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Why Two-Sided Marketplaces Self-Destruct
A two-sided marketplace never achieves the same level of customer loyalty that a direct marketplace does
If you’ve ever used Uber or AirBNB, you’ve interacted with a two-sided marketplace. A two-sided marketplace is a technology-enabled platform that brings together two distinct groups of users to provide mutual benefit. One group — the customers — purchases from the other group — the providers — while the platform handles the pairing, the engagement, and the transaction itself.
These days, it seems like anyone can stitch together a simple two-sided marketplace. All it takes is using readily-available technology to gather a big group of customers on one side and a curated list of providers on the other. The pioneers are already there: Uber and Lyft for transportation, AirBnB for lodging, Etsy for handcrafted products, and even the beleaguered dog-walking startup Wag.
The lure of building a two-sided marketplace is that it seems like a perpetual motion machine. The bigger each side gets, the more attractive it is to the other side, and vice versa. Then all you have to do is sit back, let them transact, take a small piece, and get rich.
But the vast majority of two-sided marketplaces fail.
I’ve been building two-sided marketplaces for the better part of 20 years, including one now where I’m bolting a third-party marketplace onto an existing multi-million dollar service platform. I’ve learned that it doesn’t matter if the market is ride-sharing or artisan T-shirts or dog-walking or anything in between — the vast majority of two-sided marketplaces fail for some of the same reasons, and those reasons originate from just a handful of risk areas.
Nail the risk areas, and you increase your chances of success exponentially.
Easy To Overlook, Hard to Conquer
All of the risk areas I’m going to share with you have two common threads.
- They rarely get much attention until they become a problem, which doesn’t happen until some time after launch.
- They are all difficult to get your hands around. The problems don’t have quick fixes. These are functions you…
