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What is the Peer-To-Peer Business Model and Does it Work?

Along with technological advances, businesses have evolved accordingly in an increasingly global marketplace. As an entrepreneur, you’ll have to eventually consider these developments and what opportunities they present to your company’s growth.

In this article, we will look at the Peer-To-Peer (P2P) business model, which is primarily driven by technology, how these generate revenue, and examples of companies that have been hugely successful using this type of business model.    

 

What is the Peer-To-Peer (P2P) Business Model?

Unlike traditional business models, P2P companies are ‘decentralized,’ meaning they don’t sell finished products or services through employees hired to carry out production. Instead, two companies trade with each other to service the market without the involvement of a third party. In most instances, independent businesses own the tools needed to do their job. For example, an Uber driver owns the car they drive.

Technology facilitates this where products and services can be found using search engines and online platforms. However, while traders who use this business model have access to millions of users, it is a highly competitive example. For example, although e-commerce company Etsy has 39.4 million buyers, only 2.1 million sellers use this online platform. 

This standard of operation is also heavily reliant on the entrepreneurial judgment of the contractor to manage risks such as providers who fail to deliver, deliver a poor-quality product, or buyers who don’t pay. In addition, when adopting this business model, it’s important to keep in mind that it is less stable than traditional methods because owners are not in control of costs. For example, P2P business owners don’t get an income when the business is ‘quiet’ and directly suffer losses.

Now that we’ve seen the possible pitfalls let’s look at the opportunities for making an income.

 

How does the Peer-To-Peer Business Model make money?

 

One of the ways that P2Ps make money is by charging commissions from sellers that use their e-commerce platform. For example, Uber charges 25% per transaction, and Etsy charges a 5% fee on the final sale of items sold through their website. 

In addition to this, and depending on the type of P2P business, they may charge a fee for listing your product or service. Etsy, for example, charges 20 cents. Similarly, although free to use for buyers, eBay charges sellers a listing fee plus a commission for each completed transaction. 

Additionally, another form of income is giving customers the option of promoting their listing to get better access to potential clients. Add-on services can also be included to add value to your customers and, by extension, increase revenue by charging extra for payment processing.

 

Examples of Peer-To-Peer Business Model

If you don’t yet have the inspiration for the next groundbreaking P2P business, check out how the following e-commerce operations have revolutionized the online marketplace.

1. Airbnb: This American company was established in 2008. This hybrid model works through intermediary services such as providing a platform that connects buyers and sellers as well as processing payments. However, contractors who deliver the service are private homeowners who avail their homes to vacation homes for a predetermined time, while Airbnb makes their profit from the commission made from each booking.

2. Uber and Lyft: Uber was founded in 2009 and is, at the time of this writing, used by 101 million users. This ride-hailing, food, and package delivery service offer dynamic pricing where prices fluctuate based on supply and demand, and customers know what the service will cost upfront.

Lyft came on the scene in 2012 and, similar to Uber, is a mobile app where you can find vehicles and motorized scooters for hire. It also offers a bicycle-sharing system.

3. eBay: This e-commerce network, established in 1995, offers consumer-to-consumer and business-to-consumer services. It’s an online auction and shopping website where buyers can bid for various goods and services worldwide and also have the option to Buy Now. 

4. Etsy: This platform was founded in 2005 and is a network on which you can buy and sell handmade, vintage (classified as older than 20 years) items and craft supplies. Users can find the kind of jewelry, bags, clothing, home décor and furniture, toys, and art that you might find at a craft fair, where sellers get their own storefront.

A decade after its establishment, Etsy launched Etsy Manufacturing which allowed sellers to contact third parties to manufacture their products. Competitors such as Amazon Handmade have differentiated themselves by aligning themselves with Etsy’s original value proposition of never selling mass-produced items.

Potential challenges

The most significant threat to the success of the P2P companies listed above is security, the other side of the coin to the power of technology-driven businesses. 

To illustrate, in 2014, eBay informed users that their personal information, such as log-in details and physical addresses, had been hacked and advised them to change their passwords.

In 2015, Uber also communicated a data breach whereby the names and license plate numbers of about 50,000 drivers were unintentionally disclosed. This number had increased almost ten-fold when just two years later, the personal information of 600,000 drivers as well as 57 million customers had been compromised.

An Airbnb executive resigned in 2019 when it came to light that user data such as phone numbers and email addresses had been shared with third parties.

From the above, we see that the many possibilities that technology presents also come at a risk, specifically regarding the Peer-To-Peer business models that depend on information technology. Therefore, it is imperative that entrepreneurs who want to venture into the field of P2P business formalize and implement policies and procedures that safeguard user data to earn customer trust and ensure client loyalty.

In this article, we’ve looked at what Peer-To-Peer businesses are exactly, how they make money, given examples of successful P2P companies that have a worldwide footprint, and touched on the possible drawbacks involved. 

We’ve also seen how existing P2P companies continue to evolve. In addition, as a company owner, you should consider having dedicated resources to do the market research needed for the development of your product or service.

So, now that you’ve had a look at an alternative to traditional business models, what is the next step that your company will take into the future economy? For more on the different types of business models, read our article 21 Different Types of Business Models With Examples.

Mary Francois on Linkedin
Mary Francois
Staff Writer: Mary Francois is a writer with a strong footing in the adult learning space. Her focus is creating valuable content based on her experience in business development. She takes inspiration from Maya Angelou’s wise words, ‘when you learn, teach. When you grow, give.’

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Staff Writer: Mary Francois is a writer with a strong footing in the adult learning space. Her focus is creating valuable content based on her experience in business development. She takes inspiration from Maya Angelou’s wise words, ‘when you learn, teach. When you grow, give.’

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