Should You Target Supply or Demand in a Two-Sided Marketplace?

A lot of startups—even ones with enormous valuations—are really just two-sided marketplaces.

eBay connects buyers and sellers. Uber connects drivers with those who need rides. Airbnb connects homeowners with travelers who need a place to stay. YouTube connects content creators with those looking to be entertained. Dating sites—like OKCupid—connect daters with dates. The list goes on and on.

In each of these two-sided marketplaces, there is supply and demand. There are a finite amount of people selling memorabilia on eBay, a finite amount of drivers on Uber, a finite amount of hosts on Airbnb, a finite amount of (quality) videos on YouTube, and a finite amount of “dateworthy” individuals on dating sites.

When companies are just starting out, there comes a time in every founder’s life when he or she has to ask themselves whether their startup is going to focus primarily on enhancing the supply side of the equation or nurturing the demand side. When I mentor early-stage companies just getting started out, it’s a question I get seemingly every day.

So which is it?

Why You Need to Focus on Supply

There’s only one clear answer to the question: Follow the pattern of the most successful startups, and focus like a laser on supply.

Why? Switching costs, or the costs incurred—money, energy and time—when a supplier or consumer switches platforms.

There are a lot of barriers standing in the way between a seller on eBay and the potential buyer, for example. The seller needs to create an account. Then he or she needs to take pictures of whatever’s for sale. Next, it’s time to create a listing. Finally, the seller needs to cross his or her fingers and hope that a buyer is interested in conducting a transaction with someone who hasn’t been reviewed by peers.

Over time, if the seller conducts successful transactions, his or her rating will go up. All of this, of course, doesn’t happen overnight.

But once a seller commits to establishing a presence on eBay, it’s unlikely he or she will abandon the platform and set up shop elsewhere. The switching costs are too high.

Why You Shouldn’t Focus on Demand

Thanks to technology, the switching costs associated with customers not finding what they want are negligible.

Imagine a customer goes to eBay and finds only one seller offering the item he or she is looking for. Unfortunately, the item appears to be extremely overpriced. To solve the problem, the customer simply needs to click on the search bar of his or her browser and navigate over to Amazon. Should that fail, the person might head to Jet or conduct a simple Google search. They might seek out even other alternatives.

The associated switching costs are infinitesimal. All shoppers need is a few seconds.

Examples of Startups Targeting Supply

Need a little more convincing on the virtues of focusing on the supply side of your platform? Consider these three cases:

• Airbnb works super hard to get its hosts online. It provides free professional photographers to help make listings beautiful. The company also provides helpful advice (e.g., provide soap!) that hosts can leverage to increase the chances their guests have enjoyable stays. This handholding helps bring hosts into the Airbnb family. Which is a good thing, considering how boring the site would be if it only had three hosts (i.e., three suppliers) in each city.

• YouTube helps content providers produce better videos. The site offers a ton of free tools, including digital studios, editing support, and analytics. It also offers revenue sharing. Altogether, these perks translate into the reality that there are practically countless users uploading infinite hours of footage to the site. Not only can you make better videos, you can make money.

• Ashley Madison, the online dating site that encourages infidelity, infamously went as far as creating fake supply to encourage users to engage with the platform—something that was uncovered when the company’s private data was posted online. According to its own statistics, Ashley Madison had 31 million male users and 5.5 million female users. Turns out up to 95% of those female users weren’t real, but the site’s owners had to figure out how to keep the male users coming back.

If you build it, they (customers) will come—assuming there’s enough supply of whatever it happens to be. By focusing on the supply side of the equation, it becomes that much easier for your startup to reach the next level.