Our Approach to the Marketplace Paradox
Companies following a two-sided marketplace model can benefit from powerful network effects because the value proposition of one side is strengthened by supply on the other side. For example, Uber drivers are incentivized to join the network because of the value created by having a multitude of active users. Customers join the network because they want the ability to easily find a driver who can take them wherever they need to go, something that’s only possible when there are a lot of active drivers. The value for each side of the marketplace is derived from the other side. This is known as the marketplace paradox because it complicates scaling activities.
It’s difficult for resource-constrained startups to simultaneously build up supply and demand while still offering compelling value propositions for both parties. There are three strategies startups use when dealing with this problem.
Integrating with established platforms:
Startups often get around this through various forms of “growth hacking”. Airbnb, for example, integrated with Craigslist, which had a strong user base, by posting property listings with a link to their own website. This provided them with access to thousands of potential users, and they were able to focus on growing the supply side of the business. Eventually, once they had enough users, they were able to facilitate matches on their own platform.
Focus on one side of the marketplace:
Oftentimes, marketplaces are either demand-constrained or supply-constrained. By identifying which category a marketplace falls under, startups can focus their user acquisition efforts on the more constrained side of the marketplace.
Creating an alternate value proposition:
By strengthening the value proposition through ancillary offerings, users will be more inclined to join a marketplace. For example, a freelancing marketplace could offer resources and guides that teach people how to maximize their earnings doing contract work.
“The value for each side of the marketplace is derived from the other side. This is known as the marketplace paradox because it complicates scaling activities.”
Bounty Board is a two-sided marketplace. On the one side, we have a community of innovators who can find validated projects to work on with early adopters supporting them. On the other side, companies struggle to innovate because they might not have the internal innovation capabilities to solve their problems.Bounty essentially connects these two groups. We allow companies to post “Bounties” where they describe the problems they’re facing, with scoped requirements and budgets. Innovators bid on these opportunities and work with the companies to solve their problems.
To bypass the two-sided marketplace paradox, we’re building a resource and content hub for our community of innovators. This will consist of blog posts, podcast episodes, newsletters, workshops, events, courses, and mentor office hours. By doing this, we’re creating a strong value proposition for innovators to join our platform, regardless of the number of Bounties coming through. This makes it extremely easy for us to find communities of innovators to bring onto our platform. Our efforts can therefore be spent pursuing corporate partnerships to generate a consistent flow of Bounties being posted.
We have also noticed that our constraint is on the corporate side of the marketplace. It’s extremely easy for us to find innovators to join our network. We have therefore focused our efforts towards corporate user acquisition. We then onboard community members on an ad hoc basis, to balance out the ratio of bounties-to-innovators.