Agenda:
- Definitions;
- Examples;
- Network effects;
- Subsidy-side & Money-side;
- Critical Issues;
- Ignition Strategies & Tactics.
1.Definitions:
-> In the last 15 years, multi-sided platforms have:
- Become some of the largest and fastest-growing businesses;
- Reduced several market frictions;
- Challenged many industries;
- Overran the incumbents in many cases.
iPhone
-> iPhone is a platform that connect developers to users.
-> Before there was digital content: simple video-games, snake… a lot of people paid a lot for aplication. Mkt was controled by “Mobile Portal”.
-> Apple created a new way to develop app free to everyone.
-> Apple opened the market to everyone, with a 50-30% payment (70% apple, 30% developers)
-> This democratized the market.
Platform:
-> TYPES:
- TWO SIDED PLATFORM: when two group are connected by the platform.
- MULTI SIDED PLATFORM: more than 2 groups are connected.
- MATCH MAKING PLATFORMS: Aim to make connections to match user groups.
-> Platform are created to solved the market friction.
MARKET FRICTION: problem that appear when the demand and the offert dosen’t match easily.
-> They challeng the overall industry.
-> CHAR:
- There is a physical limit to the connection llinked to the digital technologies.
- Compared to traditional businesses have lower cost thanks to a reduction of fixed costs.
“A platform provides the infrastructure and rules for a marketplace that brings together producers and consumers” (Van Alstyne et al., 2016).
“Multisided platforms are technologies, products and services that create value primarily by enabling direct interactions between two or more customer or participant groups” (Hagiu, 2013).
“They [Multi-sided platforms] enable direct interactions between two or more distinct sides. Each side is affiliated to the platform” (Hagiu and Wright, 2015).
“Platforms are matchmakers of sorts, although the matchers are often not one-to-one. But like matchmakers, they discover a need for, and then facilitate, consumer coordination” (Wu, 2013).
“They are called platforms because they usually operate a physical or virtual place that helps the different customers get together. Their efforts are aimed at reducing a market friction. Such a reduction is a necessary but not sufficient condition for a multi-sided platform to succeed” (Evans & Schmalensee, 2016)
Characteristics:
-> Platform have a different business model than other business:
- Identify the size: the customer segments of the BMC;
-> More than one, otherway is not a platform;
- Market Frictions:
-> M-S Platforms create huge value by:
- Reducing search costs: Airbnb provides advanced search functionalities based on the desirable characteristics;
- Reducing transaction costs: eBay allows payments performed by Paypal;
- Reducing product development costs:
- Wikipedia provides editors with tools for collaboration;
- Sony provides game developers with development kits and application programming interfaces.
2.Example:
Two sides:
More than 2 sides:
-> Recruiter and employees are linked;
-> Make recognise other people your activities.
-> You are there to promote yourself to make know the other what you can do.
-> Start to share some interactions and create a network. Recruiters look at that, at your socialmedia pages.
New Businesses:
3.Network Effects:
-> DEF: applay every time the value of being part of a group increases or decreases as the size of the group increases.
- E.g. if i’m the only one with a phone there isn’t a big network effect. If there are 8 billion people having it=> We have a big N.F.
- SAME SIDE Network Effects:
-> DEF: Network effects affect the same customer group they originate from
- CROSS SIDE Network Effects:
-> DEF: Network effects affect a different customer group from the one they originate from.
- Is the arrow’s effect.
-> Example: eBay case
Causes of Network Effects:
| CAUSE | DESCRIPTION | EXAMPLE | NATURE |
| Information Provision | Each user or customer can provide information that could be useful for other users or customers. | Reviews on TripAdvisor or Amazon, which are provided by users and buyers, drive the future choices of other users and buyers. | The network effects so generated may be either positive or negative, due to the quality of the information provided. When it is truthful, the network effects created are positive; when it is misleading, negative effects originate. |
| Competition | When transactions are performed between two customer groups, each additional customer in one group represents an additional competitor for customers of that group. | More sellers on eBay mean more competition on that side. | Negative for the customer group that exhibits the effect, while it may be positive for the customer group which perform the transactions with that group and that can benefit from price battles and so on. |
| Volume/ Traffic | In some cases, the traffic and volumes generated by more customers can affect the company’s offering in ways that do not involve higher probabilities of matching and so on. Instead, fashion and trends of the moment can be the reasons. | Social networks are good examples: when snapchat faced its disruptive growth in terms of user, it became the trend of the moment. Each new user enforced this attractive power related to the trend. | As trends and fashions, this kind of network effects are positive when the trend of the moment is favorable, negative when it changes. |
| Higher Probability of finding a counterport for a transaction | When customer groups perform transactions between them, the wider the other customer base is, the higher the probability of finding a counterpart to perform the transaction with. It can be exhibited also inside the same customer group in case transactions are performed within it. | More Amazon buyers mean more demand to satisfy for independent sellers that use the Amazon marketplace to sell their products. | Network effects are positive, but they usually come along with network effects related to good behavior, misbehavior and content quality, due to the “social” component of dealing with another customer. |
| Higher probability of finding a counterpart for enjoying the company’s offering | When the company’s offering has to, or it may, be experienced and enjoyed with other customers, an increased customer base enhances the probability of matching. | More online FIFA players mean a higher probability of finding another player online to play with. | Network effects so generated are usually positive, but they come along with network effects related to good behavior and misbehavior of customers, due to the social experience. |
