Digital Marketplace Models

Some of the most successful internet businesses have been digital marketplaces—platforms for matching buyers and sellers. eBay, which created a global marketplace for buying and selling pretty much anything, was a pioneer in the space. On the enterprise side, Ariba (now owned by SAP) built Ariba Network, a digital marketplace for connecting companies with vendors of all types. Airbnb, of course, is a marketplace connecting property owners with short-term renters, and even Uber can be seen as a digital marketplace that connects people who need a ride with a driver who wants to give them one. In writing this book, I used Upwork, a marketplace for connecting freelancers to people looking for freelancers, to find a skilled illustrator, a talented cover designer, and the world’s best copy editor. Even Amazon, which started as an e-retailer, is now also a digital marketplace; many items are placed on the platform by independent sellers who fulfill orders directly. 

If you’re building a digital marketplace startup venture, how will the Launch Path process described in this book be different? 

Two sides means two sets of customers. 

Because you have two groups of customers (one on the buy-side of the marketplace and one on the sell-side), you will need to achieve two sets of product-market fit. For example, Airbnb has to meet the needs of people looking for a place to rent, and it also has to meet the needs of people looking for a short-term renter. 

Trust drives transactions. 

With marketplaces, trust becomes a crucial component because you are asking strangers to do business together. Digital marketplaces often deploy a range of strategies to increase the level of trust between buyers and sellers, such as supporting buyer and seller reviews as a way to foster community trust. Shortly after Airbnb launched, they were involved in a highly publicized incident where someone’s house suffered extreme damage from an Airbnb renter. Airbnb quickly negotiated with an insurance company to bundle a million dollars’ worth of insurance into every booking, in order to further build trust.

You’re the Governor. 

The policies and governance structure, essentially the “rules of the road” for using the marketplace are critically important for marketplace businesses: who can join the marketplace? Are there qualification requirements? What is considered good behavior? What happens if I don’t comply with the marketplace’s policies?  As a marketplace operator, you will need to develop a policy and governance system that on the one hand creates a healthy, vibrant environment for its users, but on the other hand does not stifle demand by being too stringent.  For example, during Covid 19, Airbnb unilaterally relaxed their cancellation policies for guests, which in many cases exceeded levels that had already been set by their hosts, causing a small revolt among affected hosts who lost thousands of dollars in booking revenue.

Threat of disintermediation 

In Chapter 5, I’ve included a case study on Tutorspree, a marketplace for connecting tutors with people looking for a tutor. The platform took a fifty-percent share of each tutoring session booked. One of the reasons they failed was that, in the first tutoring session, tutors said to students, “Hey, next time just contact me directly, and we’ll save some money.” Successful marketplaces like Airbnb limit the threat of disintermediation by providing solid reasons why you should continue to conduct transactions on their platform (and pricing model that does not drive customers away), not outside it.

You need mass on both sides. 

A digital marketplace with all sellers and no buyers will have no transactions. Same with one that has all buyers and no sellers. This ends up being one of the most difficult aspects of building a digital marketplace—you need two sets of customer acquisition efforts going on at the same time, and without a critical mass of users on both sides of the marketplace (who also have a mutual interest in each other), it will be difficult to drive transactions. Early in Airbnb’s history, they were getting lots of people posting rooms for rent but not enough people looking for a room to rent. The founders quickly wrote a script that automatically posted every new listing to the Craigslist Rooms for Rent section, which gave them a way to build traffic on the buy-side. 

Use two Launch Path Canvases.

With a two-sided marketplace, I recommend that you produce two canvases as described in Chapter 4. Think about Uber: their model depends on not only recruiting enough riders but also recruiting enough drivers. The essential value proposition for a rider is different from the essential value proposition to drivers. For the most part, with a two-sided marketplace, it may be helpful for you to create two Launch Path Canvases as you develop and refine your startup, one for each side of the marketplace.

Marketplaces tend to be great businesses because once they achieve critical mass, then network effects and other growth accelerators kick in, allowing you to collect  a cut of an increasing number of transactions. But getting to that critical mass means really understanding the customer on both sides of the marketplace and achieving two sets of product-market fit.