A particular business pattern: multi-sided market

Some great examples

In 1950, Frank McNamara: the credit card

A “member” of the Diners Club could charge meals at restaurants and pay the card company at the end of the month. Without enough cardholders, merchants wouldn’t participate, and without enough merchants on board, customers wouldn’t bother to obtain a card. Mr. McNamara loaded the charges on the merchants. American Express Company adopted this pricing model a few years later, and made a fortune.

Google: free premium or freemium

Google has created powerful and free tools to ease the communication amongst people (GMAIL, Google Hangout), share information (Google Prime, Google search, etc…), operating system (android) and much more… It even seems like Google tools are giving everything for free. However, there are some services useful for advertisers such as google AdWords and google AdSense. The more people Google reach, the more it creates value for advertisers and content creator.

Being at both side of the market

They are platforms that bring together two or more distinct but interdependent groups of customers. Credit cards, for example, link merchants with cardholders; computer operating systems link hardware manufacturers, application developers, and users; newspapers link readers and advertisers; video gaming consoles link game developers with players. They have existed for a long time, but proliferated with the rise of information technology. Microsoft Windows operating system, the Financial Times, Google, the Wii game console, and Facebook are just a few examples of successful multi-sided platforms.

Chicken or egg

The platform’s value for a particular user group depends substantially on the number of users on the platform’s “other sides.” A video game console will only attract buyers if enough games are available for the platform. On the other hand, game developers will develop games for a new video console only if a substantial number of gamers already use it. Hence multi-sided platforms often face a “chicken and egg” dilemma. 

One-way multi-sided platforms solve this problem is by subsidizing a Customer Segment. Though a platform operator incurs costs by serving all customer groups, it often decides to lure one segment to the platform with an inexpensive or free Value Proposition in order to subsequently attract users of the platform’s “other side.”  One difficulty multi-sided platform operator face is understanding which side to subsidize and how to price correctly to attract customers.

PSP/Xbox versus Nintendo Wii

Innovation: Powerful console for hardcore gamers

Traditionally, video console manufacturers targeted avid gamers and competed on console price and performance. For this audience of “hardcore gamers” graphics and game quality and processor speed were the main selection criteria. As a consequence, manufacturers developed extremely sophisticated and expensive consoles and sold them at a loss for years, subsidizing the hardware with two other revenue sources.

First, they developed and sold their own games for their own consoles. Second, they earned royalties from third party developers who paid for the right to create games for specific consoles. This is the typical pattern of a double-sided platform business model: one side, the consumer, is heavily subsidized to deliver as many consoles as possible to the market. Money is then earned from the other side of the platform: game developers.

Innovation: Fun factor for casual gamers

Nintendo, on the other hand, focused on a market segment that was far less sensitive to technological performance. Instead it lured customers with its motion-controlled “fun factor.” This was a much cheaper technological innovation compared to new, more powerful chipsets. Thus, the Nintendo Wii was less costly to produce, allowing the company to forego commercialization subsidies.

This is the main difference between Nintendo and rivals Sony and Microsoft: Nintendo earns money from both sides of its double-sided Wii platform. It generates profits on each console sold to consumers and pockets royalties from game developers. To summarize, three interlinked business model factors explain the commercial success of the Wii:

• Low-cost differentiation of the product (motion control)

• Focus on a new, untapped market that cares less about technology (casual gamers)

• Double-sided platform pattern that generates revenues from both “sides” of the Wii.

How to build your own multi-sided platform

Who should you serve?

You won’t be able to serve everybody all around the world, so you should be specific and focus on at least 2 clear customer segments. Keep in mind that for a multi-sided platform to work, one customer segment won’t show up without the other.

Start by creating a community of users

Creating value and creating a strong sense of community between users is key to develop a multi-sided platform. A multi-sided platform grows in value to the extent that it attracts more users, that’s why you should focus on:

1. Attracting user groups

2. Matchmaking between customer segments

3. Reducing cost by channeling transactions

Turn your customers value into recurring revenue

Each Customer Segment produces a different revenue stream. One or more segments may enjoy free offers or reduced prices subsidized by revenues from other Customer Segments.  Choosing which segment to subsidize can be a crucial pricing decision that determines the success of a multi-sided platform.

How to recognize potential customers ?

As an entrepreneur, you want to make sure there are people who are going to pay for your products. As of now this seems useless until you face a "bad client"; the type of clients who almost make you hate your business. Then, how do you differentiate them from your true customers?

There's no given radar, but you can make sure with the following stages:

1. They have have a need

2. They understand that they have a problem

3. They are searching for a solution

4. The problem is so important that they started using an interim solution

5. The customer has committed or can quickly acquire a budget to purchase a solution

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Credit Sources:

• “Strategies for Two-Sided Markets.” Harvard Business Review. Eisenmann, Parker, Van Alstyne.  October 2006.

• Invisible Engines: How Software Platforms Drive Innovation and Transform Industries. Evans, Hagiu, Schmalensee. 2006.

• “Managing the Maze of Multisided Markets.”  Strategy & Business.  Evans, David. Fall 2003.

• Osterwalder, Alexander. Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers. Wiley. Édition

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