NB: This is a guest article by Tao Tao, co-founder and vice president of product at GetYourGuide.
Peer-to-peer marketplaces are popular at the moment. Having attained web fame in second-hand marketplaces (eBay), they have now become popular business models from accommodation (Airbnb) to tours and activities.
In two articles, Iâ€™d like to briefly summarize the economics of peer-to-peer marketplaces and collaborative consumption, identify its key drivers and enablers, and suggest how and if businesses should leverage the power of peer-to-peer marketplaces.
What is the difference between peer-to-peer, C2C and collaborative consumption? These terms are often used interchangeably.
- Peer-to-peer means that peers provide services or goods to each other, eg. on eBay where consumers sell goods to each other.
- C2C (customer-to-customer) is a sub-group of peer-to-peer and adds the restriction that peers be (mainly) non-professional in nature, eg. when there were hardly any professional vendors on eBay.
- Collaborative consumption is a general movement that describes how people consume goods and services as opposed to peer-to-peer that describes the organizational relationship of consumers and vendors to each other.
[FYI: As a primer into collaborative consumption, I will refer to Beyond Zipcar: Collaborative Consumption. In essence, users in a world of collaborative consumption can have the benefit of ownership of a certain good or service without actually having to own said good]
Collaborative consumption can be categorized into three types:
- Products as services: privately-owned good can be shared or rented at lower cost than purchasing these goods outright. Example: car sharing with Zipcar.
- Redistribution markets: instead of discarding a certain good, it can be sold for cash, given away for free, or swapped for a different good. Example: selling used goods on eBay.
- Collaborative lifestyles: people with similar interests share and exchange assets such as time, skills, space or money. Example: co-working spaces.
It is important to note that not all collaborative consumption networks are peer-to-peer in nature. Zipcar for instance is not peer-to-peer because the cars are not provided by the consumers to each other but by Zipcar. Consumers simply benefit from not having to own the car in order to enjoy the benefits of being able to drive around in them.
Collaborative consumption describes the economics of the leveraging the group and and sharing whereas peer-to-peer explains the power of having a special type of marketplace for which sharing and the group are necessary conditions.
Why is collaborative consumption powerful?
Collaborative consumption is powerful because it lets people consume goods that they could not afford to consume or at much lower cost than before. Economically speaking, collaborative consumption reduces the rival nature of goods.
A perfectly rival good is something that can only be owned or consumed by one person (eg. a passport), and providing that good to other people imposes a cost (eg. you have to issue a new passport for every person).
Non-rival goods on the other hand allow for possession or consumption by multiple consumers because the cost of providing that good to an additional consumer is zero or really low (eg. access to a library). In-between these two extremes there exists a spectrum of goods that have higher or lower cost for multiple re-consumption.
Hence, reducing the rival nature of goods means that goods can now be consumed multiple times by several people.
The reason many goods can only be consumed once in the first place is either because they are not durable, i.e. they can only be consumed once before they perish (eg. anything edible but we are not concerned with non-durable goods for this analysis) or because access cost is prohibitive.
Collaborative provides consumers with access to goods and services by removing or strongly reducing the cost of ownership through the power of the group. To properly understand this important point, we must look at fixed vs. variable cost and idle capacity.
The prohibitive part of ownership is usually the fixed cost component (eg. buying a car or a machine) and not the variable cost component (eg. car maintenance and fuel). Through the power of the group, the fixed cost component can be pooled and spread across multiple users over time (eg. only one person needs to buy a ladder for it to be used by the entire neighborhood).
This, however, requires that two important criteria be fulfilled: coordination and sufficient capacity for multiple parties to have access to the same good at either the same time (eg co-working spaces) or sequentially (eg. car sharing).
In fact, idle capacity is the single most important characteristic for goods in collaborative consumption to exhibit. If you think about it: most of the goods you own are only used a fraction of the time (car, expensive tools, etc.) and could easily be useful to other people (possibly in exchange for some money or other benefits to lower your initial fixed cost investment).
That is: if the sharing could be properly coordinated. And this is exactly where companies like AirBnb come into play, especially when coordination needs to go beyond the neighborhood to national or even the international level. I will talk about coordination and idle capacity in more detail in part 2.
Why are peer-to-peer marketplaces powerful?
