The marketplace Dilemma
As we well know, a physical marketplace is 2-sided which needs the participation of at least 2 groups (the producer and the customer) to achieve success.
This business model is similar to an online marketplace platform and a great idea for entrepreneurs who want to create an online place connecting providers and consumers. We need to get two sides of customers on board. The marketplace owner does not directly create inventory but acts as intermediary connecting sellers and buyers.
Since in our last article, we highlighted the different revenue options applicable to this model, we got a lot of questions like which side of the market should be charged? Is there a criterion?
These will be discussed in this article; hence the topic:
How to determine which side to charge in a marketplace model
It is vital to know that a marketplace model thrives on the network effect — that is — the effect created when a product or a service becomes more valuable as more and more people use it. In other words, the more users there are on one side of the marketplace, the greater the value of the services they receive from the other side, and vice versa.
Since a market can be influenced by the forces of demand and supply, one can segment the marketplace model into two kinds-:
- The supply — constrained marketplace
- The demand — constrained marketplace
A marketplace is said to be supply — constrained when the supply side has more influence on the marketplace than the demand side. An example is the Airbnb market space where It’s harder to convince hosts to rent their houses to strangers than it is to get guests to knock on those doors. In that case, It is wise to charge the demand side (the consumers) or in Airbnb’s case, charge them more than the supply-side i.e though Airbnb charges both hosts and guests, it imposes most of its fees on guests (5–15%).
A marketplace, on the other hand, is said to be demand-constrained when the demand side has more influence on the marketplace than the supply side. And by more influence, it could also mean that there are fewer buyers on the platform than there are vendors or producers. In this case, charging the producers will be more attractive. OpenTable is a demand-constrained marketplace and charges providers accordingly.
One just needs to determine whether your marketplace is demand- or supply-constrained and reduce the friction on that side: Need buyers? Then charge sellers and vice versa.
Some questions now arise: What happens to the other side of the market that has more influence? Do we charge them? Or should it be free for them? The answer is Yes. You can charge them (just like the Airbnb model) or make it free for them in order to remove the entry barrier on that side especially at the entry phase of your marketplace.
One other tactic will be to subsidize the side with more influence. For example, a supply-constrained market can provide free equipment and even marketing services to attract vendors/producers.This was the approach AirBnB took when they decided to write the listing description on renter’s behalf and hire professional photographers to take awesome pictures of apartments for such potential renters. Other marketing activities are boosted on social media, email to actively promote these apartments to potential customers. By offering benefits, the marketplace can encourage the participation of the benefited group. As a result of the network effect, this will attract the other side to the marketplace.
In summary, charge the side(s) for whom adds the most value, has the most influence or in shortage. But as the owner, get to decide if you wish to charge both or not.
Originally published at nyocha.org on April 16, 2018.