The internet has enabled the functioning of various new types of business models. The peer-to-peer business model is one such business model which has recently come into existence. Companies such as Outdoorsy and BlaBlaCar have transformed the way in which individuals and small businesses interact with one another. LinkedIn is one of the biggest names which has emerged from the peer-to-peer model.

It is important for any budding entrepreneur to be aware of what a peer-to-peer business model is and how it actually works. In this article, we will explain the functioning of this business model and also explain its pros and cons.

What is a Peer to Peer Business Model?

The peer-to-peer business model is a type of business model in which technology is used to connect multiple individuals to each other. The idea is that technology is used to connect different people who belong to the same homogenous group. Since people belonging to the same group are called peers, the technology is called peer-to-peer technology.

The buyer and the seller are generally private individuals who sell goods and services on their own. These platforms are not very useful for larger companies that own the means of production. The only company which is involved in the entire process is the intermediary company that connects both sides. More often than not, the intermediary company is just a technology interface.

The intermediary company facilitates the transaction by making it quicker and safer. Also, the intermediary plays the role of a middleman when it comes to facilitating payments.

The peer-to-peer business model is multi-faceted. It allows companies to create several types of businesses such as marketplaces, crowdsourcing, and multi-sided platforms.

The Peer-to-Peer Revenue Model

Different peer-to-peer companies make money in different ways. The revenue models which are most commonly used by such companies have been listed below:

• Some companies charge a transaction fee to their users. This fee could either be fixed or it could be a percentage of the overall transaction value

• There are other companies that provide enhanced access to certain users in exchange for a fee. This can be considered to be a version of the freemium model

• Lastly, many peer-to-peer companies make money by selling advertisements on their websites. Once the companies are able to get a significant number of people to use their service, advertisers are willing to pay to reach them.

Advantages of Peer To Peer Model

The various advantages of the peer-to-peer model which are commonly mentioned, have been explained below:

• The peer-to-peer business model allows individuals as well as small businesses to focus on their core skills. Thanks to these websites, the company does not have to spend a lot of time or money on marketing and advertising. They get a focused target market in one place. Marketing at such websites helps individuals gain much more business at a minuscule expense.

• The peer-to-peer business model allows service providers to conduct preliminary market research for free. The users can study the user needs and wants from listings that have been mentioned in previous posts. This helps them enhance their own service offerings in order to better meet the needs of the consumer.

• Service providers, as well as customers, find the peer-to-peer marketplaces to be much cheaper. This is because the business model allows the elimination of middlemen and the resultant cost benefits can be passed on to the consumers even though the service provider makes a larger profit. Since most peer-to-peer platforms charge a fixed fee, users, as well as service providers, can enjoy economies of scale since their transaction costs do not rise with their sales.

Disadvantages of Peer To Peer Model

• The biggest disadvantage of the peer-to-peer business model is that the intermediary company is not able to exercise control over the quality of services being provided. Since the website is connecting two people from the same group, they cannot even vet the participants in order to establish certain quality standards. The end result is that a lot of users have bad experiences on such websites which leads to a reduction in the overall popularity of the business model.

• Sometimes peer-to-peer companies hold on to payments for long periods of time. After facilitating the transaction, the website acts as the middleman for the payment transaction. However, some websites take money from the buyer immediately but pay the seller after a long period of time. They try to take advantage of the asymmetric bargaining power in order to lock in some funds and earn interest on money that doesn’t belong to them. However, this creates cash flow problems for the service providers.

The fact of the matter is that peer to peer model is quickly catching up. Right now, this model has not created as many unicorns and billion-dollar companies as some of the other models. However, more start-ups are innovating using this business model. Hence, it is likely to witness high growth in the immediate future.