Over the years, we’ve built plenty of marketplace solutions. Unlike feature based or business management software, the value of the technology within marketplace software is in the relationship that is facilitates. The most common formation is a two-sided market place. Two-sided marketplaces connect a seller and a buyer. Examples we’ve build include connecting law firms with project attorneys, job seekers with employers, riders with drivers, or even brides with wedding vendors. Two audiences exist and the software becomes the match maker. Their interests are align, they just need to be connected.
Two-sided markets have inherent complexities. A common complexity is around value. Once the match is formed, what keeps the customer and vendor within the system? Airbnb, for instance, matches renters with home owners. Since the behavior involves real world interaction, the two parties could conduct business offline in future interactions. It becomes the goal of the marketplace to add value beyond the matchmaking. In the case of Airbnb, the leverage renters insurance. If you skirt their system, they reserve the right to decline all claims if anything goes awry.
Craiglist charges certain markets for simply creating the listing. They expect you to handle financial transactions off system, but charge the vendor. Interestingly enough, Craigslist only does this in a few cities. Charging vendors in a small number of cities produces enough revenue to make it free for everyone else, which continues to increase adoption.
Match.com is another fascinating example. When they fulfill their stated purpose, helping people find love, they actually lose a customer. Once you’ve entered into a happy, healthy dating relationship, their service becomes less valuable to it’s users. This tension can create a reverse incentive for the marketplace.
Triple the Chaos
Two-sided markets are complex, no doubt. But what’s more complex than a two-sided market? A three-sided market. That’s right, three audiences each coming to the table for a piece of the value-equation. In a three-sided market, the market software becomes the referee. The marketplace is responsible for maintaining the delicate balance of everyones’ best interest.
Imagine a triangle. The strongest form of a triangle is one in which all sides and angles are equal. A solid market with three parties should maintain a similar balance. If one party senses misalignment, it becomes more advantageous for them to leave. Over time however, the balance tips as each party pushes for their best interests.
Take recruiting firm for instance. Job candidates sign up, employers post jobs, and recruiters access the candidate pool to fill positions. Recruiters, compensated on a percentage of the employees salary, are incentivized to pursue high salaries for employees but only for those willing to pay either commission. Employees, incentivized to find the most purpose filled, flexible work at the best pay, field as many options as possible to make sure they find the best one. Meanwhile, most employers want to keep the process short, hire at-or-below market, and find someone who fits their values. Their interests overlap, but clearly conflict along the way.
Defining the value and continually communicating it to each party is essential to maintain equilibrium.
Chicken or the Egg
Whether the market has 2 or 3 sides, a chicken-and-egg scenario quickly forms. Imagine trying to use Uber without enough drivers. It doesn’t work. How about enticing drivers without anyone to drive? The marketplace depends on having enough people on both sides of the relationship.
Fortunately, we have noticed a trend. It’s easier to get the vendors than the customer. The audience who stands to gain financially is easier to build, so start there. We have speculated on why this might be, but it’s important not to overcomplicate it. The one who is making money is more likely to show up than the one you’re expecting to spend it. Eventually you will need the other side of the market but we’ve seen great value in moving fast and confidently building the list of sellers first.
Building marketplace technology is complicated enough, don’t add unnecessary weight. Starting simple to prove the concept and validate the value will save time, money, and headache. I shared recently about starting smaller, which includes insight into a 3-sided marketplace. The big takeaway was how effective a simple email blast proved to be. No fancy software or complex system, but a simple touch point that connects key audiences at a consistent interval. Find the smallest measurable step and get started.
In the end, you should expect a 4-5x increase in complexity when building a marketplace. There are unknown technical constraints and instability in the increased human element. There are more variables than a service based business or a suite of products, so you’ll have more people with misaligned interests. Choose wisely. If you imagine an elegant three-sided market, push yourself to start with two. If you’re planning to invest in a two-sided market, figure out how you can validate with half the market first.