How Most Two-Sided Marketplaces Fail Their Vendors
By: Joe Procopio
Tags: Startup, Entrepreneurship, Product Management, Productivity, Business

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 initial launch.

You’re building a new kind of service, so you’re looking for a new kind of vendor

There’s only one way to escape the gravity of the 2SM death spiral. The marketplace has to offer, transact, and deliver the traditional service in a new and innovative way.

I use Lyft and Uber a lot as an example of this paradigm shift. To get a taxi, you search the Internet for a provider, you figure out the pricing, you call, you figure out how they get to you, you tell them where you’re going, you reach into your wallet for cash or credit card.

With Lyft and Uber, you open the app and push a button.

This creates a completely new type of vendor that isn’t separated from the pack by lack of quality, but by being able to offer an old service in a new way, and being very good at that, likely even in the top tier of it.

Those are the vendors your marketplace needs. And you need to give them motivation to work with you, as well as benefits that enhance their business, not just yours.

How to spot the vendor failure points in a 2SM

When I founded Teaching Startup — a new way to get answers to entrepreneurs — I built it off of traditional startup advising, which I do a lot of.

The reason I wanted to create Teaching Startup was to be able to reach more entrepreneurs with the limited amount of time I have. Not every entrepreneur needs or can afford a full time advisor, and I only have so many hours in a week. There was an equation of value vs. time vs. dollars that I felt like I could solve.

So to do my research, I joined a bunch of advisor-on-demand type services, because even though I wanted to offer a completely new type of service, they were the closest thing available to what I had envisioned. I signed up for established service marketplaces and startup service marketplaces alike.

As a vendor, I discovered that all these 2SMs had at least one, if not several, of the following flaws.

1. The onboarding and vetting process is a mess

In each and every single case, I had to provide my entire career’s worth of information to the marketplace before I would be accepted. Some offered to scrape my info from LinkedIn, but that usually resulted in a bad transfer, and even when it did work, LinkedIn isn’t the best representation of my value as an advisor.

The other popular onboarding paradigm was for me to walk through pages and pages of questions with drop-down answers that rarely fit my skill set. Yes, I do technology, but I’m not an “IT Manager.”

Only one marketplace actually contacted me to confirm any of the details I had given. When I talked to the representative, who was actually in a C-Level position at the company, they admitted that personal vetting was way too costly for them to do, but there was no other way to do it.

By the way, every single marketplace was very interested in me providing referrals to other experts like myself.

2. There is very little matching or tiering.

With every single marketplace, I get more offers for jobs I can’t do than jobs I can, like the ratio is somewhere near 10:1. It’s obvious that the marketplace works on little more than supply and demand.

In other words, when the marketplace lands a customer willing to pay, they blast all the vendors that are close to meeting the customer’s requirements, and then the first vendor to accept gets the gig.

This means a couple things. First, the vendors who provide the most information and react the quickest will get the most work. Here’s the problem. According to the law of best vendors and advertising as stated above, the vendors who are in position to do that likely aren’t as good as the ones who aren’t.

Second, requiring a ton of information from the vendor, along with no proactive onboarding, along with little matching or tiering, means that the marketplace is relying on the customer to do the vetting. This will break the marketplace, and likely in an expensive way.

3. The expectation is that just listing the vendor is valuable to the vendor

You can do a Google search on a traditional service and find the best providers pretty quickly. None of them need another SEO-fueled channel to increase discoverability. A marketplace should help good vendors find new business that is more valuable to them than what’s coming in from those Google searches.

A 2SM should never be a listing service or a rating service. All that does is provide a microcosm of what already exists on the Internet. Thus, the dynamics of a 2SM vicious cycle will always result in one of two things:

The vendor not being engaged because there aren’t enough customers that need the exact value they provide. The vendor not being engaged because there are too many customers that need the broad value they provide.

And another domino falls in the 2SM cycle.

Furthermore, more often than not, the information that the 2SMs choose to display, along with the UX and the UI they use to display it, results in a pretty poor representation of the vendor.

I actually deleted more than one advice-on-demand 2SM account once I saw how I was being sold.

4. The vendors get inundated with noise

Service providers get paid for their time. Time is their most valuable resource. A 2SM does their vendors a huge disservice when they waste the vendor’s time.

As I mentioned in flaw #2 above, I was getting close to a 10:1 ratio of junk offers to real opportunities. But what’s worse than getting a firehose of noise, is not being about way to tweak it or turn it off. In some cases, I was getting four or five different emails that, when I dug deeper, represented the same opportunity that I hadn’t rejected yet.

Then, to fix it, I had to walk back through my profile and change or delete certain information to try to game the 2SMs algorithm (if there indeed was one), to send me less of what I didn’t want.

5. The vendors get punished for vendor leak

Vendor leak, the scenario where the customer uses the 2SM to find the vendor, then goes around the 2SM to engage the vendor, is the scourge of the 2SM. And as it turns out, the less value the 2SM provides to either side, the bigger the problem vendor leak is.

The solution, of course, would be for the 2SM to add more value on both the customer and the vendor side. The solution most 2SMs choose, however, is to punish the vendor by putting limits on the vendor value shown to the customer in an effort to prevent the customer from contacting the vendor directly.

This makes it harder for good vendors to get the business they need, harder for the customer to decide which vendor to use, and harder for the vendor to turn off unwanted noise.

The Solution: The 2SM needs to serve the vendor as well as it serves the customer

Once I decide that my marketplace will be two-sided, the first thing I do is determine what return my 2SM needs to provide to get vendors to transact their business in this new way, and exclusively through my platform.

That return is based on what’s important to their individual business, and most of the time, it’s not just finding new customers for them, it’s finding better customers for them.

A better customer is one that they can serve for less cost, in less time, and at higher margins. There will be different ways for this to happen for different vendors, it takes time to figure out how the marketplace can make this happen for all its vendors, so it’s the part that’s usually skipped.

But when done properly, it means good vendors can do more business at higher margins and in less time. That means better vendors can serve more needs for more customers. That brings more customers into the marketplace.

And that’s actually a real virtuous cycle.

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