How to Win With a Multisided Platform Business Model

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

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.

For more about how to build this business model, read the full article.