What are the challenges of a two sided platform business model?
Building a two sided marketplace / platform business is probably the most difficult type of business to get started, but it often can have some of the most upside potential if you are successful. The biggest challenge when started a two sided marketplace is to balance both sides of the market. For example, if Uber had 1,000 drivers and only 10 customers that needed a ride, the drivers would get frustrated and leave the platform. If there were 1,000 customers that all needed a ride at the same time, but only 10 drivers available, the riders would get frustrated and leave the platform. Your challenge is to delicately balance having the right about of supply on both sides of the market. You may need to advertise to acquire supply on both sides of the market which can get really capital intensive really fast. Marketplace businesses often require a lot of capital to reach a critical mass, but once you reach that tipping point it can be really difficult for a competitor to come in and unseat your marketplace as an industry leader.
How do I start a two sided marketplace?
A common hack to start a two sided marketplace is to focus on finding paying customers for whatever service will be provided on the platform, and then you or your employees can provide the service yourself until you reach a critical mass to be able to start finding workers for the other side of the marketplace. For example, DoorDash founders started by picking up and making deliveries themselves as employees of the company to ensure that their customers had a good experience. Then over time they could open up the platform to independent contractors that could complete the deliveries.
How much does it cost to start a two sided marketplace business?
Marketplace businesses can be some of the most capital intensive businesses to get started. When you use our financial projection template you will be able to see why this is the case, but put simply, you will likely need to advertise to acquire customers on both sides of the marketplace. For example, Airbnb might need to advertise to acquire people looking to rent a home in a particular area, and may need to advertise to acquire customers to list a home as available to rent. There are customer acquisition costs on both sides for a platform business like this. Additionally, it takes significant transaction value to generate substantial revenue for the platform. Since the platform will likely take a commission of 20% for example, when you work to hit $1 million in transaction value on the platform, the platform itself will only be able to keep $200,000. You will need sufficient startup capital to be able to continue to acquire more and more customers until you reach a transaction value on the platform that can actually cover your costs. This is why successful marketplace businesses like Uber, Airbnb, and DoorDash have had to raise billions of dollars in investment to reach a critical mass.
