Module 5: Business Modeling
Managing Platform BMs
Why should you consider strategies to manage a multi-sided platform?
The multi-sided platform business model has become increasingly popular and dominant in the digital economy. While there is potential for success with a multi-sided platform business model, there are several barriers that are difficult to overcome without a sound strategy.
What is a Multi-Sided Platform Business Model?
In a multi-sided platform (MSP), you have two or more customer segments that both interact with the platform or platform owner. At the same time, direct or indirect interaction or transactions represent a flow of value between the different parties. MSPs rely on network effects on both sides of the platform that create unique conditions for success.
An advantage of multiple sides can be increased revenue streams and larger network effects, however there are tradeoff to consider as well. More sides require greater initial startup costs and ongoing management that may not be feasible for your organization taking into account your key resources and activities.
What is a Network Effect?
To identify and map your team's assumptions, you can follow the following steps:
1. Get started
Platform business models typically benefit from network effects. This means that the platform's attractiveness to a user depends on how many others are already on the platform, or, if you have multi-sided platforms, one side requires as many users as possible of the other side already being on the platform. E.g.: Uber is attractive to passengers only if there are enough drivers and vice versa.
But if both sides of a multi-sided platform require each other to be attractive, which one do you invest in first, and how do you bring them on board? Some options are:
- create stand-alone value for one side
- subsidize one or multiple sides
The solution depends on the specific situation, but it often involves temporarily losing money.
How can you successfully adopt these strategies?
The following points are not a step by step process, but showcase different strategies and considerations to make your multisided business model thrive.
1. Business Model Canvas: Define your sides
When filling out your Business Model or Lean Canvas, you must define several customer bases, one for each side to make your MSP successful. The Business Model should also include a value propositions, channels and relationships for each customer group.
2. Market Analysis: Aim for economies of scale
Costs decrease as the number of users on each side of the platform increases, so it is essential to find markets and customer bases that can scale. In performing a market analysis, look for large addressable markets not just on one side but all sides of you MSP.
3. Understand the chicken/egg proposition
The chicken/egg proposition means that no one will join one side without the other side in place. There are several key implications for a business model like increased costs of gaining access to multiple customer bases at once. This can mean increased costs for marketing, platform maintenance, and sales. Especially in launching a platform, choosing only two sides to start with and scale can help reduce start-up costs.
4. Understand the important strategy questions
The basic idea behind a platform business model is that you set up and orchestrate different sides of your market. You are not just doing a service and selling it to one party, but you are trying to create a network effect where one side of the market reinforces the other side of the market.
The most difficult MSP design decisions are those that involve features putting the interests of different sides of the MSP at odds with each other or with those of the MSP. Such features create strategic trade-offs for the MSP because they generate positive value for some participant groups or for the MSP itself, but negative value for other participant groups.
5. With Your Team: Anticipate market failures
With you team, brainstorm possible market failures that would prevent the ecosystem from functioning properly and how they can be mitigated. Some common failures are low-quality suppliers or sellers driving out high-quality ones or too much competition on one side of the platform reduces incentives to maintain and develop high quality services For each market failure that you identified in your brainstorm, write down at least three strategies to mitigates risks for failure.
6. Test and Implement
Using the methods of Business Model Innovation and the Lean methodology, prototype, test, and implement aspects of your business model for both sides of your platform before investing in them.
What’s up next?
Understand what unique challenges your organization may face by performing a Business Health Check, take Corporate Challenges into account and develop a strategy to handle several business models at the same time.
Business Model Canvas, market analysis, A4 paper and pens