The two-sided marketplace business model
Double-sided markets create value for all parties: providers, customers, and the marketplace entrepreneur.
The purpose of a double-sided marketplace platform is to facilitate interaction between providers and customers. The two user groups can find each other and exchange value on a trustworthy platform, and the platform – typically – charges a commission or another kind of each transaction.
The two-sided market model offers significant benefits for all parties: the customer, the provider, and the marketplace entrepreneur.
Perks for marketplace customers: easier, faster, cheaper
Two-sided marketplaces make it significantly easier, faster, and cheaper for customers to find what they need. As an example, consider what getting a taxi was like before Uber entered the market.
Depending on the market, the customer either needed to call a number or stand on the street and wait for an unoccupied taxi to drive by. They’d know nothing about the driver and commit to a ride the final sum of which typically remained a mystery until the very end – and often needed to be paid in cash.
Uber improved the experience in all these aspects. Ordering a ride became as simple as touching a button, and wait times reduced due to Uber’s effective matching algorithm. Each drivers’ name, face, and reviews were knowable to the customers beforehand, and prices of rides reduced at least at first.
That is not to say Uber’s user experience (or business model) would be perfect. But they were good enough for a significant amount of people to switch from taxis, their own cars, or public transport to Uber.
Perks for providers: more customers, better tools
The nature of a two-sided market means that also the other side, providers, need to have something to gain from using the platform. More often than not, they are the side entrepreneurs should focus on the most.
Successful marketplaces generate providers a lot more demand they’d find on their own. Homeowners, for instance, could well build their own website for renting their house online.
But compare that to the exposure they get on Airbnb? Probably well worth the commission, particularly since they don’t need to pay anything unless they themselves make money. Listing a house or an apartment on Airbnb is also significantly easier than building a website for it.
Home owners could also list their homes on a generic classifieds site like Craigslist. That is likely just as simple as listing their site on Airbnb. However, Airbnb offers providers such powerful tools to manage their bookings, fees, and profiles that their service becomes much more attractive.
Thanks to the ease of listing and managing a vacation rental and the promise of good income, Airbnb has also brought in providers who previously wouldn’t have even considered renting their apartment.
Perks for the entrepreneur: double-sided network effects and cross-side virality
Two-sided marketplaces have tremendous potential to grow through double-sided network effects and cross-side demonstration virality.
Network effects mean the phenomenon in which the value of a product, service, or platform grows as more and more people start using it. The telephone is an often-cited example of such a product, and most platform businesses and social networks belong to this category as well.
When network effects unfold on a two-sided business, the user acquisition costs drop. A growing number of customers means more demand, and the demand brings in new supply. More supply means more selection, availability, and price competition, all of which are powerful in bringing in new demand. At best, network effects create a virtuous cycle traditional businesses could never achieve.
As the platform grows and becomes more and more valuable to its users, the more value the marketplace entrepreneur can justifiably capture from each transaction. So, the larger the two-sided platform gets, the more value it generates to all parties.
What is more, particularly in the P2P sphere of the sharing economy, marketplaces can benefit from cross-side virality. Any new customer to a platform such as Airbnb, Eventbrite, or eBay is also a potential provider. In fact, all these three marketplaces effectively advertise the opportunity to their new customers.
Cross-side virality can significantly boost network effects. At the cost of acquiring a new customer, the platform also gains a new provider, who brings in new customers, who, in turn, become providers – and the wheel keeps turning.