Two sided marketplace

One of the most important thing in two sided marketplace is to build up trust! Have you ever played The game of trust? Tough one. Right?

“Just because blockchain technology is built to eliminate the reliance on trust doesn’t mean users will trust the machine or network.”

— Jonny Howle, UX/UI Designer

Investors usually have an aversion i.e. hate two sided marketplaces because it can be an impossibly hard thing to execute.  Since two sided marketplaces are the product of their network, they are challenging to establish and maintain once created. At the beginning, a platform does not create enough value to attract new users. In the first place, it’s not very exciting for creators to join the platform when there are no consumers and vice versa.

 

These type of platforms fail quickly if the value proposition for one side doesn’t clearly match a need on the other side. With this chicken-and-egg problem of supply and demand, It’s hard to get one user acquisition model right. Let alone two. If you build up one side of the network, and not the other, you don’t make money. And let me tell you that no cool technology will change that!

Did I mention Marketing?

Marketing to both sides of the marketplace costs money. Iterating through your acquisition models costs money. 

Marketing to two groups users costs more than double.

The right technology and hacks will facilitate growth and scale. But it won’t provide that initial spark you need for your demand and supply. You actually need quality, real people who are willing to hustle on both sides of your marketplace.

So what are the things you can do in order to tip the scales of a two sided marketplace in your favor?

1. Choose a Niche

General two sided marketplaces are probably no longer an option. Upwork is currently the market leader in that regard and we already said that it is more important to be first than to be better!

Start with small but whole!

So, find a very specific niche target market and completely monopolize it before expanding into adjacent markets. One way to find a niche is to look at general two sided marketplaces and find the market they are either over-serving or under-serving. If the market is over-served e.g. by Upwork you can try taking it with a lower cost product. And if the market is under-served you can reach your customers with a more differentiated and focused product.

Why is starting small so effective when it sounds counterintuitive? After all, if you were starting a traditional one sided business, land grab would make a lot of sense. That’s where platform businesses are different from traditional businesses which provide goods or service to the end consumer. The business interactions in a one sided business are owned and managed by the business owner. In case of the platform, the interactions are owned by the end users. And the platform’s goal is to increase the likelihood and efficiency of such interactions.

Choose a Niche

Focusing on a niche of producers and consumers helps in such cases. This is how most companies scale, by focusing on a niche (Amazon with books) or a region (Uber focused on New  York). Facebook demonstrated this strategy while focusing and getting traction first in Harvard, then among colleges, then moving over to schools in multiple countries before opening out the network. The key is to shift over to an adjacent niche seamlessly once you have enough traction on the first niche.

Once again, focus on a niche and serve it really really well!

 

2. Start doing things that don’t scale

In the beginning, you will probably be the one solving your customer issues yourself in one way or the other. When you are connecting two established but non-connected existing systems or entities, chances are you will have to dig deep into solving their issues yourself at first.

Create Demand

Many people say that you should first focus on supply. I think that this is the wrong way of looking at things in most cases.

While the switching costs associated with customers not finding what they want are negligible and they will easily leave if you have no supply. The supply side is easier to hack in the early stages.

So focus on demand. If you have a strong demand side you will be able to get more and more people on the supply side as well as the demand side is the one with money and that is always a good draw.

One of the reasons most two sided marketplaces fail is that they focus on the supply side more. And find it hard to retain suppliers, because they are not earning any money.

Create Supply

One possible way to hack the two sided marketplace problem is to find a single provider. To take care of the supply side of the two sided marketplace at the beginning. This way you can focus on generating leads for the demand side. Which is, in my opinion, harder to do, as the demand side is the one that needs to spend the money in order for the system to work.

Once you have created a demand side you can always try to reach out to providers. You can do it on other more general marketplaces via LinkedIn and offer them a new, better and more focused opportunity.

In some cases, you can even use supply proxies, where you can add businesses that provide the supply side of the marketplace yourself and let them claim their accounts from you.

