Why Two-Sided Marketplaces are Challenging to Build and Grow
An Analysis From A Startup Founder Who Built A Successful One
Two-sided marketplaces are one of the most challenging business models to create and grow. In this article, we will discuss why two-sided marketplaces are difficult to build and grow.
A two-sided marketplace is a marketplace that facilitates transactions between two distinct and separate groups of people.
A buyer is a person who purchases goods or services in such marketplaces. A vendor is a person who sells goods or services in such marketplaces.
There are two types of two-sided markets, direct and indirect.
In the direct type of marketplaces, buyers deal with vendors directly, while in the indirect type of marketplaces, buyers deal with intermediaries who act as go-betweens for them.
An example of an indirect marketplace is stock exchanges where sellers deal with intermediaries called brokers who act as go-betweens for them.
Two-sided marketplaces do not require both sides to be present simultaneously for transactions to take place, unlike other types of online markets like Amazon or eBay, where both sides need to be present at the same time for transactions to take place.
These markets lend themselves naturally to the on-demand economy business model where goods and services can be delivered instantly due to their digital nature, making it possible for their delivery process to be automated.
This makes it possible for the digital marketplace to scale up quickly.
Two-sided marketplaces require a great deal of trust and cooperation between their two distinct groups of buyers and vendors because of the additional layer of intermediaries between them.
These intermediaries are called brokers in stock exchanges who act as go-betweens for sellers and buyers.
Intermediaries increase the cost of transacting and add value by making transactions easier and more reliable due to their expertise.
Two-sided marketplaces are more difficult to build due to establishing trust among their buyer and vendor communities.
However, they have a greater chance at generating a high volume of transactions than other types of online business models like e-commerce websites, social networks, or software as a service (SaaS) platforms because they have the power to generate economies of scale, which is not possible for other business models that do not require both sides be present at the same time for transactions to take place.
Challenges Facing Two-Sided Marketplaces:
Scaling
Scaling refers to increasing sales when a new business model is created, or an existing one is expanded into new markets.
Scaling can be achieved by improving sales through marketing, increasing the number of sellers and buyers in the marketplace, and/or lowering costs to increase transactions.
Scaling up is a critical part of scaling because it allows businesses to increase their revenues quickly by expanding their marketplaces into new territories or markets.
Scaling up can be achieved through international expansion, geographic expansion, or service line expansion.
Scaling up is a major challenge for two-sided marketplaces that are still in their infancy due to the lack of trust between their buyer and vendor communities, making it difficult for them to grow rapidly.
This difficulty in scaling up means that these marketplaces have a low potential for generating high revenues, especially if they are direct type marketplaces because they require both sides to transact directly with each other, unlike indirect type two-sided marketplaces where buyers deal with intermediaries who act as go-betweens for them.
For example, a person who wants to buy a product from a vendor on a two-sided marketplace will not be purchasing the product directly from the vendor but will have to deal with an intermediary who is either the owner of the marketplace or an individual or company that deals with buyers and vendors on behalf of the marketplace.
These intermediaries add value by making transactions easier and more reliable, so they exist in two-sided marketplaces, but they also increase their costs for transacting.
Growth
Growth refers to increasing the number of transactions happening on a marketplace.
Growth can be achieved by increasing the number of buyers and sellers on a marketplace, the number of products or services being sold on a marketplace, and reducing costs for transacting so that more people will want to use the marketplace for their transactions.
Growth is important for two-sided marketplaces because it allows them to scale up quickly, increasing their revenues rapidly due to the high volume of transactions that can occur.
The main challenge facing growth in two-sided marketplaces is that they require both sides in their transaction chains to be present initially for transactions to take place, unlike other types of online marketplaces like e-commerce markets, social networks, or SaaS platforms, which do not require both sides be present at the same time for transactions to take place.
This makes it difficult for two-sided marketplaces to achieve economies of scale until both sides are present simultaneously for transactions to take place.
For example, a person who wants to buy a product from an online vendor will not use an online marketplace like Amazon or Alibaba, but rather they will visit an e-commerce website where they can see all products available and contact sellers directly to negotiate the price of their desired products.
This is because most online marketplaces like Amazon and Alibaba do not allow vendors to sell directly to buyers on their platforms which means that they cannot achieve economies of scale until both sides are present simultaneously for transactions to take place.
This is unlike two-sided marketplaces that allow both sides in their transaction chains to be present simultaneously for transactions to take place, like stock exchanges or stock markets, which have very high volumes of transactions.
Marketing
Marketing refers to increasing awareness, trust, and credibility among buyers and sellers on a marketplace.
Marketing can be achieved by expanding the number of sellers and buyers using a marketplace, increasing brand awareness, advertising products or services being sold on a marketplace, and reducing costs associated with marketing such as marketing costs, sales commissions, among others.
In a two-sided marketplace, sellers and buyers are the key players who influence the platform’s success.
In most cases, buyers might not be aware of a platform as they are still new or less popular.
In such cases, it is challenging to drive a large volume of traffic to the site, leading to low sales.
On the other hand, sellers may find it difficult to sell products on a marketplace because there might not be enough buyers on the platform.
Building a marketplace is hard. It requires an understanding of real-world commerce and effective product management.
To build a successful two-sided marketplace, you need to consider the marketplace from both sides and create a meaningful experience.
This is not an easy feat to accomplish, and many marketplace companies fail because they don’t do this very well. I’ve been fortunate to be involved with a successful two-sided marketplace called Cudy.
Let me know your thoughts on building two-sided marketplaces in the comments section!
About the Author
I am the Founder of Cudy Technologies (www.cudy.co), a full-stack EdTech startup helping teachers and students learn better. I am also a mentor and angel investor in other Startups of my other interests (Proptech, Fintech, HRtech, Ride-hailing, C2C marketplaces, and SaaS). You can also find me on Cudy for early-stage Startup Founder mentorship and advice.
You can connect with me on Linkedin (https://www.linkedin.com/in/alexanderlhk) and let me know that you are a reader of my Medium posts in your invitation message.
