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.