The Rise of the Three-Sided Marketplace

Multi-sided marketplaces are nothing new. However, their presence is rapidly expanding as new technologies create more opportunities to handle the complex logistics of a successful marketplace. Traditional two-sided marketplaces present a disjointed experience — the buyer side (or order placement), the payment processing, and the seller side (or delivery of the service) are all managed by separate entities. While this has long worked well for marketplaces like eBay and Etsy, we are now witnessing a new generation of marketplaces that are extremely defensible and rapidly increasing their market share — three-sided marketplaces.

Balancing the logistics of a three-sided marketplace is a daunting task, but it can be accomplished, and many are finding a way to do so. Successful multi-sided platforms like Uber have solved the “chicken and egg problem”, and now on-demand startups are figuring out how to solve the “chicken, egg and nest problem”.

As we move towards a world where marketplaces are dominating everyday transactions, one of the main market opportunities to arise is convenience. Three-sided marketplaces effectively eliminate all of the hassles involved with completing a transaction between one party and another. While the “middleman” concept is nothing new, technology has opened new doors and provided the ability to monetize a marketplace from three sides, instead of two.

Eliminating Logistic Pain Points

When a transaction does not go as planned, the marketplace is typically the one who takes the hit. Nobody blames the Uber driver, we blame Uber itself. The two-sided marketplace has to accommodate both sellers and buyers through support and education on how a transaction should take place. When we bring three sides into the picture, many of the logistical pain points of a transaction can be eliminated. The marketplace takes complete control over the user experience, simplifying everything from the payment process to the delivery of the goods or services.

Beepi, a marketplace for used cars that delivers vehicles to buyers’ homes, has set out to change the way we buy and sell preowned vehicles. Beepi removes the hassle of finding, negotiating, and ultimately buying a used vehicle by curating its marketplace. The company performs an 185-point inspection at its distribution center and only vehicles which meet certain criteria are allowed in the marketplace for sale. Beepi also eliminates the many pain points of selling a vehicle. The company guarantees a sale within 30 days at a price $1000 higher than a local dealer by determining prices through a proprietary algorithm that shows how much a vehicle is selling for across different areas.

When we launched Gone, a mobile-first service that eliminates all the pain points involved with trying to sell something online, convenience was crucial to pulling sellers away from traditional second-hand marketplaces such as eBay and Craigslist. We developed a recommerce system in which sellers send Gone a photo of their items, and our pricing algorithm scans a range of online marketplaces to determine the optimal prices at which we can resell the items. Partnering with UPS, we automatically ship our sellers the necessary packaging materials, as well as offer concierge pick up services to remove all friction involved in selling second-hand goods. This recommerce model is increasingly affecting how consumers make purchase decisions. Just as consumers have always factored in the resale value when purchasing big ticket items such as a home or car, Gone makes it dead simple for consumers to unlock value in a wide range of past purchases such as electronics.

The RealReal, a consignment marketplace for luxury goods, has also mastered the three-sided marketplace model. They require sellers first to send their products to a centralized warehouse where the company performs a rigorous authentication process to eliminate counterfeit items, uniformly photograph the items, and then resell them. This eliminates all the hassles for sellers of high-end merchandise as well as ensures a seamless, trustworthy experience for buyers.

Better data, algorithms, and tools are allowing traditional marketplaces to reduce the issues that arise with increased complexities in logistics and eliminate many of the pain points that have long burdened traditional transactions.

Defensibility

Only when liquidity has been established between two sides can a marketplace truly gain negotiating power with the third side, and marketplaces are figuring out how to do this. Postmates founder Nabeel Hyatt stated that rather than engaging all three sides of their marketplace at once (its couriers, restaurants, and customers), the company first focused on two sides — its couriers and pleasing its customers. Postmates couriers started out in “disguise”, picking up orders and delivering them to customers without involving the restaurants. Only after Postmates drove millions of dollars in revenue to the restaurants did they approach their merchants and monetize the third side of their marketplace.

By waiting for the right moment to engage with the 3rd or 4th side, Postmates shows us that with a narrow focus a marketplace can be very efficient and avoid the need for changing its product or service or accommodating the demands of multiple sides. Postmates is now able to make money from their customers by offering speedy delivery, from their restaurants or merchants by driving them revenue, as well as from their couriers by offering insurance packages and better gear so they can make more deliveries. When three sides of a model can accelerate each other, a new breed of fast-growing, defensible marketplaces is born.