The Trouble with Two Sided Marketplaces (and how to deal with them)

Share & Comment

Demand & SupplyRecently, I spent some time with the 2014A batch of startup companies in JFDI.Asia. Although their value propositions are different due to the nature of their challenges, I can basically break some of their questions into the following: (a) I am running a two-sided marketplace with demand and supply (or some may call it a chicken and egg problem), which side should I focus first? (b) How can I grow both sides at the same time and what are the ways to do that given that I have no control on either sides? To answer that question, I relied on my previous experience in running a two sided marketplace type startup and also fine tuned my experience into a simple principle as to how you can turn them from a two sided to a single sided marketplace.

Basically, in a two sided marketplace, the company makes money when a buyer and seller come together to make a transaction. The most convenient examples based on the collaborative consumption concept comes from AirBnB and Uber. In AirBnB, the buyers are the consumers who are looking for a room to stay in a city while the sellers are the landlords or people who intend to sub-lease their property to cut down the amount of rent required. Uber on the other end, utilises the demand of consumers to get transportation at any location or time and match with the supply of transportation so that the consumer can get from point A to point B. If that is not simple enough, you can think of app stores such as iTunes and Google Play, where the developers sell their apps thru the distribution of users within IOS or Android ecosystem.

Most two-sided marketplaces have the following properties:

  • The seller is responsible for listing and promoting the product/service he or she is selling to. Let me also include a disclaimer that in Asia, most sellers are lazy and would expect the marketplace owner to do the work for them. So, don’t expect to build something and dream that your sellers will show up. The answer is that you have put in a lot of effort to acquire them.
  • The marketplace owner will try their best to have an automated or hands off approach. In theory, that’s the dream of every platform owner, but the reality is that in the early days, you have to do the dirty work in getting the marketplace working.
  • The buyer and seller have competing interests and wants to maximise their interests economically, i.e the buyer want to extract the most value in monetary terms while the seller hopes to spend as little as possible. So, the interest for the marketplace owner to make a small fee out of the whole transaction, and hence their role is to ensure that the process flow for the whole transaction has to be simple and efficient for both buyers and sellers and at the same time, able to bring some revenue to the table for the platform.

Most startup entrepreneurs faced the following chicken and egg problem: you have to incentivise both buyers and sellers to come and use your marketplace and in some sense, you have to double the amount of effort. So, given limited time and resources, the question is: which should I focus first? The answer appears to be complicated from the first glance. After all, I have worked in a two sided marketplace once and after a tedious and tiring experience, I have told myself to avoid it as much as possible. If I have the choice, my preference is not to do it. Of course, I cannot dissuade some of you not to do so.

You can choose to believe me or not. I have grown a mobile advertising network from 0 to 2K businesses distributing across 10 million transactions per month across both mobile and web applications in various platforms in the span of 9 months. Believe me, it’s a lot of hard work and tears and I always wonder what it would be a better way to do this. In my world, I could have increase the distribution by simply not wasting my time to work with 3rd party developers in Asia, because the culture is simply not there to allow anyone to do so. If I have a second chance to do this again, I will have just build my own apps and not waste time with partnering. Quoting my favourite line from the founder oF LVMH, “If you control your distribution, you control your brand.”

I have distilled down to how I can turn a two sided marketplace to a one sided marketplace after some reflection through experience and also learning from the successes and failures of other two sided marketplaces. In this case, I will advise the entrepreneur to focus on failed cases more than success cases.

The basic principle is as follows: you should only build two-sided marketplaces or turn two sided into a single sided marketplace where the user acquisition of one side is of least resistance and focus on the other where revenues are of paramount importance. If your user acquisition on both buyer and seller sides are horrible, I will be harsh to tell you to give up instead of wasting your time. As a matter of fact, I have challenged this conjecture against people who write “academic” pieces about two sided marketplaces and give bullshit advice (where they have not run a two sided marketplace) to entrepreneurs. Of course, they found no counter examples and gave me half baked answers. For example, the third party developers in Asia are one of those red herrings which a company thinking of building APIs for community should avoid. It is because they are in a survival mode and prefer to be consultants than using your API to be efficient. If you want to run a two sided marketplace with third party developers in Asia on one side, my answer to you is “Good luck!”

So, why should you turn a two-sided into one sided marketplace? The answer is focus. You have limited resources and time to run your company. Let me use an example of a successful two sided marketplace that worked on the principle I have stated. If you think about it, Groupon, AirBnB and Uber all have one common trait which passed thru their blood: they are focused in acquiring the sellers which are small & medium businesses, landlords or drivers who need customers. The best part for them is that their buyers are far simpler to acquire because they are just consumers stuck with a need that you and I would need. For example, a consumer wants the best discounted deal (Groupon), a place to stay when they travel to another location (AirBnB) and a transport which takes them from point A to B where the resource is hard to acquire at certain times of the day (Uber). In each one of them, the user acquisition for buyers are of least friction where the other side is where they focused on. You have to identify which side is frictionless and build the other side that is not frictionless. In the case of some property websites where they match buyers and sellers, the equation is flipped to the other side. The entrepreneur will fake it until they make it where they scrap listings data from other sides to draw the buyers in.

In the end, how do you measure your success for a two sided marketplace? I will leave you with this nice diagram from the book “Lean Analytics” by Alistair Croll & Benjamin Yoskovitz:

Two Sided Marketplaces

Photo Credits: iStockPhoto and “Lean Analytics” by Alistair Croll & Benjamin Yoskovitz.

Share & Comment

Published by

Bernard Leong

A Pragmatic Idealist

Have something to add?

Loading Facebook Comments ...

One thought on “The Trouble with Two Sided Marketplaces (and how to deal with them)”

Comments are closed.