A platform is any two-sided environment that facilitates an exchange between parties. If you’re looking to build a platform, you’ll need to navigate the complexity of appealing to both buyers and sellers. Here are four best practices for getting started.
Iconic venture capitalist Marc Andreessen famously proclaimed, “Software is eating the world.” With the benefit of hindsight, we can make a slight modification to his declaration that further improves its accuracy: “Platforms are eating the world.”
A platform is any two-sided environment that facilitates an exchange — between buyers and sellers, consumers and producers, or even readers and publishers. It’s a business construct that has existed for millennia, though recent technological advancements have accelerated its proliferation as a model for revenue generation.
Today, some of the world’s most successful companies, including Amazon, Uber, and Airbnb, have deployed platforms that disrupted industries and fundamentally changed consumer behavior. Their success hasn’t gone unnoticed, and now countless entrepreneurs and business leaders seek to replicate it. So, why aren’t more companies succeeding?
Building a Platform Is Harder Than It Looks
The beauty of two-sided marketplaces lies in their simplicity. Companies that successfully deploy platforms rely on sophisticated technology and comprehensive expertise in fields like machine learning and data science to predict demand and create supply. However, the elegance of modern design and user experience masks an underlying complexity. Companies can potentially transform their industries with quality platforms, but only if they deliver value to both sides.
Buyers are looking for platforms that provide value in terms of price transparency and certainty, talent diversity and availability, quality and speed of work, security and user-friendliness, and customer service and support. On the other side of the marketplace, sellers find value in accessing a global market actively seeking their offerings, using a well-designed online profile to showcase their work, maintaining control over negotiations and final pricing, and receiving payments in a timely and secure manner. Both sides also value platforms that ensure customer success by offering training and other helpful resources.
It might seem like buyers’ and sellers’ interests are conflicting, but they both ultimately want the same thing: a successful and smooth transaction. That’s why my philosophy is that the business model should be based on shared success. As companies build two-sided marketplaces, they’ll need to gather enough information and make decisions that provide value to both sides. This isn’t easy to do, but the potential rewards are virtually limitless.
How to Develop a Successful Two-Sided Marketplace
If you’re looking to build a platform, you’ll need to navigate the complexity of appealing to both buyers and sellers. Here’s how you can get started:
Solve the “chicken or egg” problem.
Because you’re building a platform for two distinct groups of people, you’ll likely encounter what’s known as the “chicken or egg” problem. Buyers won’t use your platform if there are no sellers, and sellers want buyers they can start reaching out to. Your platform will serve as the connector, so which side do you focus on attracting first?
You have a couple of options. You could take the zigzag approach, building up each side slowly as you demonstrate value over time. Growth will be slow, but you’ll be able to accumulate a community of passionate users who have grown with the marketplace. Alternatively, you could build up one side to critical mass while subsidizing the other, setting the marketplace into immediate motion. To do this, you could focus on components that create value for sellers and attract buyers with promotional offers (discounted first purchases, free shipping, etc.).
Kick-start the network effect.
At a certain point, platform scaling becomes seemingly automatic thanks to the network effect. This phenomenon occurs when you reach a critical mass of users that naturally leads to the creation of more value for all users. For example, as video game publishers create more games for a variety of audiences and interests, they attract more gamers. Those gamers buy more games and encourage studios and publishers to continue making more. This effect also explains why social media companies either flourish (like Facebook) or fail (like MySpace).
As you start accumulating platform users, highlight their involvement to trigger the network effect. For example, if you chose to build up the sell side, you can invest in advertising their products to buyers. If you focused on the buyers instead, you can promote their demographics and preferences to sellers. On the other hand, if you took the zigzag approach, you’ll likely run into the network effect naturally. In this case, you can increase its impact by marketing your platform as a whole.
Ensure quality through a curation mechanism.
As marketplaces grow and the network effect kicks into gear, platform creators often struggle with quality. Too many unqualified sellers on a platform may deters buyers from participating. No one wants to spend hours searching for a suitable product or service provider.
This is where a curation mechanism can help. For example, clients on our Voices platform can use our search engine to refine results and find the perfect voice actors for their projects. You might want to add other features to your platform over time, but your priority should be optimizing the core transaction. Ask yourself: “What’s the main reason both sides are connecting, and how I can help make the exchange easier?”
Facilitate the payment and monetize the right side.
In two-sided marketplaces, users trust your platform to not only consummate matches, but also facilitate payments. Know what type of transaction you’re enabling, whether it’s an online exclusive transaction (like eBay) or an online-to-offline experience (like Uber). No matter what type you enable, you’ll likely need to prevent disintermediation (like when users try to take a transaction offline). Success depends on how smoothly exchanges can be made via your platform.
Typically, a percentage of each sale is paid to the marketplace. This is commonly referred to as the take rate. Although the percentage can vary among platforms, the fee should never be an insurmountable obstacle to buyers or sellers. You have to decide what amount makes the platform profitable and decide which side should pay the fee. Do you charge a subscription fee to buyers, do you charge the seller per transaction, or some combination thereof? Alternately, you could monetize your platform by selling advertisements or offering value-added services.
A platform based on shared success has a higher chance of achieving a lasting competitive advantage. By following these four best practices, you’ve increased the likelihood of creating a two-sided marketplace that can withstand the test of time.
Written by David Ciccarelli.
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