This guest blog post was written by Jaclyn Longo, an Analyst at Propel. Propel is located at Western University and is part of the Campus-Linked Accelerator (CLA) program. The centre provides co-working space, mentorship, seed funding, events and acts as an advocate for local youth-based (aged 18-29) startups in the community. For more info, visit the Propel website.
Two-Sided Markets: Which came first, the chicken or the egg?
Which came first, the chicken or the egg? This classic causality dilemma accurately describes the challenge faced by two-sided markets. Two-sided markets are networks that bring together two distinct groups. Each group relies on the presence of the other in order to derive value from the network.
Whether we realize it or not, we interact with two-sided markets on a daily basis across a number of industries, for example credit cards link consumers and merchants, cable television links advertisers and viewers and video game consoles link developers with gamers. With technology advancements aiding the uptake of the sharing economy, two-sided markets are becoming even more popular.
Two-sided markets are difficult to develop, because in order to be successful the value proposition needs to appeal to both sides of the network. However, a well-developed market provides a barrier to entry due to its network effects (the value of the product or service is dependent on the number of others using it). There is also an inherent chicken-and-egg problem to consider when building a two-sided network. One side won’t join without the other. This is a major challenge that platforms need to overcome in order to be successful and reap the network effect benefits.
When developing a two-sided market there are three main things to consider:
1) Different Types of Users
Two-sided markets serve two distinct groups of users. It is important to understand the needs of both of groups of users, as both are needed to develop a successful platform. Successful companies understand how their value proposition serves both sides of the market and they leverage this knowledge. Since the needs of their users are different, platforms often need to make tough decisions about who to “favour”. For example, Airbnb chooses to favour guests; everything on their website is geared towards the guest’s experience and information for guests is more accessible. Airbnb is a great example of a two-sided market that understands there are differences between their users; they have dedicated teams for both hosts and guests to ensure that the unique needs of each group are met. Airbnb has authored a case study on how they designed their platform with both hosts and guests in mind.
2) Pricing Model
Pricing is complicated for two-sided markets, as platform providers have to decide how much to charge not just one but two groups of customers. Having an understanding of which side of the market is more price sensitive and which user group is driving the most value out of the platform can help providers better price their platforms. Some providers may choose to subsidize one side of the market in order to grow their user base with the hopes that this will attract the paying side of the market. Often there is one side more eager to leverage the network, which can give insight into which side of the market to subsidize. The Harvard Business Review article “Strategies for Two Sided Markets” goes into detail about different pricing strategies successful two-sided markets use and can help you determine which model is best for your business.
3) It takes time
Developing a two-sided market takes time. You need to establish not one, but two user groups whose presence relies on the other being there. For this reason, two-sided markets generally need more time then a traditional business model to gain traction. The majority of companies that have been successful in developing two-sided markets and creating those natural network barriers have done so by starting small and focusing on specific or niche markets before expanding. Zeroing in on a specific industry or geographical market can help two-sided market startups focus their limited resources and gain traction.
For further reading and more tips on developing two-side markets check out these articles: