By: Colin Gardiner
An online marketplace is a platform that brings together buyers and sellers of goods or services and other third parties. It provides the medium and infrastructure to facilitate a transaction. Online marketplaces provide key features to create liquidity, such as reviews, payments, messaging, banking, payroll, insurance, and more. It’s crucial to identify the type of marketplace you have to design it for optimal outcomes.
While all marketplaces share common mechanics, they are not built the same way. The structure of a marketplace fundamentally shapes how liquidity forms, how matching works, and where defensibility comes from. Before diving into growth strategies or monetization, it’s important to understand the different marketplace archetypes and what problems each is best suited to solve.
This article is part three of a three-part series on labor marketplaces, focused on how marketplace structure, models, and monetization choices shape liquidity, defensibility, and scale.
Marketplace types
Horizontal marketplace: A horizontal marketplace is a platform that offers a wide range of goods or services across multiple categories or industries. Examples of horizontal marketplaces include Amazon and eBay, while for labor marketplaces, the primary one is Upwork.
Vertical marketplace: A marketplace that focuses solely on one category or industry, such as nurses, retail workers, gig workers, etc., is known as a vertical marketplace. For example, Reflex is a vertical marketplace that specializes in providing seasonal retail workers for staffing purposes.
Managed marketplace: Marketplaces that own or create one side of the marketplace are called managed marketplaces because they take on more activities to facilitate the transaction. These marketplaces typically arise in situations where specific standards or regulations are necessary, such as labor marketplaces for nurses or home care. They can also arise when the marketplace aggregates and assumes some of the supply’s commercial decisions, such as directly staffing demand without the supply’s agreement.
Identifying the type of marketplace you are building is only the first step. Once the structure is defined, the next critical question becomes how transactions actually happen on the platform. That depends on the market making model you choose and how much effort is required from buyers and suppliers to complete a match.
Marker-making model
Matching is the most essential function of a marketplace. Matching leads to liquidity, which leads to the overall growth of the marketplace. There are four distinct types of market-making for marketplaces.
Type of Market Making | Example | Buyer Effort | Supplier Effort | Transaction Standardization | Conversion Rate | Buyer-to-Seller Ratio |
| Marketplace Picks | Design Pickle | Low | Low | High | High | High |
| Labor Picks | Uber, Lyft | Low | Medium | High | Medium | Medium |
Employer Picks | Contracts Counsel | Medium | Low | Medium | Medium | Medium |
| Double-Commit | Upwork | High | High | Low | Low | Low |
Labor marketplaces typically begin with a double-commitment model, unless the labor is standardized, in which case it can be a buyer-pick model. For example, instantly hireable labor is buyer-pick, while contact to hire is double-commitment. The model is significant because the liquidity of marketplaces with a labor pick or employer pick model is significantly different from those that require a double-commitment. However, double-commitment marketplaces have their advantages; they can handle customized and complex requests well, albeit with lower conversion and fill rates. Regardless of the model, it is essential to optimize the search and hiring flow and factors that increase the likelihood of a transaction.
Regardless of the model, it is essential to optimize the search and hiring flow and the factors that increase the likelihood of a transaction. However, the effectiveness of any market making model is heavily influenced by the nature of the supply itself. Whether labor is interchangeable or highly specialized plays a major role in how liquidity forms and how defensible the marketplace can become.
Marketplace structure and homogeneity/heterogeneity of supply
Online labor marketplaces can be organized in two ways: homogeneous or heterogeneous. Homogeneous marketplaces focus on a narrow range of job categories, such as graphic design or writing. Heterogeneous marketplaces have a broad range of job categories. Finding the right balance between these two types of marketplaces is critical to your success.
Consider the following key points:
- Homogeneous marketplaces have the potential to be more efficient and scalable, but they may also face the challenge of commoditization and increased competition.
- Heterogeneous marketplaces have the potential to offer more growth opportunities and differentiation, but they may also face the challenge of fragmentation and a more complex user experience.
The composition of the market, primarily the supply, significantly impacts how the market operates. In particular, whether the supply is homogeneous or heterogeneous can significantly affect the marketplace’s dynamics and overall success, including its defensibility. A homogeneous marketplace refers to a marketplace where the supply, often referring to labor, is interchangeable or similar in nature. This is commonly seen in the gig economy where workers may only require basic skills like driving a car or riding a bike to participate. In such marketplaces, the supply can be easily replaced with one another, and the focus is generally on price competition.
Conversely, a marketplace with a heterogeneous supply is one where the labor pool is diverse in terms of skill level, expertise, and other factors. This type of marketplace is commonly found in industries such as software development, where different levels of technical proficiency and knowledge exist. In such marketplaces, differentiation and specialization are crucial, whereas price competition tends to be less significant.
It’s essential for both buyers and sellers to understand the distinctions between homogeneous and heterogeneous marketplaces. This knowledge can assist buyers in assessing supply quality and making informed decisions about selecting providers in a homogeneous marketplace. On the other hand, comprehending the dynamics of a heterogeneous marketplace can help sellers position themselves and distinguish their services in a competitive market.
