Two-Sided Network Effects in the Sharing Economy
Articles:
- https://www.linkedin.com/pulse/uber-airbnb-challenges-two-sided-markets-roderick-huiskamp
- https://digital.hbs.edu/platform-digit/submission/airbnb-reinventing-hospitality-with-network-effects/
Network effects are often mentioned when talking about popular social media platforms such as Facebook, Whatsapp, etc or content platforms such as Instagram, Youtube, etc. However, with the rise of the sharing economy, we have now begun to see businesses take network effects one-step further through leveraging two-sided network effects. Before deep diving into companies who have intelligently employed these two-sided network effects, a question one might ask is What is the sharing economy? The sharing economy, in essence, moves away from the traditional business model of businesses selling consumers a product and rather comprises of a peer-to-peer platform. Startups that have been the rising stars of the sharing economy include Uber, a ride sharing platform, and Airbnb, a home-rental platform.
The interesting thing about the business models of both Uber and Airbnb arises from the success of their business hinging on not just one but two network effects for the two types of customers that use their product. In the case of Airbnb, these two types of customers customers are the individuals who put their homes on rent and individuals who rent out available listings. Similarly for Uber, its two customer types are drivers and riders. Thus, both customers need to clearly see the value proposition in order for the network to grow which poses a unique challenge to these types of businesses. The two types of customers are essentially dependent on each other as value exists for homeowners or drivers only when there exist sufficient renters or riders and vice versa. This is because as the number of homeowners increases, renters have a wider variety of options to choose from. Similarly, as the number of renters increases, the homeowners have greater potential for profits due to more demand. The overall value of the network increases when the network of both types of consumers grows.
Airbnb, in particular, employed a clever strategy to incentivize both homeowners and renters to use their platform. For homeowners, Airbnb allowed them to list their properties on both Craigslist and Airbnb thus lowering the barrier of entry homeowners experienced to enter the network. Meanwhile for renters, Airbnb employed Facebook Connect whereby renters could see which friends had stayed at a particular homeowners house/were friends with the homeowner. Thus, as users saw more and more of their friends becoming friends with homeowners, it created a sense of trust in the Airbnb platform and incentivized new users to come on to the platform. Over the course of 5 years, the proportion of both homeowners and renters on Airbnb increased dramatically as a result of indirect network effects.
Thus, as can be seen, two-sided network effects have proved quite useful for companies such as Airbnb and Uber.