Yelp offers access to a local listings search engine and creates traction among consumers before kicking in the lead generation engine for merchants.

Tripadvisor started out as a reviews site only for consumers but is now rapidly emerging as a customer care channel for hotels who actively claim their listings on the site and address customer feedback.

Foursquare is another great example where consumers were happy playing the check-in game even before the merchants got into the scene.

3. Build a community

The ultimate goals of creating a two sided marketplace are that it is a business model that scales indefinitely as the power of the community enables each side of the marketplace to self-organize and grow with low customer acquisition or retention costs.

The keyword here is “the power of the community”.

Community

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.

When it comes to customer retention two sided marketplaces are extremely defensible. That’s because of the network effects of marketplaces and the high switching costs of moving to another marketplace. For each new buyer or seller that enters the market, the market as a whole becomes stronger and without the dense population of an existing marketplace, users will not switch to an alternative.

In order to create a community, you need to be purpose-driven and have a common goal with your community members. Which is easier said than done. Involve and empower your members, keep a focus on the community purpose and be deliberate about your decisions regarding the community culture.

4. Create content

Creating content enables you to build an engaged audience around a topic and that is crucial for a business model that relies on user activity to be successful.

Content

By writing guides and advice for your marketplace niche you get to leverage the power of content for SEO purposes and building the trust factor that is crucial to the success of a two side marketplace.

Content is also a great way to build relationships and that is crucial when you are building your community.

Also, I just mentioned communities again. Remember that you need to empower your users. Offering them a chance to write for your blog can also benefit their image. So keep in mind that you can use that as a tool to drive up engagement too.

5. Preserve and don’t give up

Two side marketplaces usually grow at a slow pace at first. Before scaling you need to preserve and incrementally improve your product while waiting for an opportunity to hit the accelerator when the network effect kicks in.

You can’t build a community and keep the focus on your members if you are always pivoting. This is the main thing I consider different when building a marketplace as opposed to a lean startup. You cannot easily just hack a community and build trust. Money can’t give you too much speed here.

Heavily incentivize the consumers

This is a strategy made popular by American Express where consumers (especially those with a larger potential for commerce) are heavily incentivized through premium services to join a network but the merchants are charged a premium fee.

Establishing visual consistency across products and the customer experience is essential to the perception of trustworthiness. You need to create an awesome experience for your early adopters before you can begin to appeal to a broader audience.

Adjusting your burn rate downwards in order to lengthen the runway as much as possible is actually the right strategy with a two sided marketplace. Don’t have many employees at the start. Focus just on two positions – people building the product – and people filling up the supply and demand side.

two sided marketplace

Conclusion

You may notice that often discussions about the success of platform businesses such as EbayAirBnB, and Uber often miss how hard they are to build, really hard. Same as with trust, no two-sided marketplace is built overnight. However, once you reach scale, things truly start clicking and an established marketplace is hard to unseat due to the strong network effects at play.

Hope this was helpful!

If you are building an online marketplace, how do you survive the tough times when you’re trying to get traction and build out your supplier and consumer communities?

 

5 Steps to Build a Two Sided Marketplace

Ivan Bjelajac

I’m passionate about helping entrepreneurs by connecting their ideas with the right tools, resources, technology, and funding. I’m also passionate about travels. I co-founded MVP Workshop to focus on early stage startups with high growth potential who want to validate their ideas in order to hedge risk.

Operating Director of GoDaddy Belgrade and ManageWP.
CEO of Devana Technologies.
MVP Workshop’s co-founder.

Category: Build
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1 comment

  • Keep in mind that it took over 5 years for the Network Effect to allow Yelp to reach 25 million reviews.

    It also took about 3 years for Yelp to receive 25 million monthly users.

    Yelp focused on extremely constrained early regional focus combined with the human need to express their opinions when happy or angry with a product.Reference

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