A two-sided marketplace is a business model that connects providers to customers for economic exchange. Examples include Airbnb, eBay, Uber, Upwork, and Etsy.
Reasons for success
There are a few reasons that such marketplaces have seen success in recent years. Firs of all, they scale incredibly well because they do not require owning their own inventory. Doing away with the need to invest in stock initially makes two-sided marketplaces unique and appealing.
The software to create such marketplaces is now common and therefore affordable. In the past, the software needed to create two-sided marketplaces was difficult to come by and expensive, which made it a serious barrier to enter the market, but times have changed.
The two-sided model has the ability to create dynamics that are powerful and speed up the business’ growth. The value of the model grows with the size of its user base. With increasing numbers comes a network effect, and greater scale makes obtaining and keeping customers (and the profits that come with them) easier.
The two-sided marketplace business model
Customers have three main benefits from this type of marketplace.
- It is far faster (and easier) to obtain goods and/or services from this type of marketplace, as the process of doing so is reduced to using an app or other form of remote communication, rather than having to make a trip in person to the broker.
- It is far easier to find such brokers in the first place and negates lengthy searches for said brokers who provide the particular good and/or service.
- There can be increased trust in such a system as opposed to the alternative. An example is knowing about the car sent to pick up a customer via Uber, when with a taxi system there would be no prior knowledge of the driver, car, or any relevant information.
Sellers or providers also enjoy perks from this system.
- There are better tools available to sellers, with updates and improvements being made all the time in the ever-progressing current day and age. They increase ease, effectiveness, and efficiency.
- There is a larger customer base, as with such a platform, more customers than ever have access to the business. This also provides the network effect for exponential growth.
- Entrepreneurs enjoy network effects where the value of the good, service, or platform providing them grows exponentially as the platform gains more users. Due to the nature of the platform though, the effect is double-sided since it benefits all parties involved, as more demand brings in more supply. Customers are spoilt for choice, sellers enjoy good business, and entrepreneurs can capture more from each transaction.
- There is also a feature of the two-sided marketplace called cross-side virality, which means that any new customer is also potentially a new provider. If these customers do become providers, then they will bring in more customers who are also potential providers, and so on.
Challenges of the two-sided business model
A problem termed the chicken-or-egg problem is the opposite of network effects. Customers tend toward platforms with a robust selection of high-quality supply, but suppliers are interested in joining marketplaces that have lots of demand. This is a challenge for marketplace entrepreneurs in the early stages.
Having a two-sided marketplace is akin to having two business, one that deals with the customers and one that deals with the sellers. Both parties require different features, incentives, and propositions. This makes liquidity and reaching it a difficulty.
This type of marketplace also requires a lot more trust than a traditional business would, as users need to trust each other, the sellers, and the platform in order to use it. Using two-sided marketplaces means that customers risk their information, money, possessions, and at times even safety.
Trends in the marketplace model
The market is relatively full of two-sided marketplaces that provide every good or service imaginable. Market conditions are not ripe for all of them though, and the need for connecting large networks of buyers and sellers is not present for every single good and service out there.
Many two-sided marketplaces may move to multi-sided marketplaces instead, where, if they find success, they may add on additional business models and therefore be able to enter new markets.
An example of this is Alibaba’s retail marketplace success, which allowed them to launch financial services as well as healthcare services.
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