Two-sided Marketplaces

Six unique aspects - part 2

In the last article, I highlighted the first two factors that I think are somewhat unique to marketplaces and should be considered by folks building or running one of these - chicken or the egg problem and the marketplace flywheel. In this article, I’m going to continue with the final four - lightning in a bottle, competitive advantage, inelasticity of demand, and symbiotic relationship. 

The third factor that is somewhat unique for marketplaces is that they demonstrate what some have referred to as “lightning in a bottle.” This term was originally used to describe what Benjamin Franklin’s kite experiment was attempting to do literally, capturing electricity from lightning and storing it in a Leyden jar. However in the early 1900’s it became used in baseball to denote a “difficult feat” or even more recently as an ephemeral state of greatness. What is meant by this is that marketplaces often require a heavy upfront investment but once at scale it provides a very healthy cash flow. For example, a typical marketplace that supports the sale of goods requires the infrastructure and features for listing items, searching through items, checking out, making payments, providing customer support, advertising, etc. This is a very long list of features that each by themselves are sometimes distinct companies. Software as a Service businesses often need much less in terms of features to launch and possibly even become profitable. However, at a really large scale these early investments pay for themselve many times over.

The fourth factor is the competitive advantage of a marketplace. I purposefully use the singular term “advantage” rather than the plural “advantages” because while there are a number of qualities that make up this factor, the advantage comes from the combination of them, not from each individually. The four typical qualities of a marketplace that provide it with a competitive advantage are: brand, items, data, and functionality. Individually lots of other companies including ecommerce sites have similar qualities. A lot of ecommerce companies might have great brands but they usually don’t have the same volume or diversity of items that a marketplace would have. Together these qualities multiply each other so that a great brand (multiplied by) a large quantity of diverse product offerings (multiplied by) a massive amount of data that can be leveraged for recommendations and such (multiplied by) the significant functionality that we mentioned in the last factor “lightning in a bottle” all create something that is a large competitive advantage for a marketplace. 

BRAND    X    ITEMS    X    DATA    X    FEATURES

Challengers have to compete with all of these combined, not just a single one. An up and coming marketplace might spend a lot on marketing with brand advertising to build a great brand but if they don’t have the large volume of products, whether that be actual items for sale or content to consume, they aren’t going to be successful competing. 

The fifth factor is the inelasticity of demand for the marketplace services (not the items) at scale. Inelasticity of demand is evident when demand for a good or service is static even when its price changes. Now I know some of you formally trained in economics are going to point out that inelastic products are usually necessities without acceptable substitutes such as utilities, prescription drugs, and tobacco products. I posit that the marketplace at scale provides a service that is not substitutable. If the marketplace has scale it’s where a lot of people on both sides (producers and consumers) are going. This is very hard to replicate and often there isn’t another viable alternative. Therefore, if you want someone to buy your product or consume your content, you need to go to that marketplace and pay whatever fees they demand. Twitter recently thought they were unique enough to demand $8 for blue check marks but apparently there are lots of alternatives. So, let this be a lesson to all marketplaces, there can absolutely be inelasticity of demand for your platform service but only at scale without alternatives. Until you achieve that you should be very careful of fees and pay attention to the next factor. 

The sixth and final factor is the symbiotic relationship between the marketplace and the two-sides. Everything needs to work for all three parties - marketplace, producers, and consumers. A price increase that doesn’t get some reinvestment back into the marketplace via product development or marketing is only good for one side. This can, unless the marketplace has achieved such scale that they have inelastic demand, result in people departing the marketplace for alternatives. If those alternatives don’t exist, this often gives competitors an opportunity to pounce. Continuing with the Twitter story, this is exactly what Meta did with the launching of Threads. On July 7, Threads had more than 49M daily active users on Android, according to Similarweb, which was about 45% of the usage of Twitter’s 109M active Android users that day. Overall, Twitter’s daily active users dropped by 3.9% in 2023 and predictions are that they will lose 32M users by 2024. 

This symbiotic relationship doesn’t only need to exist between the producers and the marketplace but also between the producers and consumers. While Airbnb overall is doing just fine it does occasionally receive the ire of hosts when the marketplace sides too much with renters and they receive the outrage of renters when they allow exorbitant clean up fees. The balance between value and costs (money, time, property, etc.) have to work for both sides and it’s the job of the marketplace to do that.

In any business there are an inordinate amount of things one needs to consider. These six factors are just some major ones that are shared in common by most marketplaces and especially when taken together are fairly unique to marketplaces. Whether you are trying to build one or run and scale one, pay attention to these and you’ll be much further ahead than those other marketplaces that we often see stumble.