How to Win With a Multisided Platform Business Model

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

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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.

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Comment (1)
Lou Kerestesy
Thank you for the article and blog.  I work in the government space, supporting innovation in government, and it's interesting to apply these ideas to that world. 

Government agencies (fed, state, or local) have many primary and supplemental customers.  Theoretically, a multisided platform would provide value to multiple users.  One can imagine, for instance, a platform that permitted residents, a vendor, police, solid waste officials, and county/city council members and staff to communicate user-specific information about trash that has been picked up or not.  Or FEMA officials, FEMA volunteers, local responders, disaster survivors, and Congressional district members/staff to communicate user-specific information about location and access to water, food, shelter, medical care, response times, benefits administration, etc. 

The strategy questions are highly relevant, and the questions about volume, scale, etc. also have very interesting public policy angles. 

Good food for thought.  Thank you!