How Most Two-Sided Marketplaces Fail Their Vendors

Five vendor flaws that eventually kill a platform

The crazy thing about most two-sided service marketplaces is that they’re usually only one-sided.

I’ve built several two-sided marketplace startups and advised a bunch of others. The most common misconception I run into is the belief that these marketplaces are simply a virtuous cycle that works like this:

• Vendors join the marketplace for the free or low-cost marketing opportunity.
• The more vendors who join, the more options the marketplace can advertise to its customers.
• The more options the marketplace can advertise, the more customers it will bring in.
• The more customers the marketplace brings in, the more valuable the marketing opportunity is for the vendors.

But when you pull back the curtain, that’s not a virtuous cycle. It’s a vicious cycle. Actually, it’s a death spiral.

This kind of 2SM is basically, on paper, a perpetual motion machine, which is why building one seems so attractive. But like any perpetual motion machine, off paper, it doesn’t work.

Because the marketplace platform doesn’t understand that the vendors are their customers too.

Most 2SMs fail because the best vendors don’t need new customers

You know how you can recognize the top tier of vendors in any traditional service industry?

They don’t advertise. They don’t need to.

It doesn’t matter if the provider is an accountant, a hairstylist, a coder, an auto mechanic, or whatever. A great service provider rarely has spare cycles for new customers, and if they do, there’s always a waiting list of new customers who are more than willing to pay full price.

That breaks item one of the virtuous 2SM cycle above. The best vendors don’t need any new channels for advertising, so they don’t join the marketplace.

The rest of the items in the cycle then fall like dominoes. Limited vendor choice means limited options. Limited options mean fewer customers. Fewer customers means the 2SM goes quiet after an…