Blurred Lines: Marketplaces vs Platforms vs Aggregators

As a business model dork, I’m fascinated by the labels we place on monetization structures characterized by network effects and middlemen.

The three most common labels thrown around for such businesses are Marketplaces, Platforms, and Aggregators.

All of them make money by collecting a fee, often called a take rate, for connecting multiple sides, which is determined by the level of value they provide across three vectors: payment responsibility, demand generation, and required resources.

At the risk of wasting my breath, I’m going to take a gaggle of businesses try to put them into mutually exclusive buckets. Then I’ll promptly argue the counter position (against myself) as to why this is a fools errand in the first place.

Let’s get funky.

I look at the four main factors below when comparing the three business models. Here are some relative stack rankings. They are by no means iron clad characteristics.

The main difference between the three models is who is in charge of payment. Marketplaces generally play an active role in the transaction itself, while platforms, and especially aggregators, are less likely to step into the oncoming traffic that is payment flow.

A marketplace has both the benefit and responsibility of controlling the payment process, whether it does so directly or via a third-party service. A platform brings together buyers and sellers—and provides tools that enrich the experience—but it generally does not play a direct role in the final steps of a transaction.

I’d add that a second major factor is the amount of demand the intermediary generates for suppliers.

For example, you don’t go to Patreon to poke around for new comedians. You go to Patreon because your favorite comedian tells you they are uploading content there. Patreon drives limited demand for it’s creators.

However, you go to GOAT to poke around for shoes, not because Nike told you they had Zoom Alpha Flies there. You go to GOAT because you know they have curated shoes that are hard to find elsewhere. GOAT drives demand for Nike.

Cameo is somewhere in the middle. You may go to the site because you know your best friend loves a specific B list celebrity from a 2017 reality show. You may also go because you know Cameo probably has someone funny you can find for a bargain to say happy birthday. It goes both ways.

A third major factor is the required resources to get the network up and running - people and money.

Paul English, Founder of Kayak.com, was asked by Guy Raz on How I Built This if they feared Orbitz.com. His response:

Similarly, well known aggregators Zillow, Glassdoor and Yelp grab their data from other sources. Andrew Chen from A16Z points this strategy out in the Cold Start Problem. These companies use the data in innovative ways to make it instantly useful to users. But they have a head start in creating a network from scratch.

Marketplaces generally need to build out both the supply and demand side from zero, along with the technology. This requires a ton of man power on the ground to coordinate operations (think about all the vans that go around fixing bike sharing businesses in the city) plus technology.

And Platforms compete specifically on the fact that they have unique tooling that will add value for creators. They need a technological advantage to succeed.

The fourth major factor is the amount of commission the middleman can extract from the transaction. And it’s a function of the first three characteristics we covered. Here’s an excerpt from a post we did a few weeks back on the topic:

In general, Marketplaces charge higher take rates than Platforms which charge higher take rates than Aggregators.

Before you scream - Yes, this is a total generalization. I’m sure someone could find a Platform that charges more than a Marketplace. Actually, hold my beer - I’ll do it for you: OnlyFans, a Platform, charges ~20%, while Etsy, a Marketplace, charges ~8% .

But here are some general ranges:

Maybe where the rubber really hits the road is when you compare the margins and efficiency profiles of each business model. My friend Jas over at Trendline HQ made the wonderful graphic below, illustrating how while aggregators have better gross margins to deliver their services, marketplaces and platforms generate more revenue per employee.

One model is not inherently better than the other. And it’s actually hard to put any business with network effects and multiple parties into just a single, mutually exclusive bucket.

I asked James Currier, Partner at NFX as much on Twitter.

He pointed out that putting businesses into one bucket (like I’ve attempted to do) misses the point:

In fact, certain businesses oscillate between the three groups depending on their most recent strategy to retain supply and demand.

So call a business what you want - Marketplace, Platform, Aggregator, Pink, Zebra, or Toaster. At the end of the day it matters if they are able to solve a problem efficiently by using technology to deliver a service or product while increasing the overall size of the pie, rather than just rent seeking.