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.

When it Works Well:

Services designed to create a network effect

Like a freemium model, a two-sided marketplace works well when its design allows it to add increasing numbers of users in order to create a network effect—that is, the effect created when a product (like telephones) or a service (like a social network) becomes more valuable as more and more people use it.

The more users there are on one side of the marketplace, the greater the value of the services they receive from the other side, and vice versa. For example – Facebook was somewhat valuable to advertisers when they had mostly every college student join the social network. But now that everyone’s mom, grandmother, and high school friend is on Facebook – the social network is exponentially more valuable to advertisers.

When the platform grows, so do the returns, as users pay more for access to the marketplace. In standard industrial-era businesses, greater scale leads to diminishing returns. You get the opposite effect in Two-Sided Marketplaces: greater scale makes it easier to get and keep customers, and thus profits increase as the network grows.

Value for both sides clear from the start 

Two-sided marketplaces fail quickly if the value proposition for one side doesn’t clearly match a need on the other side. In Airbnb’s first high-growth marketplace, New York City, both sides of its customer pool were in deep pain and even willing to bend the law to relieve that pain. On one side, the cost of renting an apartment is astronomical; on the other, so are hotel prices, whose average can sometimes balloon above $500 a night in busy weeks. The initial value proposition was clear to both sides, and Airbnb addressed problems of trust with, on the one hand, well-shot, high-resolution, what-you-see-is-what-you-get photographs for room renters and, on the other, pre-vetted credit cards and generous insurance policies against potential damage for those renting rooms out.

Challenges to the Two-Sided-Marketplace Model

You can’t just turn on a marketplace 

The opening stages of a two-sided marketplace are challenging, because the service it offers isn’t valuable until it has acquired a large enough base of loyal users on both sides. Value increases as the platform grows to match the demand on each side.

Kickstarter and companies like it have launched their marketplaces by heavily curating the first projects they offered for crowdfunding—they didn’t just open up their marketplaces and wait for the projects to show up. Typically they began with projects limited in type and appeal—in Kickstarter’s case, small documentaries, digital art, and other forms of interactive media. The tightly connected social networks of digital-art supporters became the first crowd of project funders, and with a few successes under its belt, Kickstarter then carefully opened up to other types of projects. This curation process has continued throughout the company’s history of growth.

Two businesses in one 

Building a marketplace is like building two companies simultaneously, each one dependent on the other. Finding the path to growth means carefully balancing features and offers on each side and constantly experimenting to get the balance just right.

The business model mechanisms to test:

Mechanism to test Metrics to measure
What makes supply and demand grow on each side of the network marketplace? Total gross marketplace volume – the total dollar value of transactions over a time period.
What is the likelihood that a user will find a match on the marketplace? (1) Trading liquidity: the percent of listings that participate in transactions within a given time period. (2) Matching efficiency: the time it takes for a user searching the network to find a listing.
Do the users trust the buyers and sellers? Trust metrics, percent of users reporting high net promoter scores on both sides of the marketplace
Is the marketplace increasing in scale and growing in dominance? Is the cost of customer acquisition decreasing greater than the growth in customer lifetime value?

Emerging Trends in Two-Sided Marketplaces:

Vertical Markets

Startups are hunting the potential spoils of two-sided markets by trying to build “The Airbnb of _____.” (Fill in the blank with anything that might become a marketplace.) An abundance of companies are currently trying to combine sharing-economy concepts with digital distribution. Let’s take a look at threestartups from the Marketplaces category on Angelist:

1) Artsy: “Making all the world’s art sccessible to anyone with an Internet connection”

2) Skillshare: “a global learning community for creators”

3) Storeenvy: “We bring unique, original, and authentic stores to life and introducing them to the world”

Can you predict which ones will dominate their categories?

Deeper Dives on the Two-Sided Marketplace Business Model 

Angelist Marketplaces Startups

The Q&A: Perry Chen, Kickstarter, by Hallie Davison, More Intelligent Life., 2015.

Airbnb: The Growth Story You Didn’t Know, by Morgan Brown, Growthhackers, 2014.

Strategies for Two-Sided Markets, by Thomas R. Eisenmann, Geoffrey Parker, and Marshall W. Van Alstyne, Harvard Business Review, 2006. (limited access)

A Price Theory of Multi-Sided Platforms. by Glen e. Weyl, American Economic Review, 2010.

7 Tips for Growing a Two-Sided Marketplace. by Shane Snow, Mashable, 2011.

Two-Sided Markets: A Progress Report. by Jean-Charles Rochet and Jean Tirole, The RAND Journal of Economics, 2006. (paywall)

How to Create Financial Projections for a Two Sided Marketplace, by Projection Hub, 2014.

Internetwork Externalities and Free Information Goods, by Geoffrey Parker, ACM Digital Library. 2000.

Multi-Homing Users’ Preferences for Two-Sided Exchange Networks. by Tat Koon Koh and Mark Fichman. MIS Quarterly. 2014.

What do you think about the Two-Sided Marketplaces model? Do you work in a company that has tried this approach? Do you have other resources or company suggestions we should source? Share your comments or suggest another business model to add to our library.

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