How to Build a Two-Sided Marketplace: A Comprehensive Guide
Two-sided marketplaces are those that bring two user groups together to help them get network benefits from each other and generate economic value. A two-sided marketplace is an online platform that connects two distinct groups of users, typically buyers, and sellers, enabling them to interact and transact with each other. The platform acts as an intermediary in this model, facilitating transactions between the two parties. You can build a two-sided marketplace regardless of the industry you are in.
Industry Impact and Market Examples
The network effects, both cross-side and same-side, of two-sided marketplaces have brought a substantial change in the conventional business setting and the competition in it. Companies like eBay in eCommerce, Facebook in social media advertising, Uber in transportation industry, and Upwork in gig economy are all examples of two-sided marketplaces. The last five years have given rise to the ‘aggregator platform’ business model, resulting in the meteoric growth of companies such as Airbnb or Doordash.
These asset-lite network players go beyond the traditional models; they create value by connecting fragmented suppliers and fragmented customers onto the same platform. According to market data, the financial impact of this model is significant:
| Entity | Net Earnings Increase (Past Decade) |
| S&P 500 Two-Sided Marketplaces | 330% |
| Overall S&P 500 Improvement | 16% |
Two Important Tips Before Creating Your Strategy
No doubt, the initial planning and designing of a two-sided marketplace is challenging, but once you get a hold of it, you can take it to great heights. Consider these strategies:
- Start Slow: A two-sided marketplace requires a patient entrepreneur, as it runs on a slow burner. This business model requires time more than money for it to scale. In the beginning, focus more on associating with a team of people who can build the product you want to offer.
- Focus on a Relevant Audience: Before you try to attract a larger target audience to your marketplace, focus on winning the trust of early adopters. Precisely, focus on one geographical area before targeting the other areas.
The Business Model and Managing Constraints
A two-sided marketplace business model is both simple and complex. As a two-sided marketplace owner, you act as an intermediary, where the design plays the commanding role in attracting users in large numbers. To succeed, the marketplace company needs to address the constraints in each market:
Assess Market Constraints
A demand constraint suggests that there are insufficient customers for the existing supply. On the other hand, a supply constraint occurs when there is not enough supply to serve pent-up demand that exists.
Measure Price Sensitivity
Once the target is decided, it is critical to assess how sensitive they are to price. Companies should A/B test multiple promotions and assess incremental revenue resulting from the promotion.
Maintain Balance
Building a two-sided marketplace requires incorporating the website features in balance and keeping a constant check to maintain that balance. The marketplace should be such that it helps deliver the services in a faster and more efficient way and enables supply and demand equilibrium.
Once you successfully build your online two-sided marketplace, this economy will enable you to add to the growth, as the economy continues to see digitalization.
