What is a Two-Sided Marketplace?

A Two-Sided Marketplace business model is a platform for economic exchange between two distinct user groups that provide each other with the benefits of a large network.

Sometimes Called "Platform Business Model"

The concept of “Platform Business Models” has taken hold in academic, government, and consulting circles to describe the way tech giants like Amazon, Alibaba, and Airbnb create and capture value.

Yet it is not as common for these companies to refer to their business models as platform business models. Instead, when you peer closer you see a number of different archetypes: Amazon has e-commerce, marketplaces, product sales, pay-per-use, and other models. Alibaba has even more business model archetypes. Airbnb started as a 2-sided and is now a multi-sided marketplace model.

 

Therefore we find the term “Platform Business Model” useful for policy and concepts, but as business model designers we find the concept of “platform business model” too vague. We want to help you figure out the pricing and value chain driving the business or concept you are describing first.

Two-Sided Marketplace vs. PaaS

This should therefore help clarify the difference between a Platform-as-a-Service company. Platform-as-a-Service provisions a technical platform for software creation, whereas two-sided marketplace companies broker a relationship between two entities, often taking a cut of the transaction revenue.

Marketplace Business Models in Use

Airbnb | Alibaba |  Amazon Marketplaces | Apple Appstore and iTunes | Atari | Door Dash | Etsy | Goat | Hipcamp | Indeed | Kickstarter | Match.com | Taobao | Task Rabbit | Tmall | Uber | Upwork

Why Customers Like Marketplaces:

Benefits for Customers

  • Convenience: Simplifies transactions by connecting buyers and sellers (or service providers and users) on a single platform.
  • Choice and Variety: Offers a wide selection of products or services, allowing customers to compare options and find the best match for their needs.
  • Cost Savings: Competition among providers can drive down prices, benefiting buyers.
  • Trust and Safety: Features such as reviews, ratings, and secure payment systems build customer confidence in the marketplace.
  • Efficiency: Reduces the time and effort required to find and evaluate providers or buyers.
  • Personalized Recommendations: Many platforms use data to offer tailored suggestions, enhancing the customer experience.

Why Offer a Marketplace:

Benefits for Organizations Offering Marketplace Models

  • Scalability: The platform grows as more buyers and sellers join, creating a self-reinforcing network effect.
  • Recurring Revenue: Monetization strategies such as transaction fees, subscription models, or advertising generate steady income.
  • Low Inventory Costs: Companies don’t need to own the products or services they facilitate, reducing overhead.
  • Data Insights: Marketplaces gather valuable data on user behavior, enabling better decision-making and targeted marketing.
  • Rapid Market Penetration: The model often attracts a large user base quickly, increasing visibility and reach.
  • Competitive Advantage: Platforms that achieve critical mass can dominate their niche due to strong network effects.

What do Investors Think of Marketplaces?

Why Investors May Like Two-Sided Marketplaces

  • Network Effects: More users on one side attract more users on the other, creating exponential growth potential.
  • Revenue Diversification: Companies can generate income through multiple streams, such as transaction fees, premium services, or data licensing.
  • Scalability: Once a critical mass is reached, platforms can grow rapidly with relatively low incremental costs.
  • Market Leadership: Successful marketplaces often achieve dominant positions in their sectors, making them attractive acquisition targets.

Why Investors May Be Skeptical of Two-Sided Marketplaces

  • Chicken-and-Egg Problem: Building a user base on both sides simultaneously can be challenging.
  • High Initial Costs: Significant investment in platform development, user acquisition, and marketing is required to achieve critical mass.
  • Competitive Pressure: New entrants or established competitors can replicate the model and erode market share.
  • Regulatory Risks: Platforms may face scrutiny over issues like data privacy, worker classification, or pricing transparency.

Marketplace KPIs:

  • Gross Merchandise Volume (GMV): Measures the total value of transactions on the platform.
  • Active Users: Tracks the number of buyers and sellers engaged on the platform.
  • Take Rate: Assesses the percentage of GMV captured as platform revenue.
  • Customer Retention Rate: Indicates how many users continue to use the platform over time.
  • Cost of Customer Acquisition (CAC): Evaluates how much it costs to attract new users to the platform.
  • Churn Rate: Tracks the percentage of users who stop using the platform.

Challenges to the Marketplace Model

  • Balancing Supply and Demand: Ensuring that buyers and sellers find value on the platform can be difficult.
  • Building Trust: Both parties must trust the platform and each other, which requires robust security and transparent policies.
  • High Competition: The model’s popularity means markets are often saturated, making differentiation crucial.
  • Dependency on Scale: Platforms may struggle to survive without a large and active user base.
  • Revenue Pressure: Early-stage marketplaces often operate at a loss while focusing on growth.

Strategic Responses to Marketplace Challenges

  • Focus on One Side: Solve the “cold start” problem with a “single player mode” – deliver a service on one side before you promise a marketplace match. 
  • Narrow on Niche Markets: Start by targeting a specific segment to build momentum before expanding.
  • Deliver Retention Before Growth: Make your marketplace “10x better” for a small, loyal segment before scaling. 
  • Cultivate Liquidity at the Narrowest Level First: Liquidity—the ability of buyers and sellers to find one another quickly—is the core of a marketplace’s success. Start by focusing on achieving liquidity in a tightly defined geographic area, product category, or vertical. 
  • Invest in Invisible Growth Loops: Instead of relying on costly paid acquisition, build growth loops directly into the platform. Examples include referral programs, network-driven value (e.g., reviews), or sharing features.
  • Deploy Seller Onboarding That Drives Early Success: Ensure sellers achieve immediate success by providing tools like onboarding playbooks, templates, or access to early promotional campaigns to attract buyers.
  • Build Trust With Transparent Mechanisms: invest in identity verification, dispute resolution processes, and robust review systems to reduce friction and build platform credibility.

Before You Consider Marketplaces

  • Is there a match in value propositions connected to solving a pain point (Airbnb in NYC: cover the cost of high rent, find more affordable hotel rooms)?
  • What regulation may throttle your growth?
  • Would you benefit from starting on one side of the marketplace first (single player before multiplayer model)?
  • Do you have a well-defined niche target segment for one or both sides?
  • Can you curate the first offering to limit choice?
  • What potential network effects will allow you to create tipping points?

Testing the Model

  • How can you simulate inventory before you have it?
  • How long does it take to attract organic users on both sides?
  • For later stage marketplaces – measure network effects and trading liquidity
  • Is there a user proposition that can be easily tested and implemented on both sides?
  • Do customers gain an advantage over existing comparable offerings?
  • Can you reduce friction within the onboarding experience on both sides?
  • How do you facilitate relationship connections in the marketplace that people love?

More on Marketplaces

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