How to Win With a Multisided Platform Business Model; What does it take to build a platform where many constituencies can do business?

How to Win With a Multisided Platform Business Model

Blog May 20, 2014  Reading Time: 2 min

Leslie Brokaw

What does it take to build a platform where many constituencies can do business?

The multisided platform business model connects customers to sellers directly. One big global success is Airbnb, which calls itself a “community marketplace.” It links travelers to rental properties, including many private homes.

Multisided platform (MSP) businesses are hot, no question.

An MSP is a service, technology or product that lets two or more customer or participant groups have direct interactions. Examples of successful MSPs include PayPal, eBay, Alibaba and Facebook. Apple’s iOS is an MSP, since it connects application developers and users. Even shopping malls qualify, since they connect retail stores and consumers.

But what gets the most attention these days are online platforms. And many people are trying to figure out how they can get in the game.

“Increasing awareness of business models and the spectacular MSP successes from the past decade have prompted many entrepreneurs and investors to attempt building or identifying ‘the next eBay,’” writes Andrei Hagiu in “Strategic Decisions for Multisided Platforms,” in the Winter 2014 issue of MIT Sloan Management Review.

It’s not easy, though. “Successful MSPs are the exception rather than the norm,” says Hagiu.

So how can a new MSP position itself to be among the winners rather than the losers? Hagiu offers some observations and advice:

1. Aim for volume.

“An important feature of most MSPs is that the value to customers on one side of a platform typically increases with the number of participating customers on another side,” Hagiu writes. He says this is known as the presence of “cross-side network effects,” also called “indirect network effects.”

2. Aim for economies of scale.

Many MSPs see their average cost of serving a customer on one side decline with the total number of customers that participate. This is a especially common, Hagiu says, with software MSPs, which have high up-front development costs and low or zero marginal costs when new users are added.

3. Understand that MSPs are a chicken/egg proposition.

Getting an MSP to the critical mass it needs to be successful can create a high barrier to entry. But getting there is a challenge: No side will join without the other side in place. Think of Airbnb, the website for people to rent out lodging. Renters wouldn’t visit a site unless it was well-populated with options, but people with homes or rooms to rent wouldn’t bother posting their properties unless there was a significant potential audience. “Overcoming the chicken-and-egg problem is one of the most difficult challenges for many MSPs,” notes Hagiu.

4. Answer the important strategy questions.

Strategy questions include these: How many sides will be part of the platform? What kind of design should the platform have? How should pricing be set up (and should the service be free or subsidized to at least one side)? And what kinds of governance rules will be necessary to regulate fair play among participants?

MSPs are tricky propositions. Even well-conceived ideas often face resistance from potential constituencies. They also face the inherent challenge of complexity and of having to satisfy several conflicting interests.

Hagiu’s research draws on more than 10 in-depth case studies developed in the past five years. It also draws from his advisory work with several technology companies and formal economic modeling. Hagiu is an associate professor in the strategy group at the Harvard Business School.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: