Marketplace University

What is a two-sided marketplace?

A two sided marketplace is a network made up of two distinct types of users (supply and demand) that come together to sell and buy people’s time, space, or products. 

Paris Mielke

March 21, 2022

March 21, 2022
10 min

What is a two-sided marketplace?

a) Definition
A two sided marketplace is a network made up of two distinct types of users (supply and demand) that come together to sell and buy people’s time, space, or products. 
b) Marketplace Types: B2B, B2C, P2P/C2C

Both suppliers and consumers can be individuals or businesses. This leads to several different types of two-sided marketplaces.

In the case of multi-sided marketplaces there can be multiple different types of suppliers or customers that require different capabilities in the app. The varying needs of each user type can quickly increase the app’s complexity making it more difficult to ensure the needs of each side of the market are being met. However, when a symbiotic group of users are brought together with simple, clear, yet strong incentives, multi-sided networks can greatly increase the value of the network for all participants.

Benefits of a two sided marketplace business model

a) Supply-side: save time & earn more money

The value proposition of two-sided marketplaces for the supply-side is usually saving time and/or earning more money. Suppliers often utilize management tools provided by the marketplace to automate otherwise tedious tasks like payment, scheduling, communication, and listing management. This frees up more time for suppliers to focus on other aspects of their business. Additionally, two-sided marketplaces can alleviate the marketing burden for small businesses by matching them with demand they otherwise wouldn’t be able to attract on their own. As Chris Dixon, Partner at a16z coined, users ‘come for the tool, stay for the network.’ This came to define a new strategy for kickstarting SaaS-enabled marketplaces.

b) Demand-side: faster & cheaper to get what you want

The value proposition of two-sided marketplaces for the demand-side is usually transacting faster and/or cheaper by more efficiently matching supply and demand. For instance, marketplaces like Airbnb make it significantly easier to discover and compare places to stay to help guests ensure they are getting the best deal. In the early days, it often makes sense to manually manage the matching process between both sides of the market. This concept of “managed marketplaces” ensures the highest quality experience by curating potential matches.

c) Founder-side: network effects & more ways to monetize

The value proposition for founders of two-sided marketplaces is the potential for network effects when implemented properly, and the variety of potential ways to monetize. Read more about the different ways you can profit from a marketplace business model including taking a commission, membership fee, listing fee, and/or lead fee here.

How to grow a two sided marketplace

a) Getting started: overcoming the “chicken-and-egg problem”
What came first, the chicken or the egg? This is a classic dilemma that stems from the observation that all chickens hatch from eggs, and all chicken eggs are laid by chickens.

When applied to the concept of marketplaces, the chicken and egg problem refers to the issue of determining which side of the market you need to onboard first in order to kickstart the value for the rest of the network. Andrew Chen, investor at A16Z and author of The Cold Start Problem suggests that new marketplace founders should approach this problem by focusing on “the hard side”. The hard side is described as “doing more work, contributing more to your network, but are that much harder to acquire and retain” (Andrew Chen, The Cold Start Problem). For marketplaces the hard side is usually the supply side (the sellers/providers) that create listings and attract customers to your network. 

b) Metrics: measure, learn, repeat

One of the most common pitfalls new marketplace founders face is not spending the time early enough on to learn how to track KPIs (key performance indicators). You can’t improve what you aren’t measuring, so it is critical to take the time to carefully plan out how you will measure the success of sales, marketing, or product experiments. The key to rapid growth is to continuously try new things based on new hypotheses you develop while making sure that you’re tracking whether they’re actually improving your business. Otherwise running your business will feel like running blind.

How to build a two sided marketplace

a) Understand your customers

In order to form a business hypothesis you first need to decide on a problem or niche of potential customers that you would like to focus on. Keep in mind, the narrower the niche, the easier it is to develop a high-quality solution.

The “Jobs To Be Done” Framework is a great way to approach understanding potential customer's specific goal, or “job,” when deciding to “hire” a product to fulfill their product need.

The framework teaches us that by talking to the customers of your competitors, you can learn not only about how they discovered their product, but why they chose it over the other options they considered, and when they were ready to purchase it. With this information, product development and marketing becomes much easier.

b) Form a hypothesis: A [type of customer] will pay X to get Y because Z

The goal is to launch an MVP as quickly as possible, but you first need to define a hypothesis as to why a customer will pay for your solution, for how much, and why. Defining the hypothesis is the first step to creating a measurable experiment that will ensure you’re always moving in the right direction.

E.g. “A [non-technical early-stage marketplace founder] will pay [$150/mo] to get [launch a customized marketplace MVP in a few days] because [it’s 100x cheaper and faster to launch than hiring a traditional developer.]”

c) Validate your hypothesis: How to build a marketplace MVP fast

Once you’ve formed your starting hypothesis for your customer, willingness to pay, and value proposition, you'll want to validate it as soon as possible (ideally before) launching your MVP. The key is to get your target audience to commit their time (or ideally some amount of money) to trying your solution by quickly standing up a landing page, form, or quiz that markets your value proposition to them. Your solution does not need to be fully automated, but it does need to solve a painful problem for your customers.

If your hypothesis was wrong, fret not! It’s better you found this out earlier rather than thousands of dollars and months later. So long as you’re passionate about the problem you are trying to solve, and the addressable market is large enough, keep pivoting your solution (not the problem!) and you will have the highest likelihood of success. You’ll quickly become an industry expert if you stay focused on a specific problem and can stay motivated for the long term. For some people their motivation may be a desire to change the world or even prove someone wrong. Whatever the case may be, starting and growing a marketplace business is no simple feat. You have to hold onto this motivation when you start to feel burned out.

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