What You Need to Know Before Starting a Platform Business

There’s a great deal of enthusiasm about platform strategies these days. Entrepreneurs pitch their startups as the next Uber, the next Facebook, or the next Airbnb, while executives in established companies are retooling their strategies around platforms to drive growth and compete digitally.

But creating a successful platform business is not easy, as economists Richard Schmalensee and David S. Evans will tell you. Schmalensee and Evans have studied multisided platforms — in other words, businesses that create value by connecting two or more sets of participants via a physical or virtual platform — for more than a decade. Their most recent book for executives, Matchmakers: The New Economics of Multisided Platforms, was published by Harvard Business Review Press in 2016.

Schmalensee, a former dean and professor emeritus of management and of economics at the MIT Sloan School of Management, and Evans, chairman of the consulting firm Global Economics Group and a lecturer at the University of Chicago Law School, don’t sugarcoat the difficulties associated with pursuing a successful platform strategy. As they wrote in Matchmakers, “A multisided platform is one of the toughest businesses to get right. The entrepreneur has to solve a tough puzzle and use counterintuitive strategies to make a go of it.”

MIT Sloan Management Review editorial director Martha E. Mangelsdorf spoke with Schmalensee and Evans to learn more about just what it takes to get a platform strategy right. What follows is an edited and condensed version of their conversation.

In your most recent book, you point out that what you call the “matchmaking” business model — businesses that create value by connecting different groups — have been around for a long time, and have included everything from a trading area in ancient Athens to credit card companies. Is it safe to say that digital technologies make these kinds of businesses more common — and more important?

Schmalensee: Yes, the “matchmaker” model of making it easier for two sides to connect and create value — and then capturing some of that value — goes back at least to the ancient Greeks. But it’s the new digital technologies that have really turbocharged this business model. It’s easier to connect now.

Evans: Think about Uber. As a business, it could not have existed in 2008.

Schmalensee: Right. Without a lot of smartphone penetration, Uber’s business model wouldn’t work.