A two-sided marketplace lets parties of producers and consumers interact with one another, and creates network effects between them through a platform intermediary. The platform’s business model is to take a percentage of the transacted value for connecting producers and consumers. The platform doesn’t own the supply chain of value, but rather controls the network of third party producers of value and the consumers coming to the platform to consume that value. Two-sided marketplaces can be difficult to successfully execute, but many of today’s most profitable startups are two-sided marketplaces.
One of the most popular two-sided marketplaces is Uber. Uber’s marketplace connects drivers with riders. Uber is one of the largest transportation companies in the world but it doesn’t own have any cars or full-time drivers on its balance sheet. There is a symbiotic relationship between riders and drivers; without riders, there wouldn’t be a demand for drivers and without drivers, there wouldn’t be enough supply to keep the riders on the platform. Uber acts as a regulator between the two parties, setting rules and standards while also providing the space for interaction. Other notable two-sided marketplaces include Airbnb, Etsy, Craigslist, and Handy.
Since two-sided marketplaces are the product of their network, they are difficult to establish and maintain once created. Here are 5 tips to keep in mind for building a strong two-sided marketplace:
During the ideation phase of starting a marketplace business, it’s best to go into a field in which you have expertise in. By creating a network business for a familiar industry, you’ll automatically have a better understanding of users’ needs and desires. This deep domain expertise will differentiate you as a founder and help tell a compelling story to investors.
For example, Transfix is a freight brokerage that connects shippers with carriers . The company was founded by Drew McElroy, who grew up in his family’s trucking business and eventually took it over. He was able to identify first-hand a problem in the industry and create a platform to solve the problem. Transfix’s domain expertise permeates into their brand positioning, “real-world expertise and strong partnerships with road-tested technology.” While other “Uber-for-trucking” companies exist, Transfix’s industry knowledge has resonated with investors.
One of the major keys to creating a successful two-sided marketplace is nailing the core transaction. The core transaction is the set of actions consumers and producers must complete in order to exchange value. Companies must plan what transaction will occur on their platform in order to properly scale their marketplace and target the right type of users for their platform. For Uber’s core transaction, drivers make themselves available for rides and ride-seekers submit requests for rides. On eBay, producers list their products on the site for sale and consumers purchase those items. AirBnB’s homeowners make their homes available for rent and vacationers book stays at different locations. You get the point.
The core transaction can be broken down into the 4 C’s: create, connect, consume, and compensate. A producer creates value or makes it available in the marketplace to be consumed. In every transaction, one party always makes the initial connection that sparks the transaction and begins the process of exchange. Once consumers find what they’re looking for, they consume the value being created by the other party. Lastly, consumers create value after consumption through some form of compensation, usually monetary, thus concluding the core transaction.
The chicken-and-egg problem is the sink-or-swim moment for most two-sided marketplaces. Initially, a platform does not generate enough value to attract new users. The problem lies here: which party do you try to get first, producers or consumers? As I mentioned earlier, Uber relies on its drivers to bring in riders, and vice versa. Without one party using the platform, there is no incentive for the other party to join or stay.
Our seven strategies for solving the chicken-and-egg problem can be generally broken down into monetary subsidies, product features, and user sequencing. Read more specifics about their execution in the link above to learn how to attract a critical mass of producers and consumers to the platform.
Once you solve the chicken-and-egg problem for your two-sided marketplace, you must ensure your platform is liquid. In other words, once a producer makes a unit of value available, there must be demand for that unit of value. Craigslist is an example of a very liquid two-sided marketplace. This is because there is a very high probability that someone listing an item, service or request on the platform will be connected with an interested party, no matter the location or time. Craigslist enables a lot of transaction of value.
One way to guarantee two-sided marketplace liquidity is analyzing your platform’s product/market fit. Mark Andreessen defines it as “being in a good market with a product that can satisfy that market.” Product/market fit doesn’t happen automatically, but after working obsessively to meet your users’ needs in an industry where your product is needed, this fit should come. And when it comes, you’ll know it as your platform will grow exponentially.
Lastly, it is extremely vital to learn from and listen to the two-sided marketplace’s users in order to optimize the platform. Feedback is one of the most important parts of growth for any business, but especially for platforms. Platforms cannot exist without a network, so the opinions and critiques of users within a network are crucial to the development and success of these types of businesses.