issued on:
June 23, 2025
author:
Monday Price Point:
Following last weeks newsletter I got this question from a reader:
"How would you approach a two-sided business model where one side is generating ecommerce orders that need fulfilment (through the Network), and the other side is made up of connected distributors who do the fulfilment (drop shipping orders)? Both sides have a need, one wants to sell more and have their orders fulfilled, the other wants to receive more orders and ship products."
So the reader is trying to:
1) Get a 2-sided marketplace going.
2) Monetize it.
Basically todays newsletter is breaking down these 2 bullets
First bullet is going to be on the concepts and dynamics of 2-sided marketplaces and second bullet (our usual 'How to do it') is going to be on how to price and monetize.
NB: I'm going to use basic examples like AirBnB in this post, but I've done marketplaces for industrial spare parts, equities dark pools, open source ecosystems, identity data rights, shipping data and more - and the same principles apply for all.
How to Get a 2-sided Marketplace Going
Bullet 1 speaks to the fact that all 2-sided marketplaces need critical mass to work.
Initially this is because marketplaces are networks - their main value is in its participants.
But further, they are also ecosystems, which is a particular type of network where the network effect comes from sub-sets or groups within the network having different unique roles, that interact with other subsets to create value.
Without ecommerce stores you can't get fulfilment providers - and without fulfilment providers you can't get ecommerce stores. And online forums need posters and repliers. Uber needs drivers and passengers. Social media need both creators and audience. And so on.
Technically this is because all marketplaces are bringing together supply (ecommerce stores with orders) and demand (fulfilment providers who want to fulfil orders) and incentivizing them by bringing down search costs and transaction costs - including cost of risk as the marketplace can ensure transactions happen as expected (people get paid, goods are as expected, online content is moderated etc.).
So Amazon works because:
- It has a lot of participants.
- Participants are divided into buyers and sellers.
- Amazon makes it easy for me to find what I need (search cost) and easy and safe for me to buy it (transaction costs)
But because of these unique roles, you also have the problem that one side has to go first - buyers wont come if there are no sellers and sellers wont list if there are no buyers. So nothing happens. Marketplace dies before it gets going.
I call this the 'Chicken and Egg-problem' of 2-sided marketplaces.
Most people who create marketplaces fail because they focus on facilitating the trust and transaction mechanisms that bring down transaction costs and don't have an answer for the larger problem of bringing down search costs - the fact that I can 'go there' to find what I'm looking for.
Take Alibaba .com , craigslist, AirBnB or Uber : they all solved the supply of the thing they were selling fantastically well while only having a 'good enough' solution for transaction costs. Goods can still be less than expected, apartments not clean, drivers rude or no shows - but as long as it is not a complete scam it simply matters less compared to the fact that I can find what I need in an instant.
Why?
Well, if I have a lot of supply then the price inside the marketplace will drop. So if I have 100 listings on AirBnB that match my search criteria the chance of me getting a good deal is far higher than if I only have 5.
100 vs 5 listings can be the difference between a nice 2-bedroom in the city centre for $250/night vs. a run-down 1-bedroom in a poor location for $400/night.
While you could theoretically search for the additional 95 rental options elsewhere to get the same good deal the search cost is huge - it could take days of work, which might well cost you far more tan the $150 price difference, even factoring in the quality of the listing.
This supply-demand aspect is why search costs are far more important than transaction costs for marketplaces - in this case the risk that the listing is not as advertised or the hassle of communicating with the host and completing the booking.
So most marketplaces should focus on first finding enough supply.
If supply is there - all the dispersed demand that exists in the market will soon get pulled in.
And after a while, when the marketplace has aggregated most of the demand in the market, this decreases demand outside of the marketplace.
So suppliers that weren't a part before now sign up
Which now makes search cost outside of the marketplace even higher as there are fewer suppliers.
Which makes buyers go to the marketplace even more.
And so on.
This is the network effect that Amazon has been really good at.
And basically it breaks down into 3 very distinct events or 'tipping points':
- Getting the first buyers/sellers into the network.
→ Why should I list my stuff with you? - Network benefits exceed network costs to sellers.
→ This is the best place to sell my stuff. - Network benefits exceed all other alternatives available to buyers.
→ This is the best place to buy this stuff
Basically you have 4 distinct phases of monetization or pricing in between these 3 tipping points.
Here is how you do it (the pricing part):
Remember, the reader is trying to:
1) Get a 2-sided marketplace going.
2) Monetize it.
If we have the 3 critical events in a marketplace evolution, then we get teh following 4 phases before and after:
Phase 1: From Zero to 1.
In this phase you just try getting any sellers to list with you.
