Why two-sided marketplaces are so awkward

The 2010s were the era of the two-sided marketplace. eBay set the stage in the years before; Uber, AirBnB, and Amazon swept in to dominate the decade. It’s an enticing prospect for startup founders whose strengths lie with connecting rather than direct-to-consumer selling. The world’s biggest two-sided marketplaces are the world’s most valuable companies. But there’s a reason the potential gains are so high.

The premise of a two-sided marketplace couldn’t be more straightforward. Develop a digital platform, curate a group of sellers, curate a group of buyers. You manage the communication, the marketing, and the money. Then sit back and let your sellers do the “work”. 

It’s an appealing proposition for startups without big budgets for stock, inventory, warehousing, property, or a fleet of vehicles. But your workload will be double that of a business operating in a direct marketplace. 

Instead of creating value for one group, you must create value for two. Both the buyer and seller are your customers, and pleasing both is not so simple.

The Challenges

Managing operations when you’re not physically there

In a direct marketplace like a shop or restaurant, the manager can intervene when a customer is unhappy or causing a problem. But in a two-way marketplaces, there is no present authority. The successful daily operation of the business hinges on peace, equilibrium, and mutual respect between buyers and sellers. 

Building a cultural ecosystem

In order to cultivate this relationship between your buyers and sellers, you have a mammoth task in front of you: creating a culture. Successful two-sided marketplaces are governed by sets of spoken and unspoken rules. This is how you ensure everyone behaves when you’re not there to monitor them. 

Keeping the cool factor 

Another challenge two-sided marketplaces face is maintaining a “cool” brand when acting as a salesperson and middleman. This is particularly critical in fashion, arts, and music industries where image is everything.  

Book an Artist built their seller base by infiltrating graphic designer networks. Artists would list their services and nudge their friends or colleagues to do the same. Founder Gaurav Kawar says the site “grew exponentially” via this format.

Some big name clients like Netflix, Jimmy Choo, Sony Music, and Mercedes Benz served to anchor Book An Artist while the company scaled its operations. This double-edged cred-building/word of mouth strategy was powerful in skirting conventional corporate advertising, and maintaining Book An Artist’s essential cool factor.

How not to pick sides 

If (not when) situations of culture breakdown arise, you need to be the arbiter. You need to be present when you’re not physically there, in the form of advanced, intelligent, and sympathetic customer support that caters fairly to both of your customer groups. 

eBay has a long and chequered history of siding with buyers – granting fraudulent refund claims, and failing to protect sellers (even top-rated sellers and those who rely on eBay sales for income).

Buyers can rate sellers on eBay, which helps to protect future buyers against getting ripped off or mis-sold. But eBay doesn’t allow sellers to review buyers in return despite the fact buyers can be just as badly behaved (e.g. getting full refunds on items they claim were damaged or never received). This one-sided rating system can be devastating to sellers when misused. 

It’s the same on Fiverr. Buyers are protected, sellers are punished. Sellers can request multiple “revisions” of delivered work even if a seller hasn’t included revisions in their price. The ratings system is two-way, but bad ratings do little damage to buyers when most of them use Fiverr on a one-off basis (to have a logo designed, for example). For buyers, a bad review can decimate their overall rating and chances of securing future buyers.

Your role as matchmaker 

Your marketing insights will provide direct assistance to your sellers. The more direction you provide about what you know your buyers are looking for, and how much they’re willing to pay, the better. 

Treating both sides equally in all other areas can be a winning strategy. 

On Depop, buyers and sellers create the same account types and are presented with the same interfaces. It’s not one vs. the other – anyone can buy used clothes, and anyone can sell them. There’s no switching and by consequence no ‘othering’. Further, the platform parrots the Instagram interface, where users can follow each other and “like” others’ posts. 

Depop cultivates friendship as an intrinsic part of the brand. 

Enabling every buyer to be a seller and vice versa is also powerful in terms of…

…Gaining traction and network effects

Acquiring a seller that can also buy means your customer acquisition cost is effectively halved.

Australian startup Patch is a real estate platform that allows buyers to “make an offer on any home. Not just the ones with a for sale sign out the front.”

In the property industry, the clients (and therefore the target audiences) have always been the sellers. You get the sellers on board first, and then market the property to a pool of buyers. Patch turned this format on its head.

The primary reason for this was that it wasn’t being done. The secondary reason was that buyers had immense pulling power through the simple fact they could make multiple offers. Sellers only had one house to sell, making contact with only one buyer. But a buyer might offer on 5 houses, swiftly making 5 sellers aware of the platform. 

Co founder Mark Allen says:

It was an intelligent way to stretch our marketing as far as possible. It’s all about awareness early on – the buyers are bringing the sellers for us.

Monetising your marketplace

Not all monetisation is created equal in two-sided marketplaces.

You might extract your fee from the sellers or from the buyers. You might use a flat rate or a percentage cut. You might charge per listing or sign up. If you need to bolster reserves in one customer group, you might make certain things free for them and recover your costs from the other.

Crucially, you don’t want your customers circumventing your system, but you don’t want to treat them like children or criminals by using overly restrictive measures. Preventing your customers from speaking and transacting outside of your platform has to be done delicately. For example, you can allow users to share personable details like names and photos, but prevent the exchange of phone numbers and email addresses. 

This is truly the era of the two-sided marketplace. They’re hard to get right, but when they work, they’re rising to become the titans of their industry.

Perhaps it has something to do with the fact that two-sided marketplaces add that personal touch back into our daily transactions. We’re buying from real people, not faceless vendors. The key to building a successful one is to keep this truism at the heart of your operations. 

Remember your customers are people interacting with people. Keep listening to both ends and improving their experience relentlessly.

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