand. The financial dimension will help you develop proper distribution channels by identifying the people that are willing to pay for your product or service and make it financially sustainable in the long run.
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.
Digital and tech business models can be classified according to four levels of transformation into digitally-enabled, digitally-enhanced, tech or platform business models, and business platforms/ecosystems.
A digital business model might be defined as a model that leverages digital technologies to improve several aspects of an organization. From how the company acquires customers, to what product/service it provides. A digital business model is such when digital technology helps enhance its value proposition.
A tech business model is made of four main components: value model (value propositions, mission, vision), technological model (R&D management), distribution model (sales and marketing organizational structure), and financial model (revenue modeling, cost structure, profitability and cash generation/management). Those elements coming together can serve as the basis to build a solid tech business model.
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.
A Blockchain Business Model is made of four main components: Value Model (Core Philosophy, Core Value and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
In an asymmetric businessmodel, 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.
In an asymmetric businessmodel, 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.
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.
Cloud business models are all built on top of cloud computing, a concept that took over around 2006 when former Google’s CEO Eric Schmit mentioned it. Most cloud-based business models can be classified as IaaS (Infrastructure as a Service), PaaS (Platform as a Service), or SaaS (Software as a Service). While those models are primarily monetized via subscriptions, they are monetized via pay-as-you-go revenue models and hybrid models (subscriptions + pay-as-you-go).
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.
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.
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.
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.
B2B, which stands for business-to-business, is a process for selling products or services to other businesses. On the other hand, a B2C sells directly to its consumers.
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.
Direct-to-consumer (D2C) is a business model where companies sell their products directly to the consumer without the assistance of a third-party wholesaler or retailer. In this way, the company can cut through intermediaries and increase its margins. However, to be successful the direct-to-consumers company needs to build its own distribution, which in the short term can be more expensive. Yet in the long-term creates a competitive advantage.
The C2C business model describes a market environment where one customer purchases from another on a third-party platform that may also handle the transaction. Under the C2C model, both the seller and the buyer are considered consumers. Customer to customer (C2C) is, therefore, a business model where consumers buy and sell directly between themselves. Consumer-to-consumer has become a prevalent business model especially as the web helped disintermediate various industries.
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.
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.
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.
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.
Businesses employing the brokerage business model make money via brokerage services. This means they are involved with the facilitation, negotiation, or arbitration of a transaction between a buyer and a seller. The brokerage business model involves a business connecting buyers with sellers to collect a commission on the resultant transaction. Therefore, acting as a middleman within a transaction.
Dropshipping is a retail business model where the dropshipper externalizes the manufacturing and logistics and focuses only on distribution and customer acquisition. Therefore, the dropshipper collects final customers’ sales orders, sending them over to third-party suppliers, who ship directly to those customers. In this way, through dropshipping, it is possible to run a business without operational costs and logistics management.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
2 thoughts on “The Framework To Build A Successful Two-Sided Marketplace”
Very interesting, Gennaro. Hadn’t thought of it in these terms, but it’s what independent authors do. 🙂
grazie Zara 🙂