Chapter 52

Two-Sided Market

The pattern

Two-Sided Markets facilitate interaction between two complementary groups for mutual benefit via an intermediary or a platform. For example, recruitment websites link jobseekers and recruiters, while a search engine attracts both users and advertisers (WHO?). Central to the concept are so-called ‘indirect network effects’: the more people from one group use the platform, the more attractive it becomes to people in the other group. This works in both directions (WHAT?). The main challenge in operating such a platform is to steer the two customer groups in such a way as to maximise indirect network effects. Achieving this helps to bind customers to the company (HOW?). It is also possible to target three or more customer groups: we then speak of a multi-sided market. Google’s search engine constitutes a three-sided market that brings together Internet users (searchers), website hosts and advertisers. Not all participants necessarily pay for involvement: in the case of search engines, for example, they are free for users to browse, but advertisers pay to be included on the website (VALUE?).

Before a Two-Sided Market can work, the chicken or the egg problem needs to be resolved. So long as there are no customers using the platform, neither group has an incentive to join it. Thus, the situation calls for achieving speedy visibility of the platform by means of far-reaching ad campaigns and special offers (WHAT?, HOW?).

The origins

Two-Sided Markets have been around for a long time. Stock exchanges were one of the first applications of the concept more than 600 years ago. The first such exchange that most resembles the current model was founded by the Van der Beurze family in the 15th century. The family owned an inn in the Flemish city of Bruges, which was an important European trade hub at the time. Regular visits from influential traders made the inn a centre for trade and financial activities, connecting buyers and vendors. Today, stock exchanges are still some of the most powerful and essential instances of a Two-Sided Market.

Two-Sided Market: indirect network effects

The innovators

The Two-Sided Market pattern is extremely versatile and has been used in a number of business model innovations – for instance, in the credit card business: credit card companies bring together credit card owners on the one hand and retailers and businesses that accept the cards on the other. Diners Club, founded in 1950, was the first credit card company to provide consumers with an average of two weeks’ credit before they were required to repay the debt. Cardholders were not charged interest (this came later), but rather an annual subscription fee of US $3, while merchants were charged 7 per cent on each transaction made. But to gain momentum, Diners Club first had to face a different challenge (the chicken and egg again). Without a sufficient number of cardholders subscribed, merchants would not participate, and, similarly, customers would not acquire a card unless sufficient merchants (shops, restaurants, hotels, etc.) were party to the system. This obliged Diners Club to undertake marketing exercises to encourage people to adopt the system, initially focusing on salesmen who might use the cards in restaurants.

Online marketplaces such as eBay, Amazon and Alibaba enable seller–buyer interactions as well, and as such they are also Two-Sided Markets. Consider Groupon: this company brokers discounted gift certificates (‘deals’) between buyers and vendors, promoting the idea of a group discount, whereby a greater discount is obtained from merchants. Customers benefit from these discounted offers and rebates, while the merchants involved enjoy exposure to large numbers of consumers. In each of the markets it serves, Groupon presents a daily special offer. Interested customers can sign up for the offer, and if a predetermined number of customers is reached, the offer becomes available to them all. This reduces the risk for merchants, whom Groupon charges a percentage of the sales price on the discounted product. The site generates considerable indirect network effects: the deals attract a great number of potential customers, and this in turn inspires many businesses to place offers on Groupon. The company claims that it had more than 45 million active users in mid-2019.

The ad-funded business models run by JCDecaux, Facebook and Metro Newspapers are also Two-Sided Markets, connecting advertisers to users. The two groups come together through indirect network effects: advertisers benefit from classic customers who circulate the ads and customers benefit from advertisers who cross-subsidise merchandise with their advertisements. JCDecaux, for example, works with city authorities and public transport operators to provide street furniture for free, or at reduced rates, in return for exclusive advertising rights. Advertisers pay for prime locations and transit media opportunities, while cities benefit from free or reduced-cost public services and advertising design innovations.

Uber and Airbnb are examples of Two-Sided Markets that operate more on a Peer-to-Peer basis (#37). Sometimes described as the largest taxi company or hotel company respectively, the two companies are linking the providers with the customers that demand accommodation or ride-hailing. While the transactions are made via the platforms, the value proposition is fulfilled through the facilities of the service-providing individuals. Exemplifying digital companies that spread incredibly fast across the globe, Uber boasted nearly 100 million customers in 2019 and Airbnb over 400 million guests since its launch in 2008. Gaining a percentage fee from every transaction, the two ventures are among the most-discussed and (mostly) most-admired companies on the planet.

For B2B markets, XOM Materials gives a good example. XOM’s value proposition for its participants is based on transparency and matching efficiency to tackle the pain points of commodity trading (e.g. steel): sellers can list materials on XOM and easily find a buyer. For instance, when they have leftover material, which was formerly difficult to sell (e.g. unconventional measures), they can now access a large crowd of buyers. Also, when a buyer is demanding a large commodity volume that is hard to bear by a single seller due to side factors (e.g. credit limits), the quote can be split by XOM between different suppliers to achieve the lowest price for the required volume. Currently on the up, XOM is the future bet of the largest steel intermediary trading firm, Klöckner & Co.

When and how to apply Two-Sided Market

A multi-sided business model that connects various parties is practically imperative for all companies. Traditional one-on-one models no longer suffice to compete in the market successfully. You must understand who your relevant stakeholders are and how they are connected. Building on this understanding, you can think about what a multi-sided business model should look like for your company.