The pricing strategy you should deploy here is best described as 'Begging and bribing'.
Just do anything to get sellers to list with you. Pay them. Offer a ton of free services. Go do free photo shoots of their apartments.
In an industrial spare parts network we once offered spare-parts holders to give them a % of inventory value they made available to the network. And we would go and integrate with their inventory systems for free. So: no work for them + free money based on the size of their inventory.
You can charge a % of sales or a $ per transaction in this phase, but the only point in doing so would be to create trust in the market for why you are doing it and to be transparent about a future model.
From a monetization perspective you are not trying to get paid yet.
Most people vastly underestimate just how insanely generous you have to be to make this really work.
Phase 2: Getting the Supply Snowball rolling.
In this phase you have a few sellers and you are simply trying to get to that first stage of critical mass where sellers don't need to be bribed to join.
To do this you need buyers.
This is the hardest phase of any marketplace and where most fail. This is the chicken-egg problem from above.
The pricing strategy you should deploy here is best described as 'Free customers!'
Because that's what you should try to do: get your sellers free customers.
Which means that you're the one paying to get those customers.
The food delivery portals like Wolt, Hungry .com, Just-Eat and so forth are all super aggressive on marketing to the end customers. As are AirBnB, Uber, E-toro, Craigslist and all other marketplaces.
This is also why marketplaces usually have the best luck by starting in a very niche domain (Amazon started with books only), because that makes it easier (cheaper) to market to aggregate demand.
In this phase you can start to monetize both on transactions and on sellers.
But any monetary friction you insert will slow down the growth of the network. So be careful.
Phase 3: Monetize and reinvest
In this phase you now have a true, net-free inflow of sellers.
Search costs are now getting low, so it's now time to really focus on transaction costs.
The pricing strategy you should deploy here is best described as 'Low taxation'.
Which means that you can take a cut out of any transaction, as long as you are providing a solid, net positive value in terms of lowering search and transaction costs.
You can also charge for various services in the marketplace (e.g. premium listings etc.).
What you should probably not do yet is charge fixed participation fees from either buyers or sellers - e.g. a flat subscription to just be a member of the marketplace.
So the pricing rests on the activity in the marketplace, not the membership.
If you tax low the network will keep growing. If you tax high it will stop.
Up to you how you want to play this.
It's a present-future tradeoff and depends on both the situation, competition and your goals as the owner.
But you can make fantastic money on this.
Phase 4: Market Owner
In this phase you have aggregated a majority of the demand in the marketplace, and you now have a license to print money.
You have, in a sense, captured the market.
Because the dynamics of ecosystem participation means that search costs everywhere else for both buyers and sellers are very high, which now becomes the primary driver of your pricing power.
And time will compound this as habit and standard business operations just rely more and more on your marketplace and have all other avenues to transact withers and dies.
I sometimes do pricing for companies that have gotten here, but don't know it: they are middlemen to all transactions in a large pool of business and they are not getting paid.
This is dumb.
The pricing strategy you should deploy here is best described as 'Try not to get too excited'.
This is tongue in cheek, of course, but the general gist is: you can charge in any way you want - transaction costs, % of sales, licenses to participate for both buyers and sellers, charge for services etc.
And you can charge a large % of the actual true economic value of your network - i.e. of the actual search and transaction cost benefits you provide.
But with super-large profits you will also attract attention - and competitors.
Amazon have tons of competitors, and they all have the same playbook: get critical mass and search costs down for a sub-segment. Alibaba did it for B2B and for chinese sourced goods. Lots of specialty ecommerce stores do it for their particular product category (e.g. collectibles, art, cars, pets, social media on a specific campus, or just for your church etc.).
This allows them to get to Phase 3 for a small, but defined part of the market. And then expand from there.
So the job of your Phase 4 pricing is to 1) make a ton of money while 2) not be so greedy as to feed the niche competitors too much.
Amazon, for example, still is way cheaper for most buyers in most product categories in most places. Not all. But most.
So for our reader question my answer is this:
- Focus on getting a ton fulfillment providers on the platform first. Bribe them.
- Then focus on getting some ecommerce buyers on. Spend marketing to get here. You can charge on transactions, but be careful.
- Once fulfillment providers start to flow in more steadily you can add services in the form of premium listings, better functionality and so forth. Mostly to them. You can still charge on the transactions, but remain careful.
- Finally, when ecommerce buyers start to flow in on their own you can increase prices, but always with a keen eye for not slowing growth down or feeding competition.
Sorry for the long post today - got excited!
As promised: a point about pricing every Monday.
PS: if you have a topic or question around B2B SaaS pricing - simply reply to this email. I read it all.
