The concept of Multi Sided Platform is certainly not a recent one, but in recent years, thanks to the success of big brands that have decided to adopt this business model, it has become extremely topical. There are many new entrepreneurs and startuppers opting for this solution today. Do you want to add yourself to the list? All you have to do is get comfortable and learn more about the opportunities (but also the complexities) associated with this particular business model.
What is a Multi Sided Platform
Before delving into complexities and opportunities, it is necessary to shed some light on the meaning of Multi Sided Platform, starting with its definition.
Definition and meaning
A Multi Sided Platform, or MSP, is a platform in which there are multiple parties (representing market supply and demand) and whose business model focuses on the interactions between these parties.
Main characteristics of a multi-sided platform
The main characteristic of multi-sided platforms lies precisely in the fact that they have value only if both supply and demand are simultaneously present within them. In the case where there is only one of these two, on the other hand, these platforms would instead have no sense of existence.
The value proposition of a Multi Sided Platform does not lie in making a particular product or service; rather, it lies in enabling the connection between the various actors within the platform itself and making it easier for them to find each other and connect.
Nowadays, the main environment where the meeting and relations between supply and demand can be facilitated is clearly, the Web. Modern multi-sided platforms, not surprisingly, are based on digital infrastructures that allow interactions between the various parties, either via app or via a website.
For platforms of this type, revenue is typically provided by fees, which can be fixed or, alternatively, represent a percentage of the value exchanged between the parties.
How a Multi Sided Platform Works
If you have read the previous lines carefully, you will not be surprised to learn that the functioning of a multi-sided platform revolves around its role as an intermediary between two (but may be more) groups of users, who are distinct but interdependent on each other.
The role of users and providers
As already anticipated, a Multi Sided Platform only makes sense if supply and demand are present within it, as it facilitates the exchange of goods or services between these two parties. Suppliers and users, therefore, play a decisive role in the success of platforms. And vice versa.
Suppliers and new companies, in fact, can start selling their products within multi-sided platforms by facing smaller investments (savings are related, in particular, to advertising) while buyers can purchase goods more conveniently and, often, more cheaply.
Interaction dynamics and network effect
It is now time to introduce the concept of network effect, which is absolutely central to the (successful) operation of multi-sided platforms: the value of an MSP increases as the number of users within it increases, and each user acquires an incremental benefit from the arrival of a new user. Metcalfe’s Law, not surprisingly, states:
“The value of a network grows in proportion to the square of the number of its users.”
As an example, it becomes apparent how on Amazon more users and potential buyers are able to attract more sellers (and vice versa).
Examples of Successful Multi Sided Platforms
We have just talked about a very famous platform, but it is possible to mention several other examples of Multi Sided Platform that have achieved great success.
Uber: connection between drivers and passengers
Uber is a classic example of a multi-sided platform and, more specifically, a two-sided platform, since at its core it allows the connection between passengers (demand) and drivers (supply). The value of this platform lies in the fact that car drivers can take advantage of Uber’s marketing and know-how to reach customers, who, for their part, can find a ride with a few simple clicks within the app.
Airbnb: guests and owners compared
Airbnb is also a two-sided multi-sided platform, as it connects property owners and guests. The key to success, as mentioned earlier for Uber, lies in the benefits offered to supply and demand, which can come together in a more convenient, quicker and cheaper way. Again, just like Uber with regard to cars, AirBnb does not need to invest directly in homes.
Other examples of popular platforms
In addition to the aforementioned Amazon, Uber, and AirBnb, examples of multi-sided platforms include eBay and PayPal (two-sided platforms), as well as Facebook. Within the latter platform not only two user groups come into contact: in fact, Mark Zuckerberg’s social network hosts content creators, advertisers and “simple” users (consumers) within it.
How to create an effective Multi Sided Platform
You can’t say you know about multi-sided platforms if you don’t know how to create one on a practical level. Read the next few lines carefully.
Identify the right markets to connect
The first step in creating an effective Multi Sided Platform is to identify the right markets to connect.
The most valuable strategy in this regard is to analyze the so-called Core Value Unit, i.e., the exchange unit at the center of the interaction between supply and demand, and identify which market segments have the highest growth potential.
Remember in this regard that a multi-sided platform without demand (or without supply) makes no sense to exist. This is where the concept of liquidity comes in, understood as that condition in which a minimum threshold of supply and demand has been reached such that the expectation that the transaction will go through is high. This liquidity, in successful platforms, is then self-powered by the aforementioned network effect.
Use the Business Model Canvas to design your model
You have a useful tool at your disposal to design and model your multi-sided platform and that is the Business Model Canvas. This framework helps you represent your business model, without neglecting any component, of which there are 9: key partners, key activities, key resources, value proposition, customer relationships, channels, customer segments, cost structure and revenue streams.
Pricing and monetization strategies
From a monetization perspective, multi-sided platforms can adopt a variety of strategies, but the main avenue that secures revenue is through fees, either fixed (subscription) or tied as a percentage of the value exchanged between supply and demand.
Pricing strategies, of course, must be aimed at maximizing value for all involved so as to retain users and attract new ones.
Challenges and solutions in managing a Multi Sided Platform
You should be aware that in creating and managing a multi-sided platform you will face some challenges.
Managing quality and user trust
The first challenge you need to consider is one that concerns quality within the platform: quality of service must be guaranteed for all user groups. Trust is a crucial aspect for the success of a Multi Sided Platform: all users must be able to trust that the counterpart’s quality standards are up to par. The platform, for its part, should implement quality controls to ensure that everyone remains satisfied.
Addressing the “”chicken and the egg”” problem
If it is true (and it is) that without supply you can’t have demand and without demand you can’t have supply, the question that arises is obvious: which one should you focus on first? The “chicken-and-egg problem” is certainly not an easy one to solve: in fact, there is no single, always valid answer.
There are, however, several viable avenues: you could, for example, focus on a product that has value for a group of users regardless of the presence of the counterpart, or you could make sure that it is precisely the group of users representing the supply that “brings in” the demand to the platform (perhaps behind a financial incentive).
Whatever your strategy, Remember that a multi-sided platform must create value for both supply and demand. The challenge lies in striking a balance in this regard.
Final tips for starting your Multi Sided Platform
We are nearing the conclusion of this guide dedicated to Multi Sided Platforms, but there is still room for some final tips on mistakes to avoid and best practices to adopt.
Mistakes to avoid and best practices
One mistake to avoid we have already mentioned in the previous lines: avoid focusing only on demand or only on supply and find the right balance between them within the platform.
Another misstep not to commit is to delegate the growth of the number of users to the users themselves: already too many entrepreneurs have failed by simply thinking that the users themselves, once they landed on the platform, would tell their friends and relatives, thus ensuring an inexhaustible source of new contacts. Remember that the customer acquisition problem is yours, and you are the one who has to worry about maximizing the chance that users will arrive and stay on your Multi Sided Platform.
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