The Uber fallacy: challenging the precedence of a two-sided marketplace
The oft-cited examples of success in the digital age, Uber and eBay have two things in common. They enjoy a billion-dollar monopoly over their respective markets, and they adopted a risky business model: the two-sided marketplace.
Uniting two sets of customers, the supplier and the end-user, two-sided marketplace models generate profit by ‘skimming a little off the top’. Said marketplace has worked wonders for companies like Airbnb, valued at $38 billion, while Spotify’s two-sided ads platform generated an additional $32 million for the streaming service in 2019.
Why is the two-sided marketplace gathering pace?
“People are trying it simply because it’s possible. It’s much easier than it was 10 years ago,” says Fergus Dyer-Smith, CEO of video production agency Wooshii.
“Before the internet, we had no way of connecting people. Now we have mobile devices giving us instant access, and we’re able to connect globally.”
Indeed, convenience is a huge selling point for the model. Thumbtack began its life as a two-sided marketplace, connecting end-users with local tradespersons and vice versa. There’s also relatively little effort involved for the businessowner. “You don’t have to supply goods or services – all you’re having to run is the infrastructure,” adds Mr Dyer-Smith.
Why isn’t everybody doing it?
While convenience and minimal effort might make it an attractive proposition, the model does not come without its challenges – or risks.
“Getting it off the ground takes a huge amount of capital, so you’ll likely need subsidising platforms. The other challenge comes from building both sides. Take our business, for example – we need to find enough people who need video content, and match them with the right balance of suppliers. That makes it really hard.”
Additionally, the market is dominated by titans, leaving little room for start-ups to compete. “There aren’t many ride-sharing apps that are going to take on Uber. Likewise, nobody challenged eBay once they became successful. Once the suppliers are happy with their customer base and vice versa, why would they go anywhere else?”
Without a disruptive product or service, it’s unlikely that mere mortals can reach Uber status. In the event that they do, the model is even more difficult to sustain.
The liquidity issue: how can you make sure both sides are satisfied?
“The other problem is the liquidity issue if you don’t have enough of either side,” says Mr Dyer-Smith. He cites OpenTable as an example, which evolved from a standalone tool managing seating plans to a two-sided system, offering bookings to customers. “Had they not built up a huge database of restaurants to take the bookings, they would have really struggled.”
Beyond acquisition, there is also the ongoing challenge of satisfying both customers, maintaining a steady flow of supply and demand. “To be successful, you need to make sure both sides are satisfied. Uber wouldn’t work, for example, if customers had to wait 20 minutes for a taxi every time.”
The hybrid model: a realistic alternative?
Contrary to popular belief, a two-sided model involves a lot more management than just ‘skimming a little off the top’. This is where a hybrid model comes in, offering a practical solution for small and large businesses.
“The two-sided model doesn’t work on the low end or high end. Small businesses, for example, are driven by price. This means that acquiring one customer could be hugely expensive because they’re not scaling. On the other hand, larger companies are driven by time. A two-sided marketplace is essentially creating more work for them.”
To tackle these challenges, Wooshii proposed a hybrid model, whereby they play a bigger part in managing customers, ideal for larger businesses short on time. “It’s a happy medium because we’re not talking to customers on a daily basis, and neither are the businesses,” says Mr Dyer-Smith.
The hybrid model also allows end-users more flexibility when choosing a supplier, rather than Wooshi simply pairing up two customer types. By the same token, hybrids offer smaller suppliers greater autonomy when choosing their end-users.
Why adaptability is the key to success
While not everybody can be Uber, there is hope yet start-ups. The trick is to build up a database of one or the other, then to evolve once your network is large enough.
Said tactic worked for Thumbtack, which now focuses on lead generation. “You need to start with a good network, and then have the capability to deliver.”
The digital age is changing every day – success comes from keeping up the pace.