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
- The new experience test
- The economic advantage test
- The technological advantage test
- The market fragmentation test
- The suppliers’ sign-up friction test
- The TAM test
- The market expansion test
- The frequency test
- The payment flow test
- The network effects test
- Case studies
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.
The economic advantage test
Does it offer an economic advantage to both sides of the transaction?
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?
Resources for your business:
- Successful Types of Business Models You Need to Know
- What Is a Business Model Canvas? Business Model Canvas Explained
- Blitzscaling Business Model Innovation Canvas In A Nutshell
- What Is a Value Proposition? Value Proposition Canvas Explained
- What Is a Lean Startup Canvas? Lean Startup Canvas Explained
- What Is Business Development? The Complete Guide To Business Development