How to Model Two-Sided Marketplace Economics for SaaS and E-commerce Startups

Marketplace Financial Model: Two-Sided Dynamics

Building a financial forecast for a two-sided marketplace often feels like modeling two separate companies that refuse to talk to each other. Changes on the supply side create unpredictable ripples on the demand side, leading to lopsided revenue projections that don't inspire confidence. The core challenge in learning how to forecast two sided marketplace growth is not about complex spreadsheet formulas; it's about correctly modeling the dynamic relationship between your buyers and sellers. Treating them as a single, blended entity masks the real levers of your business, making it difficult to allocate capital effectively or tell a coherent story to investors. The reality for most Pre-Seed to Series B startups is more pragmatic: a robust model connects these two sides, turning unreliable guesses into a strategic asset for managing runway and hitting fundraising targets.

The Core Engine: How to Forecast Supply and Demand Interdependence

How does growth on one side of the market actually drive growth and revenue on the other? The answer lies in treating your marketplace not as two separate funnels, but as a single, interconnected engine. The first step is to correctly model this relationship to create credible marketplace revenue projections. This involves identifying which side of your platform acts as the primary constraint on growth.

Identifying Your Constrained Side and Key Transaction Unit

Your constrained side is the group of users, buyers or sellers, that you must attract first to make any transactions possible. For a platform like Uber, the constrained side is drivers. Without enough drivers, riders experience long wait times and the service fails. For an e-commerce marketplace like Etsy, the constrained side is sellers. Without unique goods, buyers have no reason to visit. Identifying this constraint is the first critical step in supply and demand forecasting because it tells you where to focus your initial growth efforts.

Once you know your constraint, you must define your Key Transaction Unit. This is the fundamental unit of value exchanged on your platform. For a freelance marketplace connecting graphic designers with businesses, the Key Transaction Unit is a completed design project. For a B2B SaaS marketplace selling software subscriptions, it might be one monthly or annual license sold. This unit forms the basis of your revenue forecast.

A Step-by-Step Guide to Modeling the Connection

With your constrained side and transaction unit defined, you can model the engine. Let’s continue with the freelance marketplace example, where designers are the constrained supply. Here’s how to model the connection in a spreadsheet, like Google Sheets or Excel:

1. Forecast Supply Growth: Start by projecting the number of active designers you acquire each month. This forecast should be based on your user acquisition strategy, whether it's paid marketing, content, or direct sales. Be realistic about your conversion rates and costs.
2. Model the Utilization Ratio: Estimate the average number of projects one active designer can complete per month. This is your Utilization Ratio. Early on, this is an assumption based on market research. Later, it becomes a key performance indicator derived from your own data. For a product marketplace, this might be the average number of items a seller lists and the sell-through rate.
3. Calculate Total Transaction Capacity: Multiply your number of active designers by the Utilization Ratio. This calculation gives you the total number of projects your supply side *can* handle. This figure represents the maximum potential revenue your marketplace can generate in a given period.
4. Link Demand to Capacity for Revenue Projections: Your demand forecast, the number of businesses seeking logos, can now be compared against your transaction capacity. Your actual number of completed projects will be the lesser of what is demanded and what can be supplied. This step directly links your supply-side growth to your revenue potential, creating a dynamic and realistic financial forecast.

A scenario we repeatedly see is founders over-investing in demand generation before they have the supply to fulfill it. This leads to wasted marketing spend and a poor user experience for buyers who cannot find what they need. Modeling this connection correctly prevents you from acquiring buyers who have nothing to purchase.

Recognizing Revenue: Gross vs. Net

A common point of confusion in platform growth modeling is how to recognize revenue. Marketplaces typically process the entire transaction value (Gross Merchandise Value or GMV) but only recognize the commission or fee (Net Revenue) on their income statement. Following the correct accounting treatment is essential for compliance and investor reporting. The core principle is outlined in principal versus agent guidance under both US GAAP (ASC 606) and international standards. If you control the good or service before it is transferred to the customer, you are the principal and recognize gross revenue. If you simply arrange for another party to provide the good or service, you are an agent and recognize net revenue. Most marketplaces are agents. For UK businesses, it's also important to understand how UK VAT rules for marketplaces affect whether you or your sellers are responsible for charging VAT.

