Multi-Sided Platform – Building the Next Etsy 

As I stated in the first post on this topic, a business model is how an organization creates, delivers and captures value. Today we explore a business model that is the modern update of an age old approach.

Multisided platforms (MSPs) are technologies, products or services that create value by enabling direct interactions between two (or more) customer groups. Examples of MSPs include eBay (buyers and sellers), Visa (merchants and card holders) and Facebook (users, game developers, advertisers).

 Successful MSPs can create enormous value for users, but they are difficult to build and sustain.

VALUE DRIVERS

A well-functioning MSP minimizes transaction costs and improves market dynamics for all sides. Successful MSPs reduce transaction costs, including search costs (identifying, finding and qualifying), negotiating costs (agreeing to payment terms, contracting the sale) and enforcement costs (ensuring compliance, handling remediation). In addition, market dynamics are improved because as MSPs create value for clients on one side of the platform it increases the value for the other side of the platform as well. This principle is generally defined as the cross-side network effect. An example of the cross-side network effect is that value is increased for travelers when the number of properties listed on Airbnb grows, while at the same time, the increasing the number of travelers using the Airbnb platform drives increased value to property owners

CHALLENGES IN BUILDING A MULTI-SIDED PLATFORM

While the rewards can be significant, building a successful MSP is very difficult and typically requires both time and capital. Three of the most significant challenges include:

• chicken-and-egg – difficult to attract one side of the platform without the other
• governance – rules governing multi-party interactions can be complex, incomplete and/or unfair
• switching costs – easy transition to a competitor platform make many MSPs unsustainable

 In spite of these challenges, inspired and intrepid entrepreneurs continue to charge forward to build successful MSP businesses.

TAKING ACTION

If you are an aspiring entrepreneur that is taking on the challenge of creating an MSP, be sure that your strategic plan clearly explains how you will accomplish the following key initiatives:

1. Provide Immediate Value to Initial Clients: A critical first step is to design a platform that can quickly overcome the chicken-and-egg challenge by providing value to the first users of the platform. This is often accomplished by targeting a narrow subset of the potential client base and then quickly expanding the network to logical market adjacencies. An example of this is Facebook, which started as a social site for Harvard students before expanding to other university students and ultimately to (seemingly) every person in the entire world.

2. Facilitate Trust: Put appropriate governance in place, as this will establish trust and reduce transaction costs. If your MSP fails to engender trust from all sides of the platform, it is doomed to fail. CraigsList failed to build a strong curation feature into its site, which allowed Airbnb to take market share and build a billion dollar business around their open evaluation model. Trust is essential to the success of a MSP and without good governance it is nearly impossible to create.

3. Ensure Unique Value: Understand the switching costs your clients face and ensure that your core business model is sustainable. Groupon, once a high flying start-up providing technology enabled coupons and discounts, realized too late that the barriers to entry in their business were low and they were quickly besieged by competition. Successful MSPs will attract competition, and an early critical mass of users is usually not enough to ensure the long-term sustainability of the business. Refine a value proposition unique enough to differentiate from competition.

 If you can clearly accomplish these key initiatives, you may just create the next Facebook, Etsy or eBay. And as the old saying goes---to the victors go the spoils!