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 the two sided marketplaces because it can be incredibly hard thing to execute. Two sided marketplaces are the product of their network and they are challenging to establish and maintain once created. At the beginning, a platform does not create enough value to attract new users. It’s not exciting for both creators and consumers, to join the platform when there is no one around.
These type of platforms fail quickly if the value proposition because one side doesn’t clearly match the 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 won’t make any money. Let me tell you, no piece of cool technology can 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 of users costs more than double.
The right technology and hacks might 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 the two sided marketplace in your favor?
1. Choose a Niche
General themed two sided marketplaces are probably no longer an option. Upwork is currently the market leader in that regard and we already explained why it is more important to be first than to be better!
Start with small niche!
Your best bet is to find a very specific niche market and completely monopolize it before expanding into adjacent markets. One way to find your 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 by offering 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? If you were starting a traditional one sided business, land grab would make a lot of sense. 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. That’s where platform businesses are different from traditional businesses which provide goods or service to the end consumer.
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’ll 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.
Many people suggest that you should be focusing on supply first. In most case, I think, this is the wrong way of looking at things.
While the switching costs associated with customers not finding what they want are negligible, they will easily leave if you have no supply as well. The supply side is easier to hack in the early stages.
Focus on demand instead. If you have a strong demand side you will be able to get more and more people on the supply side as well. Demand side is the one with the 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 only to find out it is hard to retain suppliers, because they are not earning any money.
One possible way to hack the two sided marketplace problem is to find a single provider. Try to take care of the supply side of the two sided marketplace at the very beginning. This way you’ll be able to 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 money in order for the system to work.
Once you have created a demand side you can always try to reach out to providers through other more general marketplaces 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 offered access to 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 before the merchants got into the scene.
3. Build a community
The ultimate goal of creating two sided marketplace is to build 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”.
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 your 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.
By writing guides and advice for your marketplace niche you get to leverage the power of content for SEO purposes and build the trust factor that is crucial to the success of a two side marketplace.
Content is also a great way to build relationships, crucial for when you are building your community.
As I mention communities again, keep in mind that you need to empower your users. Offering them a chance to write for your blog can also benefit their image and you can use that as a tool to drive up engagement.
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 can’t easily hack a community and build trust. You can’t compensate growth speed with money.
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 too many employees at the start. Focus just on two positions – people building the product – and people filling up the supply and demand side.
You may notice that discussions about the success of businesses platforms such as Ebay, AirBnB, and Uber often miss how hard were they to build. Same as with trust, no two-sided marketplace is built overnight. However, once you reach scale, things truly start clicking. 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 your supplier and consumer communities?