How to build a two-sided marketplace with the Yelp model… and why Craigslist hates it!

| November 24, 2012 | 1,952 Comments

I’ve talked about the chicken and egg problem in seeding two-sided marketplaces at length earlier. Producers won’t show up without Consumers and vice versa. One of the models that I’d proposed, that works especially well for startups like ShopKick is to build the value proposition in such a manner that your producers bring in the consumers. Another way of building a two-sided marketplace is to do it the other way round: Focus on the consumers and leverage their interest to bring in the producers. The pattern for implementing this is, in my opinion, an extension of the model originally made famous by Yelp.

 

The Yelp Model

Yelp is an online local search service that allows consumers to search for businesses, read reviews and make decisions accordingly. Yelp starts with a searchable directory of local businesses and uses that to gather search traffic. Once there’s enough traffic coming in, it pitches the search leads to businesses which are getting a lot of search-generated views or whose category is a common search term. E.g. restaurants in San Francisco. With the traffic-backed pitch, the businesses are brought on board to claim their listing and advertise for related search terms. Over time, this builds up the producer side of the network.

So that’s special because?

Two-sided markets have a problem because they require synchronization of producers and consumers coming onto the platform for interactions to happen. Since getting both sides in sufficient numbers simultaneously is almost impossible to execute, most marketplaces and platforms try to stage the seeding process getting one side in after the other. The Yelp model is particularly interesting because the staging doesn’t require expensive incentives etc. and doesn’t need to be coordinated in quick succession as consumers get value from Yelp’s search engine even when the merchants aren’t on board.

However…

The problem is Yelp’s model isn’t applicable to most marketplace startups because they do not necessarily offer a standalone value proposition like directory search. Most marketplaces start with the aim of matching buyers to sellers and actually need both sides to be on board. However, with a few tweaks, the essential principles of Yelp’s model can still be applied to a broader range of platforms and marketplaces.

 

The Generalized Yelp Model

The Generalized Yelp Model takes a leaf from Yelp’s playbook and takes the following route:

 

Supply Proxies

 

Supply proxies are data points that represent true supply but that are not actually created by the producer. The platform, hence, doesn’t own the supply side yet. The idea, ultimately, is to have producers come and claim their supply proxies and eventually create more supply on the  platform.

In the case of Yelp, the supply proxies were the directory listings. In the case of TripAdvisor, the supply proxies are the hotel or restaurant listings. Also, the Yelp model works because it takes the Yellow pages model and adds an extra layer of functionality: search. Search makes the value proposition much stronger and the product more user-friendly.

In recent times, several niche marketplaces have emerged leveraging this model. Most of these follow the same pattern: Source listings from Craigslist, create a better search and navigation experience, draw traffic and convert to leads. Craigslist (in)famously has caught on to the trend and has been sending cease and desist letters.

The Craigslist case notwithstanding, this continues to be a great model for startups with great technology but a distribution problem to work around their distribution.

 

Making It Work

There are, of course, several factors that determine the success of this model:

  1. The original source of data points: The relevance of the marketplace depends on the strength and quality of listings that are scraped. Local commerce startups may rely on yellow pages but YPs are often outdated.
  2. Legalities of scraping: Craigslist doesn’t like it. Just be sure you’re sticking fingers into the right pie.
  3. Ability to provide a better transaction experience: The marketplace that uses the scraped listings should have compelling improvements in what it offers to the producer to attract the producer away from the marketplace she is currently using. This could include frictionless and secure transactions, better customer management, a more targeted and niche community more relevant to the producer etc.
  4. Ability to own the transaction: All the above are pointless unless the marketplace can own the transaction. In many ways, the ability to own the transaction and manage it end-to-end acts as the value proposition for producers as well as a guaranteed revenue stream for the platform itself.

Have you tried using this model or variations of it?

If you liked reading this post, you might want to get a free digital copy of the forthcoming book PLATFORMED.

 

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Filed in: Growth, Seeding Platforms and Networks
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