Chickens, Eggs, and the Two-Sided Marketplace

You have heard about, and likely used, two-sided marketplaces already. Companies like Visa, eBay, Airbnb, Uber, and Tinder are all two-sided marketplace businesses that have become incredibly successful. And these kinds of marketplace businesses show no signs of diminishing. 

According to a Coresight Research report, the income of these kinds of platforms will double by 2022 globally – from under $20 billion in 2014 to just over $40 billion. PwC estimates that the global revenues in the sharing economy have the potential to reach a staggering $335 billion by 2025.

In this City University session, Josh and Kyle from City Innovations explain why two-sided markets are great for startups and some insights on how to go about building one. 

What is a Two-Sided Marketplace?

A two-sided marketplace, also referred to as just a “two-sided market” or a “two-sided network,” exists when both buyers and sellers meet to exchange a product or service, creating both bids to buy and offers to sell. 

Two-sided markets exist in various industries, serving the interest of manufacturers, retailers, service providers, and consumers. Another example is the yellow pages telephone directory, which serves consumers and advertisers. Credit card companies, video game platforms, Facebook, LinkedIn, eBay, Amazon, and more are all two-sided markets. Let’s look at Uber’s business model.

There’s someone on one side that says, “I need a ride.” There’s someone on the other side that says, “I can give someone a ride.” Uber serves almost like the facilitator of that transaction — there are two or more customer segments. The people who need the ride are different than the people giving it. Each has their own unique value proposition. The value that one group gets is only possible if the other one’s present.

This is what makes two-sided marketplaces different from traditional value chains. In a conventional model, value passes from cost to revenue. With a two-sided marketplace, the two sides of the market can find each other and exchange value on a trustworthy platform. The platform typically charges a commission of some kind for each transaction. The two-sided marketplace is a win-win-win for all parties: the buyer, the seller, and the marketplace entrepreneur. 

The problem is managing supply and demand, especially in the early stages. 

What does a chicken and an egg have to do with this?

The double-sided nature of the two-sided marketplace can generate dynamics that can help to leverage significant growth opportunities. However, the same aspects of this kind of model can present some of the toughest challenges for early-stage marketplace entrepreneurs. 

Two-sided marketplaces will face what is fondly referred to as the “Chicken and Egg Dilemma” when first starting out. This dilemma has been around for ages, dating all the way back to Aristotle. The question is, which came first? The chicken or the egg? 

The “Chicken and Egg Dilemma,” in terms of business models, is directly related to supply and demand, and the value each party in a two-sided marketplace provides one another.

Buyers (the demand) will favor a platform that has a great selection of high-quality supply. Sellers (the supply) will favor marketplaces that have a lot of demand. But if you have more of one than the other, your marketplace could fall flat. The question is: What can early-stage marketplace entrepreneurs do when they need one side to bring in the other and vice versa?

If you’re not concentrating on this chicken and egg problem, that’s how it comes to fruition. You have to really concentrate on whether there is enough supply to add value to the people who have the demand.

It all boils down to this: If you need one to be present, you need both to be present to create value for the other. 

Imagine you go to a grocery store, but there are no groceries on the shelf. You would never go back. Or imagine opening Airbnb, but there are no places to rent. You would never open the app again. 

The challenge is building up your inventory so that when the other side comes along, there is something for them. Then you need to look at how to activate those people. Making sure that both sides are present at the same time creates that activation.

So, how do you build a successful two-sided marketplace?

The two-sided marketplace model offers tremendous opportunities and poses challenges that might be tough for entrepreneurs to overcome. These kinds of businesses are all about user behavior, which is notoriously difficult to predict. 

At City Innovations, we’ve helped build hundreds of successful marketplaces. We help ventures find their perfect product-market fit and see exponential growth. Want to learn more? Click here to reach out to us and get started.

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