Mar 20, 2017
Seven Key Ingredients for a Multisided Platform
Attracting, Accelerating, and Igniting Your Platform
This article describes multi-sided platforms, key requirements to be classified an MSP, and how your current and future product strategies might apply to these requirements.
A multisided platform (MSP) enables direct transactions between two or more affiliated parties. A job search website is an example. It connects people by helping them match their needs with what the other person has to offer. A shopping mall and Amazon are both multisided platforms for the same reason; they provide a platform for buyers and sellers to connect.
Key Criteria of an MSP
- Underlying each of these is the benefit of reduced transaction costs. An MSP makes it less expensive to find, evaluate, and engage in business for the parties.
- Each side of the network must benefit from the presence of the other. The process and outcomes of these benefits are called by a number of terms that make economists eyes sparkle, including:
network externalities,
indirect network effects, and
demand-side economies of scale.
Let’s look at what each of these jargony terms means. - Network externalities are the benefits enjoyed when there are lots of participants in an MSP. Externality is an interesting economic concept. It basically means that there is a side-effect of participating in an economic transaction. In the case of MSPs, this clearly must be a positive externality. An example of a negative externality in an MSP would be getting robbed by someone you do business with on Craigslist. Yes, this actually happened to a friend of mine. That was definitely not a good day for him, and certainly a negative externality to the transaction. Positive network externalities include lower costs for customer acquisition, reduced search costs to find transaction participants (Amazon), gaining a new connection who helps you find a job (LinkedIn, Indeed), or high-quality content to read thanks to lots of reviews (Stack Overflow, Medium).
- Indirect network effects relate to the benefits from one side of the platform to the other side, when there are the right blend of numbers and participants. Direct network effects relate to the benefits of having more of people like you on the MSP (on your side of the transaction). For example, in an online game where players interact, it gets a lot more fun when there are more players. The original direct effect platform was the telephone. Having one was useless unless there was someone to call. Indirect network effects mean there are benefits for you when there are more people on the other side of the platform. The iPhone becomes more valuable to you the more app developers there are. They, in turn, sell more apps the more iPhone users there are. Think of two complementary products: iPhones and apps. Indirect network effects require complementary product benefits.
- Demand-side economies of scale relates to the benefits enjoyed as there are more consumers demanding a product. Demand-side economics, in general, relates to how consumer demand influences macroeconomic conditions. The health of an MSP is driven by demand from one side to consume or offer to the other side, at the right volume and pace to satisfy both sides. This is where the term “economy of scale” comes in. Costs for both sides go down the more participants there are. The most obvious cost is “search cost,” which includes costs for finding another party to do business with. For example, there is no question that it’s less costly and easier for restaurants to get customers at their tables if they take reservations on OpenTable. Another example is Indeed: by aggregating job search, they reduce the complexity of finding great job opportunities.
- Each party must be able to have direct interaction with the other. While the MSP helps make the connection, monitors, and may overlay services and fees on the transaction, the parties are able to transact their intended business directly, once connected. To be an MSP, control over the transaction must be limited. For example, choice of who you choose to do business with and transparency of who you are doing business with is required. If the platform hides this information, it’s not an MSP. Think about the Indeed case again. It would not be as successful, nor would it be a multi-sided platform, if a job seeker had to talk to an Indeed representative, who brokered all conversations and interactions between search, application, and interview. That’s called a recruiting service, not a multisided platform.
- The parties must be affiliated, in that each party has opted into the platform for the purposes of doing business.
Not Required, but Super-Important!
Assuming you’d like your MSP to survive over the long haul and be financially successful, there’s another thing to consider here…
Great MSPs need to be sticky. Switching costs should be high and transactions should be as friction-free as possible. Once a participant has chosen the MSP, the platform’s services, data, and features make it hard to leave. A failed example of this is Groupon, whose valuation dropped from $16B to $4B as copycat coupon sites exploded. Groupon’s users had zero friction leaving the platform and could easily find substitutes with a single Google search. A successful example of this is MSFT Windows, one of the stickiest platforms of all. Application developers and users alike have been trapped on Windows, especially Office users. Even in the face of phenomenal, free substitutes, Office still makes $7B in reliable, recurring revenue for MSFT. Microsoft Windows, upon publishing their Windows SDK APIs in the late 1980s, is perhaps the most successful original software platform that created massive benefit from indirect network effects as well. Windows application developers piled on to the platform thanks to great documentation, support, and complete system access and application buyers gobbled up the applications.
Keep Reading
Read Part Two, Should Your Platform Be a Multisided Platform?
