The Two Sided Marketplace Business Model
Sep 23, 2022
The two sided marketplace model, often called the platform business model, connects two groups of people to mutual benefit, but clear understanding of the model requires that we are cautious with our understanding of the definition.
In 1995, Pierre Omidyar sold a broken laser pointer on the website AuctionWeb for $14.83. In those days, even in the modern era, that seems like a large amount of money for a broken laser pointer.
Omidyar contacted the bidder to ask if he understood that the laser pointer didn’t work and the winner explained “I collect broken laser pointers”! Omidyar was amazed, understandably. In those days, only around 0.04% of the world’s population had internet access, so the pool of people to sell broken laser pointers to was small.
Consider also the lack of modern search engines in 1995, further decreasing the likelihood of such a unique item finding a willing buyer.
This story demonstrates the power that the internet has in connecting people who have a product or service to sell with customers and clients who are seeking particular offerings
This potential to connect vendors and buyers was not lost on Omidyar either.
Once part of his personal site, AuctionWeb became Ebay, a hobby for Omidyar, until a phone call from his Internet Service Provider (ISP) told him he would have to upgrade his internet package, due to high website traffic.
This point marks the birth of eBay as one of the first internet platform businesses, as Omidyar began charging users to cover his costs. Still, eBay remains one of the powerhouses of the platform business model and a pioneer of the concept of an internet platform connecting buyers and sellers.
Fast forward almost 20 years to 2015 and around 41% of the world’s population has access to the internet, with broadband being almost ubiquitous worldwide.
Of course, in the last few years the rate of growth has slowed, but current global internet penetration is now at 59.5% with around 4.66 billion people enjoying access to the power it has to connect us.
Along with internet access increasing exponentially, so too have companies offering a two sided marketplace connecting buyers and sellers increased as well.
Airbnb, Amazon Marketplaces, Alibaba, Uber, Etsy, Indeed, Kickstarter, Upwork and many others have all followed in the tracks laid by eBay to offer a platform providing a marketplace connecting people.
The name of the business model behind this reflects the service provided and it is referred to as the Two Sided Marketplace Model or the Platform Business Model.
Two Sided Marketplace vs Platform Business Model
Defining a Platform Business Model can be tricky. If we take Amazon for example, who might define themselves as a Platform Business Model, a closer look will reveal that Amazon actually employs a number of different business models including e-commerce marketplaces, product sales, pay-per-use and cloud computing offerings.
This means we can use “Platform Business Model” on a conceptual level, but when designing a business model for implementation, “Two Sided Marketplace” better helps us understand what the advantages and disadvantages might be.
It is useful to understand and define this accurately, as it refers to some of the biggest names in internet business (Alibaba and Amazon etc.).
As established by the eBay origin story, there are benefits to both consumers and the business offerings which utilise the Two Sided Marketplace model.
* Increased Trust - Buying or selling with a stranger is a potentially risky endeavour. The physical world of trading is heavily regulated, in a way not necessarily possible on the internet. Recognised brands increase trust and reduce risk for buyers and sellers.
* Reduced Time and Energy - Finding the marketplace makes it easier to find the service or product on offer, reducing the customers time and hassle in finding it.
* Possible lack of customer service - As well documented in the case of some of the large Two Sided Market platforms, customer service is not as strong as traditional offerings. (Think buying from eBay vs buying from John Lewis).
* Quality consistency - Again, as per our example above with John Lewis, the department store has a reputation for consistency and quality, something not as easily regulated in the two sided marketplace model.
We can measure success from the consumer perspective in how well our marketplace addresses the benefits offered to consumers. In this sense we must examine how quickly and smoothly a buyer can connect with their preferred service.
* Opportunity for marketplace domination - Companies like eBay and Airbnb enjoy a massive marketshare as there is no other established offering to compete with them. Setting one up would require directly stealing both vendors and buyers from the giants, something which would be hard to do.
* Growth - Since there are large pools of potential buyers and vendors, there is the opportunity for exponential growth.
* Hard to Start - As discussed in the benefits of owning a large market share, conversely, the difficulty in starting up is also visible.
* Attracting early users - How do you attract a vendor to a marketplace with no buyers and a buyer to a marketplace offering nothing for sale? This is the conundrum in establishing a two sided business model.
* Economics - Since prices offered may vary, the two sided business model can make it hard to predict revenue and structure company economics.
Understanding success from the business perspective should involve consideration of marketplace liquidity. Ie. the number of transactions which take place on the platform out of the possible ones in the entire marketplace.
The business employing the Two Sided Marketplace Business model should also consider what targets need to be met to achieve the businesses viable operating mechanics.
Implementing a Two Sided Marketplace Model
Understanding the nuances of the two sided marketplace model will help us navigate the tough start up phase and what we should be looking to successfully implement for a scalable, competitive business.
Going back to our original example of eBay, we can see a great example of user value here. This is that the user adds value with their presence on the marketplace. Like social media, two sided marketplace platforms increase in value as more people use them.
This works both ways, for both vendors and users. Airbnb attracts more users, the more vendors they have offering places to stay. This seems obvious because it gives more products for a potential buyer to choose from. Likewise, if more users join the platform looking for places to stay, the incentive for people offering that service to join the Airbnb platform is obvious - a greater pool of potential customers.
Given that the two sided marketplace model is dependent on strong usership for both vendors and buyers, it should also be extremely clear what the value proposition is for both of these parties from the outset.
Defining what value the marketplace offers to both vendor and customer should be immediately clear.
We’ve already talked about how setting up a valuable offering for consumers is going to require a clear value proposition, but we’ve also mentioned that breaking into a market can be tough, given the winner-takes-all nature of the industry.
In the case of eBay, it met a gap in the market for people wishing to securely purchase obscure items and people with obscure items to sell. As its popularity increased, it increased its value proposition to further cement its market dominance by acquiring paypal, a method through which they now guarantee most of the transactions which take place on the original marketplace.
Understanding how the two parties interact with each other and what is missing from their interaction outside of your platform will be crucial to ensuring a two sided marketplace model succeeds in making its value proposition clear.
Likewise, we’ve also mentioned the difficulty in attracting buyers to a marketplace with no vendors and vice versa. Again, offering a clear value proposition and identifying a gap in the market will be extremely useful in navigating this hurdle.
Finally, we should also discuss regulatory issues. Since these businesses offer drastically different services under the same model, there remains an ongoing challenge to adequately regulate these companies, and governments can sometimes struggle to understand the responsibilities the businesses have.
Most famously, Uber is consistently in the public and governmental eye for its treatment and relationship with its drivers. Similarly, the marketplace dominance for some companies who succeed in the industry has some cause for concern with regards to monopolisation and a free marketplace.
WQA provides supercharged digital product development for growth driven companies around the world. Working with Startups, Scale-ups and Enterprise, we design, build and scale digital products, experiences and platforms used by millions of people.
If you want to learn more about navigating the potential market opportunities and challenges presented by the Two Sided Business Model, you can chat to us or email us for a conversation and assessment of your unique digital context.