The supply characteristics also contribute to the strength of the network effects of the business as demonstrated in the diagram.
| Supply characteristics | Disaggregated | Aggregated |
| Heterogenous | Strong network effect | Medium network effect |
| Homogenous | Medium network effect | Weak network effect |
The more heterogeneous and disaggregated the supply, the more robust the network effects. Why is this? In labor markets where the labor is hard to find, disparate, and non-standardized, the marketplace can add lots of value by reducing search costs. This, in turn, makes the marketplace have a unique supply and ultimately be the primary market that the demand will go to to find the supply. This was the case in the early days for marketplaces like Workrise, formerly called RigUp, which aggregated oil rig workers working in disparate and remote places.
The composition of supply in a marketplace is a critical factor that can significantly impact the success and operation of the market. Whether the supply is homogeneous or heterogeneous can significantly affect how buyers and sellers interact and compete. Understanding these differences is key to thriving in today’s complex and dynamic marketplaces.
The composition of supply does not just affect matching and competition, it also shapes how value is captured. Homogeneous and heterogeneous marketplaces support very different pricing dynamics and willingness to pay. As a result, monetization strategies must be aligned with the underlying structure of the market to avoid friction or leakage.
Marketplace monetization models
Several different monetization models can be used in a marketplace, though the model needs to be closely aligned to the transactional outcome. Let’s review the different take rate models:
- Percentage of the transaction value: Typically, a fee charged to one or more sides of the marketplace
- Listing or membership fee: Fee for using the platform
- SaaS fee: Fees paid for the use of the software for running a business and/or distributing on to the marketplace
- Ancillary services: Paying for insurance, legal, etc.
- Advertising: Paying for exposure to the marketplace audience and/or placement in search.
Choosing a monetization model is inseparable from how the marketplace is built and scaled. The way revenue is generated often reflects which side of the market the platform prioritizes and controls. This naturally leads to the question of aggregation and whether demand, supply, or both should be built first.
Aggregation strategy
Tactically, marketplaces often focus on either aggregation of demand or supply first, though they need to solve both over time:
- Demand – When you control the aggregation of demand, you own the demand sources and/or delivery mechanisms. For instance, in the early days of food delivery, platforms like Grubhub and Seamless only provided the ability to order takeout, while platforms like Uber Eats and Doordash provided drivers, which led to a more facilitated experience. This approach is particularly crucial in markets with homogeneous and less fragmented supply, such as food delivery.
- Supply – One way to make a marketplace dominant is by vertically integrating into the supply side of the business through a platform approach, SaaS, or creating owned inventory. Simply providing liquidity is often not enough to succeed in today’s marketplaces. This approach is particularly important in markets where the supply is highly fragmented, and creating a more streamlined and efficient process can be a significant competitive advantage.
- One side brings the other – A marketplace can ideally aggregate one side of the market and attract the other side to it. In addition, having supply can help a marketplace rank high in organic search results, attracting more customers through Google. This often happens in markets that already exist but lack a robust platform for transactions.
Simply aggregating all the supply or demand is not a winning strategy by itself, as it still needs the presence of the other side of the marketplace. Additionally, unlike aggregators that try to offer a one-stop shopping experience but do not handle the transaction experience, marketplaces facilitate the transaction and own the experience. Generally, a marketplace should aim to be comprehensive without running the horizontal risk of being unbundled.
Building and growing an online labor marketplace requires a deep understanding of the marketplace’s structure, key attributes, and what type of marketplace and monetization models to use. In this next section, we’ll explore strategies to improve liquidity, attract supply and demand, leverage network effects, reduce search costs, navigate disintermediation, embedding, and standardize labor offerings.
If you’re building a labor marketplace and need payroll that actually fits, book time with us.
About the author
Colin Gardiner is the General Partner of Yonder, a $4.64M pre-seed fund that invests in marketplaces and network effect businesses. He is an experienced tech entrepreneur and former economist with a specialization in microeconomics and labor markets.
With a track record of working with over 100 marketplaces, Colin has played a critical role in the growth of industry-leading platforms. He has helped companies raise over $250M and scale multiple businesses past $1B in GMV, including Outdoorsy, Roamly, Tripping.com, Ancestry.com, and JustAnswer. His expertise lies in digital marketplaces and platforms, focusing on growth, monetization, retention, analytics, insurance, finance, and unit economics.
In addition to his work with Yonder, Colin runs the largest marketplace newsletter, Take Rate, which has over 5,000 subscribers. He is also the founder of Karta Labs, a marketplace consulting and advisory business.
Before his career in startups, Colin worked at the Federal Reserve Bank of San Francisco as a Research Associate, where he conducted microeconomic research on the labor market and inflation.
You can learn more about his work at Yonder, subscribe to his newsletter Take Rate, and follow him on X and LinkedIn.