I found myself speaking to an entrepreneur recently about how to develop a two-sided market. I thought I would relay some of our thoughts on the topic.

Note that there is a decent bit of literature on this topic, much of which is more pervasive than this post. Crossing The Chasm and Harvard Business Review's Strategies for Two Sided Markets are probably worth a look if you’re interested.

Two-sided networks can make compelling business models as they naturally develop barriers from network effects. A catch 22 makes developing these networks challenging, however. Each side of the network depends on the presence of the other to derive value. Guys need girls to be on Match.com in order to pay for the service, sellers wouldn’t bother with eBay if the marketplace wasn’t rife with buyers and nobody would post a project on elance.com if there was nobody to fulfill the work order.

While there are a number of tactics for building a two-sided, one important consideration is picking which the side of the network in which to build density.

The first element to think about is that one side of the network is often more eager to leverage the network and therefore easier to acquire while the other side of the network remains undeveloped. While sellers, for example, are often happy to list their goods for sale before buyers are on the system, it may be difficult to compel buyers to shop on a network that has no listings. There are two reasons for this. First, in marketplaces where one side of the network can leave behind a digital footprint (such as product listings), this side of the network can derive value passively over time. The can post their products and generate sales down the road. In contrast, the other side of the network may need to be actively searching to derive value, an exhausting exercise if there is nothing to buy. Second, the relative value proposition typically varies for each side of the network. In a product marketplace, for example, the profit motives experienced by sellers can be stronger than simply the opportunity to buy goods from a different destination.

More to come in the next post...