Marketplace Business Model: A Secret Ingredient behind the success of Amazon, Airbnb and Uber

5 min readOct 29, 2022

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The marketplace business model is used by the majority of digital apps, e-commerce and aggregator services.

A marketplace is a common platform for buyers and sellers that create trust and allows them to discover and exchange products and services.

Companies using the Marketplace business model are

Airbnb — A marketplace that lets property owners rent out their spaces to travellers
Amazon — aA online marketplace that allows individuals and businesses to sell and display products online.
Fiverr — A online marketplace for freelance services.

Marketplace ensures the balance between the supply and demand of products, facilitates transactions, and creates a trusted and safe environment for users.

For example, Airbnb ensures all quality checks like Safety, Cleanliness, and background checks before they onboard any new property under their own brand name.

Types of Marketplace?

There are different types of Marketplace based on operation work

Light Marketplace — They only managed the platform and don’t indulge in operation work like background or quality checks.
Example: Craigslist
Managed Marketplaces — They do some operational work like Quality checks to make sure that the customer gets the best experience from their services.
Example: Airbnb and Etsy
Heavily Managed Marketplaces — Controls the end-to-end operation and supply chain to focus on Speed, Cost and experience
Examples: Amazon, Uber

Key pillars of Marketplace's business model?

Marketplace Economics — Helps us understand Growth, Supply-Demand Balance along with Price Equilibrium.
Marketplace Science — Match, recommendations engines and marketplace liquidity.
Marketplace Conversion Optimization — Conversion Funnel optimization and Growth loops
Marketplace Trust and Safety — Disintermediation and Keeping bad actors out.

Marketplace Economics

Initially, all Marketplace had Supply and Demand issues i.e to get a customer you need some vendors but to onboard a vendor you need to show some customers.

This is commonly known as a chicken and egg problem.

The network effect in the Marketplace business model

Once you hit a certain scale in your business then you maintain demand and supply with techniques like Surge Pricing, Discounts etc

Price Equilibrium is the art of maintaining the price and the demand curve.

Example: Uber’s surge pricing (price goes up during moments of peak demand).

2. Marketplace Science
Marketplace science involves algorithms and data science models for search, match and recommendations to ensure users find what they need and make a transaction.

Example:

People with a Paid tinder plan get more matches compared with the Free one.
Products with a higher rating and Bestseller tag come at the top of a search on Amazon.

3. Growth Loops and Flywheel

Ever wonder how prices are always low on amazon?🤔
Well, the simple answer is the flywheel 🧐

Let me explain😎

Low prices drive success in e-commerce.

These Low prices attract more customers to buy products from amazon, which propels more sellers to join the marketplace and start selling their products.

More sellers bring more variety in products but also bring competition between them.

Guess what will happen next? 🤔

The profitable one runs ads and tries to rank them higher to get more orders.

Finally, both start competing on prices to get more orders and reviews to rank higher.

This Amazon Flywheel continues to gain momentum and further reduce product prices.

Read more about Network effects (here)

Why Marketplace Business Models are powerful?

They are light assets — Airbnb does not own as many buildings as hotels do.
They have nearly zero marginal costs
Airbnb benefits from external resources (e.g. their hosts) rather than employing people.
They benefit from network effects
In Airbnb, the more hosts register on the platform, the more guests register and the other way around.