Marketplace Unit Economics: Why You Must Avoid Blended Metrics

Now that you're forecasting growth, how do you know if it's profitable? Why can't you just use a blended Customer Acquisition Cost (CAC) and Lifetime Value (LTV)? The simple answer is that a blended average hides which side of your marketplace is a profitable engine and which is a costly, subsidized necessity. Estimating how growth or pricing changes on one side propagates to the other is hard, and blended metrics make it impossible.

The danger of blended metrics is that they can make a fundamentally broken business look viable. You might have a profitable supply side (low CAC, high LTV) but a deeply unprofitable demand side (high CAC, low LTV). The average will look acceptable right up until you run out of cash. What founders find actually works is to rigorously separate unit economics for both buyers and sellers.

Calculating Customer Acquisition Cost (CAC) for Each Side

To achieve clarity, you must track your user acquisition cost marketplace spend for each side independently. This requires discipline in your accounting and marketing analytics.

• Channel Allocation: If you run a Google Ad campaign specifically to acquire sellers, that entire cost, including ad spend and creative development, should be allocated to your seller CAC. If you run a separate social media campaign for buyers, allocate it to buyer CAC.
• Team Allocation: If you have a salesperson focused solely on onboarding suppliers, their salary and commissions are part of the seller CAC. If you have a marketing manager focused on consumers, their cost belongs to the buyer CAC.
• Systematize Tracking: This separation is straightforward to manage in accounting software like QuickBooks or Xero. Use separate expense accounts, classes, or tags for "Buyer Marketing Spend" and "Seller Marketing Spend" to automate the process and ensure your financial reports are accurate.

Forecasting Lifetime Value (LTV) for Each Side

The lifetime value of each side is also distinct and must be modeled separately. A seller’s LTV might be based on the total commission they are projected to pay over several years of activity on the platform. A buyer’s LTV is typically based on the transaction fees generated from their repeat purchases over their entire lifecycle.

At the early stage, when you lack years of historical data, cohort retention analysis is the best proxy for calculating LTV. By grouping users by the month they joined (a cohort), you can analyze their behavior over time. Analyzing how many buyers or sellers from the January cohort are still active three, six, or twelve months later provides a tangible basis for your LTV projections. You can then use these retention curves to forecast the future value of new cohorts, testing those assumptions as new data comes in.

The LTV:CAC Ratio: Your North Star for Profitability

With these separate CAC and LTV figures, you can calculate the crucial LTV:CAC ratio for each side of your marketplace. A common target for a healthy, scalable business is an LTV:CAC ratio greater than 3:1. This means that for every dollar you spend acquiring a user, you expect to generate more than three dollars in profit over their lifetime.

If your seller LTV:CAC is 5:1 but your buyer ratio is a concerning 0.8:1, you know exactly where the problem lies. You can then make precise strategic decisions, like investing in buyer retention features or finding more efficient buyer acquisition channels, rather than blindly cutting a blended marketing budget that might harm your profitable side.

How to Forecast Two-Sided Marketplace Growth by Modeling Network Effects

Everyone talks about network effects, but how do you actually find the point where they start lowering your acquisition costs and prove it in your financial model? This is where many marketplace forecasts fall flat. They treat CAC as a static input that is manually decreased over time based on hope, which can lead to mistimed investments and missed fundraising targets.

Network effects in marketplaces mean the platform becomes more valuable to each user as more users join. This increased value should manifest as improved organic growth and lower paid acquisition costs over time. The key is to measure and model this relationship explicitly.

