Two-Sided Online Marketplace are places that bring groups of users together in two-sided networks. The marketplace is platform eventually with additional services that provide infrastructure and rules that facilitate the two groups transactions. It can be taken in all kind of forms.
Some examples of Two-Sided Online Marketplace are:
- eBay is in my opinion Ebay the “traditional” Two-Sided Online Marketplace. It is a platform for people who want to sell things, and people who want to buy things in an auction style.
- Allegro.pl is the Central- and East European version of eBay
- Marktplaats.nl A Dutch marketplace for people who want to sell things, and people who want to buy things but NOT in an auction style. In the Netherlands eBay was not able to become market leader within their auction styled platform so they decided to buy the market leader Marktplaats
- AirBnB is my opinion the “new” way of a Two-Sided Online Marketplace. It is a platform for people who want to rent some of their living space (temporarly), to people who want to spend short time for holliday or business in this living space as an alternative for a hotel. It is the base of “the sharing economy” where people don’t buy things for their own but are willing to share it for a small payment.
- Uber is some kind reaction on AirBnB for people who are looking for transport and people who own a luxerious vehicle and are willing to rent it out with a driver as an alternative for a taxi.
- Kickstarter is a Two-Sided Online Marketplace that brings product creators together with early adaptors of the product who are willing to pay for the product before it is ready. It is a way of funding called crowdfunding.
- Etsy is a Two-Sided Online Marketplace that brings (hobby) artists that create products together with people who are willing to buy the art. It contains a community from artist to inspire each other.
- Amazon looks more a like online shop with a one sides market but Amazon developed itself to a Two-Sided Online Marketplace that brings (smaller) shop together with people who want to buy products.
- Cleanagents.com is a Two-Sided Online Marketplace in Germany that brings cleaners and people who would like to get their house clean together.
Although there are many examples of successful marketplaces, it is very, very difficult to build one because you always the chicken and the egg story. Matt Douglas (@mattdouglas), Founder & CEO for Punchbowl.com wrote an article in Huffington Post called “First Time Entrepreneurs Should Avoid Two-Sided Marketplaces“.
The main reasons to avoid Two-Sided Online Marketplace according Matt are:
- Markets are suffering from the “cold-start” problem because you need demand from two-sides.
- It means marketplaces need twice the marketing to be successful
And then you come back to the old problem. On which side of the market to start. It is the chicken and the egg problem.
Opposite to Matt in the Huffington Post, Thomas Eisenmann, Geoffrey Parker, and Marshall W. Van Alstyne wrote an article “Strategies for Two-Sided Markets” in the Harvard Business Review, in which they try to explain why building Two-Sided Markets are so valuable. Below my own interpretation of the article.
In the article they describe the phenomenon that two groups are attracted to each other which is called the Network Effect. The Network Effect makes the marketplace (or platform) value largely dependable of the number of users in the network. The value grows as the marketplace matches demand from both sides.
Because of network effects, successful marketplaces take benefit of increasing returns the network is scaled. It may be that users are willing pay more for access to a bigger network, at least it will be harder for the competition to build their own marketplace. This in o posit of traditional business where it usually becomes harder to gain new clients after the low hanging fruit is in.
In general two sided Two-Sided Online Marketplace will give bigger returns as they grow because of the Network Effect. It means you can take benefit of by higher margins or at least by making it the competition harder to enter.
Now to answer the question:
Why (not) to Build A Two-Sided Online Marketplace?
- Marketplaces are very valuable the more users you gain (in contrast to traditional business where it will be harder to gain more users all the time).
- Marketplaces have a Network Effect after you reach a critical mass after reaching means you will easier gain more users.
- Chicken and the egg problem. Two-Sided Online Marketplace requires 2 audiences, with which audience to start
- Double efforts to gain audiences. Sometimes you can say almost double marketing costs