Peer-to-peer marketplaces are powerful for several reasons. One reason is that marketplaces in general are powerful. Without going into too much detail, one benefit is the dis-intermediating effect that marketplaces have by cutting out layers of middle-men.
Middle-men are often required because of high access cost to a certain good or service. For example, in travel that used and continues to be the high cost of access to knowledge about the places travelers wish to travel, hence the need for middle-men to provide this knowledge and possibly arrange a booking.
Another great thing about marketplaces is that while revenues scale, cost donâ€™t have to scale proportionally (economies of scale), which often leads to a market structure with a few powerful companies (monopoly or oligopoly).
Case in point: the online travel agent (OTA) landscape with its few but powerful players (Booking.com, Expedia, etc.). This is usually a good thing for consumers (and not so much for the middle-men) because the efficiencies of reducing multiple layers of middle-men to just one layer (one monopoly marketplace or competing marketplaces) usually leads to lower prices and more convenience for consumers.
Secondly, there are often intrinsic benefits to peer-to-peer marketplaces such as the social benefits of meeting like-minded people.
The most important benefit of peer-to-peer marketplace is that in theory they can be better at solving the chicken and egg problem that is inherent to any new marketplace. To arrive at this reasoning, it must be understood that another advantage of many marketplaces and platforms in general is the existence of network effects.
If network effects exist, the more users a network has, the more each users benefits. That means that the value for each marketplace participants increases as the marketplace grows. Think of the AppleÂ AppStore: more apps to lead more users leading to more apps produced, and so on.
The problem is with kick-starting this process (eg. nobody will make an app unless there are users) and here lies the theoretical advantage of peer-to-peer networks: in a traditional two-sided market with buyers and sellers, you will require sufficient sellers to make the platform appealing to buyers.
In peer-to-peer networks networks where buyers are also sellers, you could make a network work with much less participants because of increased product or service diversity with just a few participants.
Consider this: in a traditional two-sided marketplace, it is generally true that “number of sellers” plus “number of buyers” equals “total market participants” because sellers and buyers are mutually exclusive groups of market participants.
In peer-to-peer networks this is not the case because buyers can also be sellers, so you will get that â€śnumber of sellersâ€ť plus â€śnumber of buyersâ€ť can be greater than the total number market participants. And not only is the number of potential transactions greatly increased but there is also a potentially higher diversity of products.
Diversity, however, is a double-edged sword because you donâ€™t want everyone offering the same thing in slightly different colors. Product relevance is the keyword here and weâ€™ll talk about it in more detail in part 2.
Also, note that although in peer-to-peer marketplaces n market participants could in theory enable n x (n-1) transactions (i.e. each market participants could offer something to the others), the number of possible transactions does not imply actual transactions, which will still be governed by the budget constraints of the market participants (i.e. how much money they have).
The number of possible transaction only shows that – all other things being equal – a peer-to-peer marketplace might have an easier time solving the chicken and egg problem because thereâ€™s nothing worse than an empty disco.
A platform like Airbnb can work well with just three market participants with sofas (n = 3) : they can book each other resulting in 3 bookable products and a maximum of 6 transactions whereas a purely two-sided platform such as a hotel booking website with 1 hotel and 2 customers – hence also 3 market participants – will only result in 1 bookable product and 2 possible transactions.
As a final note, when we started GetYourGuide, we had no clue about sales, so peer-to-peer seemed like a good way out to build a marketplace without the sales part. The assumption was that if we build it, they will come.
A matter of balance and marketplace positioning
Not every marketplace can or should be peer-to-peer in nature. There is a spectrum of marketplaces ranging from pure two-sided marketplaces such as Amazon to pure peer-to-peer marketplaces with hardly any professional sellers.
eBay is an example of a company that started out as a strictly peer-to-peer marketplace but moved towards a more classical two-sided marketplace as it started to shift its focus towards professional sellers.
NB: In part 2, I will discuss key factors that create more favorable conditions for peer-to-peer compared to traditional two-sided marketplaces, and give recommendations on how to best leverage them. We will take a closer look at ones including a closer look at the concept of idle assets, coordination, marginal cost and revenue, product relevance, regulation, and other relevant drivers and enablers.
NB2:Â This is a guest article by Tao Tao, co-founder and vice president of product atÂ GetYourGuide.