Building a two-sided marketplace is the best way to make a valuable business. These marketplaces are very robust because of the high switching costs to switch to a different marketplace and the network effect of the marketplace. For every new buyer that enters, they increase the value of the entire market. Without having an existing marketplace, it’s almost impossible for your users to switch to another platform.
In this post, we’ll show you how two sided marketplaces work and how you can utilize it to your advantage.
Like freemium models, two-sided marketplaces work well when it’s designed to have their users have a network effect. This means that each user that’s apart of the marketplace help the market grow and act on its own. As a result, it creates more value the more people that are involved in your marketplace.
Once the platform grows, the returns grow as well. Your users will pay extra to access the platform. In traditional business models, this can lead to diminishing returns. However, in two-sided marketplaces, the opposite happens. The more you scale, the easier it is to obtain customers – which leads to more growth and profits!
When you have limited resources, building a two sided marketplace can be difficult. In most cases, you’re going to want to build traction in small verticals before expanding your reach into larger markets. Geographically speaking, you’re going to want to grow in one location before expanding into another.
If the growth outside your niche doesn’t grow organically, then you can speed up the process by merchandising new categories to your customers. And, focus on the seller acquisition campaigns that are targeted for certain categories. This will allow your niche to grow and create more demand in your two sided marketplace.
Like any business, there are some challenges you’ll face when building a two sided marketplace. This is because the service you’re providing won’t be useful until there is a large base of users from both sides. The value of the platform grows once it meets the demand side.
For instance, companies like Kickstarter created their marketplaces by setting up smaller crowdfunding projects. They did not create a marketplace and then waited for their projects. Instead, they did the opposite. By creating projects, they were able to increase the amount of successfully crowdfunded projects and further grow their business.
One interesting part about building a two sided marketplace is when connecting buyers to sellers. But what if that buyer is an established company? By getting an established company onboard, you increase the credibility of your business.
And, it will help increase the demand for your product as well. Allying with a larger company will help your business share the same success as them.
To make a two sided marketplace, you’re going to have to fill in a gap that your consumers need. You’re going to have to make your marketplace interesting enough that your user base creates a strong community behind it. Conclusively, make one and help get your user base growing immediately!