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How to fuel the growth of a two sided marketplace

Posted by on May 8th, 2013

How to fuel the growth of a two sided marketplace
Marketplace businesses are notoriously difficult to get off the ground. When you have a two sided marketplace, it can feel like you are in a chicken and egg situation. Without buyers, you can’t attract sellers and without sellers it’s almost impossible to attract buyers.

However if you can engineer your way to a flourishing two sided marketplace, you are well on your way to building a self perpetuating and defensible business.

Last week I talked about how to build a two sided marketplace. This week I want to talk about how to fuel the growth of a two sided marketplace.

In my opinion, there are two main ways to grow a two sided marketplace. Whilst these two factors will not apply to every type of two sided marketplace, I believe they are critical components for the majority of all successful online marketplaces today.

Adding traction to a two sided marketplace

As I covered last week, it can be extremely difficult to get that initial traction in a two sided marketplace. You need to be able to build both sides of the market simultaneously, but without one side, it is almost impossible to build the other side.

But even after you have the initial traction, the hard work is far from over. Now you need to throw fuel onto the fire to grow your marketplace as quickly as possible in order to reap the benefits and defensibility of network effects. For many marketplaces, the early days are all about land grab. Usually there will only be one winner and so you must ensure you grow the quickest to become the market leader.

I think two of the most important components of a two sided marketplace growth strategy are virality and becoming a utility.

Virality in two sided marketplaces

It should really go without saying that virality is a critical component for building two sided marketplaces. Once you reach scale, the only way to keep growing is to acquire users at a very low cost.

In order to build a viral product, there are a couple of things that you need to keep in mind.

First, you need to create something that naturally creates the requirement of your current users inviting their friends of contacts. There must be some value in the outcome of that process, or your viral coefficient won’t be nearly big enough.

Secondly, you need to get your Viral Cycle Time as low as possible. This is basically the amount of time that it takes a user to invite their contacts. An ideal Viral Cycle time should be one simple task. If you start making your users jump through hoops the majority will give up before they finish. One of the best examples of a low Viral Cycle time is how easy it is to share a YouTube URL.

If you want to read a more in-depth analysis of viral growth, I’ve already covered it in the post Finding your Viral Coefficient.

A good example of a two sided marketplace using virality as a means of growth is PayPal’s huge growth off the back of eBay. Before eBay eventually acquired PayPal in 2002, PayPal accounted for over 40% of the transactions on eBay.

The PayPal example is such a good one because it is a classic viral growth story. Sellers often only accepted PayPal as a means of payment and so buyers only wanted to pay with PayPal because it made the process so easy. Prior to the acquisition, it was common to see eBay listings that had PayPal logos and listing PayPal as the preferred or only method of payment.

PayPal was able to grow virally because its users of the service naturally had reason to get other people on to the service. In order to pay or receive money, you were required to have a PayPal account. This became a self perpetuating process as PayPal piggybacked off the growth of eBay.

Creating a utility in a two sided marketplace

I think the second big opportunity for growth in two sided marketplaces is by turning your product into a utility. By this I mean, focusing on allowing your user to accomplish a task, and optimise to make your platform the cheapest and most efficient way of achieving that goal.

HowAboutWe
A couple of weeks ago I wrote about HowAboutWe as part of a post on How to make the Groupon business model work. HowAboutWe started off as a online dating site that focused on interesting first dates. Since then, the company has expanded into a couples subscription service that suggest things to do and provides discounts and exclusive opportunities on events.

HowAboutWe is an interesting example because of how they have built their marketplace. In last weeks post on building a two sided marketplace, one of my suggestions was Find a big supplier (established company) for one side of the market. HowAboutWe was able to build their buyers side of the market through the original online dating service. Once they had that traction, the seller side of the market becomes much more interested in the market and getting access to the customer base.

HowAboutWe is a subscription service which includes up to 75% off on a wide range of events and experiences. However, if HowAboutWe can make the discovery and booking process preferable over trawling through individual retailer websites, they can significantly increase their transaction volume by being the go to place to book tickets.

By centralising high quality events and experiences all in one place, and by making the experience of selecting and booking tickets seamless, HowAboutWe can significantly increase the growth and transactions of their marketplace.

Joor
Another good example of this model in action is Joor. Joor is a business to business marketplace that connects designers and buyers in the fashion industry. Joor is replacing a multistep process of writing orders down, scanning them into a computer and them emailing or faxing the order to the designer. Instead Joor offers a single platform to connect designers and buyers and because it’s a marketplace, Joor only makes money when a transaction occurs, so there are no fixed costs on being part of the market.

Again, Joor is able to significantly increase their growth by becoming the preferred method for connecting designers and buyers. Instead of the long, arduous traditional process of placing orders, Joor makes the process simple and efficient. Joor is also able to give smaller designers exposure on the same stage due to no fixed costs and low barriers to entry. As more and more designers and buyers join Joor, growth is going to become self perpetuating as users insist that they conduct all of their transactions through the central platform. This will force the late adopters to also sign up for an account and to start using Joor as their main order platform.

To read more about Joor, take a look at this article by PandoDaily.

How to fuel growth in your two sided marketplace

It’s easy to look at the success of other two sided marketplaces and try to extrapolate that the same lessons will apply to any two sided marketplace post traction.

In reality, this is not always the case.

However, generally there are lessons to learn that should be applied to any two sided marketplace looking for growth.

1. Make virality part of your DNA

Virality is an extremely important part of building a two sided marketplace. You will need to drive your cost of user acquisition as low as possible, and there is no better way of doing this than encouraging your current user base to attract new users.

Virality needs to be an integral part of your product. It is painfully obvious when attempts at virality have not been thought through from the very start of the development. Getting your Viral Cycle time as low as possible will play a significant role in creating a viral product. Try and make sharing a one step process, and try to think how your product naturally lends itself to a new way of sharing.

You also have to have a very strong reason for why your users should share your product in the first place. Often the best reason for a user to invite their friends or contacts is because it will create direct value for the inviting users. In the PayPal and eBay example, both buyers and sellers would usually require the other party to make the transaction through PayPal.

Virality has become an overused strategy for trying to fuel growth. However, it only really works if both the current user and the user who is being invited both derive value from becoming part of the network.

2. Become a utility

The second big opportunity to fuel growth of a two sided marketplace is to become a utility. When you are solving a problem that your users face every day, the volume of transactions within your marketplace will grow much quicker. The problem with many marketplaces is, the problem they are solving is a one time occurrence.

Instead, by becoming a utility, you can transform your product from a novelty to something that your users rely upon in their daily activity. Both HowAboutWe and Joor show how this can be done for two similar, but different models.

Much of eBay’s growth can be attributed to the marketplace becoming full time employment for millions of sellers all over the globe. When you can provide this type of value for your users, growth becomes inevitable.

To read more about this, take a look at my post Moving your product from a fad to a utility.

What have you found to be good strategies for growing two sided marketplaces?

Philip Brown

Hey, I'm Philip Brown, a designer and developer from Durham, England. I create websites and web based applications from the ground up. In 2011 I founded a company called Yellow Flag. If you want to find out more about me, you can follow me on Twitter or Google Plus.