A multi-sided marketplace is a digital platform that facilitates interactions between multiple user groups. In this space, each group can provide value to the other. When enough members of one group are present on the platform, this can attract members of the other. This creates a network effect, where the marketplace’s value increases as more users participate. A classic example is a job board, where employers post jobs and prospective employees submit applications.

These marketplaces can benefit both sides: in 2023, Airbnb – a marketplace for accommodation rental – earned a net income of over $4.7 billion while hosts earned more than $57 billion worldwide. Below, we’ll explain what businesses need to know about multi-sided marketplaces, including how they work, how they differ from traditional marketplaces, and their benefits and challenges for users and operators.

What’s in this article?

• How does a multi-sided marketplace work?
  
• How are multi-sided marketplaces different from traditional marketplaces?
  
• Examples of multi-sided marketplaces
  
• Benefits and downsides of using a multi-sided marketplace
  
• Challenges of building and running a multi-sided marketplace
  

How does a multi-sided marketplace work?

A multi-sided marketplace is a digital platform that allows multiple user groups to interact and transact. Here’s how it works.

• User onboarding: The marketplace attracts users from different groups, often through marketing campaigns, partnerships, and referral schemes. It provides clear onboarding processes for each group including account creation, profile setup, and verification procedures.

• Search and discovery: The platform helps users find what they’re looking for, whether it’s products, services, or other users. This often involves offering them extensive search functionalities, filtering and sorting options, and personalised recommendations.

• Interaction and communication: The marketplace facilitates interactions between users through messaging systems, reviews, ratings, and other communication tools.

• Transaction processing: The platform handles secure payments and transactions. It collects payments from buyers, disburses funds to sellers, and manages any associated fees or commissions.

• Dispute resolution: Mechanisms such as refunds, returns, and cancellations resolve disputes between users. These help maintain a fair, reliable environment for all parties.

• Data and analytics: The platform collects and analyses data on user behaviour, preferences, and transactions. It uses this information to personalise the user experience, improve platform functionalities, and make informed business decisions.

• Customer support: The marketplace provides customer support services to address users’ issues and questions. These might include FAQs, live chat, email support, or phone assistance.

How are multi-sided marketplaces different from traditional marketplaces?

Multi-sided marketplaces and traditional marketplaces both facilitate transactions over digital platforms, but they enable different types of user interactions. Here’s an overview of their differences.

Multi-sided marketplaces

• User groups: These platforms serve multiple user groups with distinct needs and offerings. Each group is interdependent, which means one group receives value from the participation of the other. For instance, a ride-sharing app connects drivers with passengers.

• Value creation: A multi-sided marketplace’s value increases as more users join it, due to the network effect. Different user groups’ interactions gain value from their quality and diversity and the number of users.

• Operational complexity: These platforms often require more complicated operational strategies to balance the needs and incentives of different user groups. They might subsidise one side to attract the other, or implement specific features to improve interactions between user groups.

• Revenue models: The revenue model depends on which user group can bear more costs or where the value is higher. It might charge one side a commission while giving free access to the other, or charge both sides different fees based on usage.

• Real-world examples: Multi-sided marketplaces include companies such as Uber – which connects drivers and passengers – and Airbnb, which connects hosts and travellers.

Regular marketplaces

• User groups: These platforms typically cater to a single user group’s needs and focus on connecting buyers and sellers. The interaction between two user roles is primarily transactional.

• Value creation: Regular marketplaces mainly create value through transaction volumes. Having more sellers and products attracts more buyers, but the interaction remains within the buyer and seller framework.

• Operational complexity: Operations are typically simpler and focus on only improving the buyer and seller relationship by managing listings, facilitating transactions, and ensuring product delivery.

• Revenue models: These platforms often rely on transaction fees, listing fees, or advertising revenue from sellers.

• Real-world examples: Traditional marketplaces include companies such as Amazon, where the main interaction is between Amazon and buyers.

Examples of multi-sided marketplaces

Each multi-sided marketplace follows a custom structure to facilitate transactions between different user groups. Here are some well-known examples.

• Uber: Uber connects riders who need transportation with drivers who offer rides, using location-based technology to match nearby options. Its user groups are drivers and riders.

• Airbnb: Airbnb allows property owners to list their spaces for short-term rental by travellers. Its user groups are hosts and guests.

• eBay: eBay facilitates auctions and direct sales for a wide range of products from electronics to collectibles. Buyers can bid on items or purchase them directly from sellers. eBay’s user groups are buyers and sellers.