Defining and Tracking Marketplace Liquidity

The best way to measure the strength of your network effect is through liquidity. Liquidity is the probability that a user on one side of the market will find a successful match on the other side. As Casey Winters, former growth lead at Pinterest and Grubhub, emphasizes, improving liquidity is the primary driver of organic growth and defensibility in a marketplace. To model this, you must track specific two-sided marketplace metrics related to liquidity.

• Search-to-Fill Rate: For a service marketplace like our freelance design example, what percentage of searches for a designer result in a booked project? A rising rate indicates better liquidity and a more valuable platform for buyers.
• Provider Utilization Rate: For a gig platform or service marketplace, what percentage of an active provider’s available time or capacity is filled with transactions from the platform? A higher rate means the platform is more valuable to your supply side, improving their retention.
• Time to Match: For any marketplace, how long does it take for a new listing (from supply) to get its first interaction or for a new request (from demand) to be fulfilled? Decreasing time indicates improving liquidity.

Making CAC a Dynamic Output of Your Model

By tracking these metrics in your model, you can identify the liquidity inflection point. This is the threshold where the marketplace becomes so reliable that it starts to grow organically through word-of-mouth, reducing your reliance on paid acquisition. The critical distinction here is to stop treating CAC as a static input. Instead, your model should treat CAC as a dynamic output of your liquidity metrics.

For example, you might observe that once your Search-to-Fill Rate crosses 70%, your organic user acquisition accelerates. You can model this with a formula in your spreadsheet, such as: CAC = [Base CAC] - ([Liquidity Metric %] * [Organic Growth Factor]). Here, the Base CAC is your initial, fully paid acquisition cost, and the Organic Growth Factor is a coefficient you determine from your data that represents how much each point of liquidity improvement reduces your CAC. This approach directly connects your operational improvements (better matching, higher utilization) to your financial projections. It allows you to show investors a clear, defensible path to profitability driven by the core strength of your network, not just by spending more on marketing.

Practical Takeaways for Your Financial Model

Forecasting for a two-sided marketplace doesn't require an enterprise-grade financial planning tool or a dedicated finance team. It requires a fundamental shift in perspective that is perfectly manageable within the spreadsheets you already use. The key is to stop thinking of your business as one entity and start modeling the interconnected system.

First, map your core engine by defining your constrained side and Key Transaction Unit to directly link supply growth to revenue potential. Second, ruthlessly separate your unit economics. Documenting your assumptions will make model handoffs easier as your team grows. Tracking CAC and LTV for buyers and sellers independently is the only way to understand your true profitability and make smart capital allocation decisions. Finally, model your network effects by making CAC a dynamic output of your core liquidity metrics. This not only creates a more defensible forecast for fundraising but also provides a clear internal roadmap for prioritizing product and operational improvements. This structured approach turns your financial model from a static report into a strategic tool for growth.

Frequently Asked Questions

Q: What is the most common mistake in marketplace financial modeling?
A: The most common mistake is using blended unit economics. Averaging the CAC and LTV of buyers and sellers masks the true performance of each side. This can hide an unprofitable user group and lead to poor capital allocation, ultimately threatening the viability of the business.

Q: How do I forecast marketplace revenue before I have any users?
A: Start with a supply-side forecast. Estimate how many sellers or service providers you can realistically acquire each month. Then, apply a conservative Utilization Ratio (e.g., projects per provider, sales per seller) to calculate your total transaction capacity. This capacity-driven approach creates a grounded, realistic initial revenue projection.

Q: When should I start focusing on acquiring the demand side of my marketplace?
A: You should only scale demand-side acquisition once you have sufficient supply to ensure a positive user experience. Focusing on demand too early leads to wasted marketing spend and high buyer churn because they cannot find what they are looking for. Monitor your liquidity metrics to know when supply is robust enough.

Q: How are marketplace revenue projections different from standard SaaS forecasts?
A: SaaS revenue is primarily driven by recurring subscriptions from a single user base. Marketplace revenue is driven by transaction volume, which depends on the complex interplay between two distinct user bases (supply and demand). This requires modeling their interdependence, liquidity, and separate unit economics, which is not a factor in most SaaS models.