• Etsy: Etsy provides a marketplace for artists and craftspeople to sell handmade or vintage items and craft supplies directly to shoppers looking for unique or custom products. Its user groups are artisans and shoppers.

• Upwork: Upwork connects freelancers with businesses that need specific projects done. These can range from software development to creative design. Upwork’s user groups are freelancers and employers.

• DoorDash: DoorDash is a platform that allows customers to order food from restaurants and drivers to deliver these orders. Its user groups are restaurants, delivery drivers, and customers.

• Grubhub: Serving the same user groups as DoorDash, Grubhub connects customers with a variety of restaurants for delivery options and assigns their orders to freelance drivers.

Benefits and downsides of using a multi-sided marketplace

Multi-sided marketplaces have unique benefits and downsides that affect users and operators alike. Here are the key advantages and potential disadvantages.

Benefits

• Growth: The marketplace’s value increases as more users join, giving users the opportunity to increase their earnings. For example, more riders on Uber can create more fares for drivers and more guests on Airbnb can result in higher earnings for hosts.

• Product and service delivery: These platforms often make it easier to find and use services or goods. For example, Upwork allows businesses to quickly find and hire freelancers with the specific skills they need, often from a global talent pool.

• Costs: By centralising resources and using technology, these marketplaces can reduce business costs. For instance, Etsy allows individual artisans to reach a global audience without the overhead of a physical store.

• Improvement: The competitive nature of these platforms encourages improvement, both from the platform providers and from users. Users often develop new ways to offer their goods or services.

• Access to a broader market: Users gain access to a much wider audience than they could likely reach on their own. This can significantly increase their customer base and revenue potential.

Downsides

• Dependence on platform: Users might depend heavily on the marketplace for their income. Changes in the platform’s policies, fees, or algorithm can greatly affect that income.

• Commission fees: Most multi-sided marketplaces charge fees or commissions, which can be substantial. For instance, 10% of a freelancer’s earnings on Upwork go toward platform service fees.

• Competition: Although access to a larger market can be beneficial, it also means increased competition. Sellers on eBay, for example, might have to compete internationally.

• Quality control: Platforms must maintain quality and ensure user satisfaction as they grow. Negative experiences with a platform can damage its reputation and user trust.

• Data security and privacy: These platforms collect large amounts of personal data. They must securely handle this data to protect user privacy and comply with data protection regulations.

Challenges of building and running a multi-sided marketplace

Building and running a multi-sided marketplace requires strategic planning, technological expertise, and market insight. Here are some of the biggest challenges and some possible solutions for businesses.

Achieving critical mass

New multi-sided marketplaces must attract enough users from the relevant user groups to make the platform viable. Otherwise, it can’t effectively match participants.

• Solution: Subsidise one side of the market to attract users to the other. For example, a new ride-sharing app might offer discounted rides to attract more riders, which in turn attracts more drivers.
  

Balancing supply and demand

Marketplaces must ensure a balance between the different sides of the marketplace (e.g. buyers and sellers, drivers and riders). An imbalance can worsen user experiences (e.g. long waiting times or insufficient product availability).

• Solution: Try dynamic pricing and real-time adjustments to help manage imbalances. For example, surge pricing during high-demand periods incentivises more drivers to be available on ride-sharing platforms.
  

Building customer trust

Users need to be able to trust the platform for security and reliable transactions, especially when the marketplace handles payments or sensitive information.

• Solution: Adopt strong verification processes, secure payment systems, and transparent user rating systems.
  

Complying with laws and regulations

Multisided marketplaces can face complicated regulatory environments that vary by location and type of service. Compliance can be expensive and resource-intensive.

• Solution: Consult legal experts to help with adherence to local laws and regulations. Adapt business models to different markets when necessary.
  

Maintaining growth and reliability

As user numbers grow, the underlying technology must handle increased traffic without compromising performance.

• Solution: Invest in scalable cloud infrastructure and strong IT support to keep the platform reliable and responsive as it grows.
  

Differentiating from competitors

Standing out in a crowded market is tough, especially when competing with established platforms.

• Solution: Focus on niche markets, develop unique features, or improve user experiences to differentiate from competitors.
  

Refining the revenue model

Marketplaces must develop a sustainable revenue model that balances its appeal to users with profitability. This can be especially difficult when users are sensitive to fees.

• Solution: Experiment with different revenue models such as subscriptions, transaction fees, and freemium models. This can help identify the most effective approach for the marketplace’s specific dynamics.