| Good behavior and misbehavior | When transactions and interactions exist between customers, positive behaviors and misbehaviors can improve or undermine the company’s offering. | In case of frequent misbehaviors by Uber drivers, potential passengers are likely to prefer a taxi rather than Uber. | Positive in case of good behaviors, negative in case of misbehaviors. |
| Content provision | When transactions exist between customers or in case each user or customer can provide content that could be useful for other users or customers, the company’s offering can be affected by this content. | The apps available on the App Store are an example of content provided by a customer group (developers, who are a customer group of Apple). | The network effects so generated may be either positive or negative, due to the quality of the content provided. High quality implies positive effects, while poor quality implies negative ones. The precision of firm controls on the content added by third parties is determinant |
| Passion/sense of community | Each customer hopes for the diffusion of it, trying to convince other people to become customers or to join the platform. It is a typical effect when the company’s offering concerns an hobby. | Close-knit Xbox players try to persuade other people to buy the console produced by Microsoft, instead of Playstation, for example. Each acquired player is an additional source of customer attraction due to her/his tries of conviction. | It usually generates positive network effects. However, in case the customers feel betrayed by the firm as concerns their passion, the consequent negative network effects would be strong |
4.Subsidy-Side & Money-Side:
Pricing Structure:
-> The existence of network effects strongly affects the decision about pricing: serving multiply types of customers, multi-sided platforms have potentially multiple revenues sources.
-> E.g. The Fork, are the resturant paing to be on the platform.
-> For a multi-sided platform, subsidizing certain users can be essential. The choice of which side subsidize and for how long represents an important strategic issue.
- There is a need of money platform.
-> In a two-sided market, a common situation implies a subsidy-side and a money-side:
- The subsidy-side is charged less than it would be in an independent market, charged nothing or is given rewards to participate in order to reach high volumes and make more valuable the platform for the other side;
- The money-side is charged more than it would be in an independent market.
📌We have other 2 alternatives:
- Subsidized only: to build critical mass (like start-up);
- Charged free: to maximize the profits thanks to the monetization of the other side influenced by network effects.
❓If ads make the user experience worse, and users often don’t even look at them, how do they still work?
-> There are the advertising that you see and there are some matrix to understand the conversion rate & the data that come from them. Every post is track and analyst of the company made analysis to improve marketing.
5.Governance:
-> In every paltform there is a trade-off to think about:
- OPENNESS: you want to reach a critical big mass…
-> E.g. facebook
- QUALITY: …but higher the numbers less is the quality.
-> You need a quality control to post.
-> E.g. app store is high quality and mid openness.
6.Ignition Strategies & Tactis:
-> DEF: Strategies to ignite people in platforms
Marquee customers:
-> Customer relationships should not focus only the most profitable customers or most important ones, but a particular attention should be paid to the ones who enable the strongest cross-side positive network effects, too.
- Essential to understand who these customers are and if some marquee customers exist and who they are.
-> E.g. shopping malls, which sign up the stores that are likely to attract lots of people early on. Doing so, smaller retailers are persuaded to rent space at the mall, knowing that they will be able to exploit the traffic generated by the marquee shops.
- Singup McDonalds or Primark that have a very strong subscription can lead customer to other brands.
Ecosystem Seeding:
-> DEF: Start from a small ecosystem and after grow a lot.
- Due to the chicken and egg dilemma, it might be convenient for a platform to start from a market niche. It allows to concentrate on defined customers, with delimited requests and needs.
- The more the platform decides to keep it narrow, the smaller its market becomes.
✔PROS:
- The platform has the capability to address better and more specifically the customer preferences,
- Smaller market niche makes easier the achievement of a critical mass.
Zig-Zag Strategy:
-> DEF: the strategy involves to start, alternating, from both the sides.
-> EXAMPLE: YouTube didn’t know if start to incentivize video creation or video watching => They build it both size.
Two-Step Strategy:
-> DEF: When the platform concentrates its efforts on attracting customers on one side, generating the positive cross-side network effects and, then, the efforts are focused on the side supported by those network effects.
-> EXAMPLE: The Fork. They started to engage client or restaurants? Restaurant should be the opened size, where to start. The good strategy is not to spread but is to concentrate in one sector! If the business is not going well you have to close all the restaurant.
Commitment Strategy:
-> DEF: all the parties have to invest a lot to jump in the platform. To do it you commit the platform.
- Sometimes customers of one firm’s business model have to make a significant investment to receive the company’s offering and to take advantage of positive cross side network effects.
- The firm should prove to these customers that there will be a large customer base on the business model from which the network effects originate. This commitment strategy is totally based on the capability of the firm to assure that promised customer base, for instance by specific partnerships or a favorable pricing structure in that business model.
-> EXAMPLE: Sony Computer Entertainment: it designed PlayStation 4 few years ago. When the console was launched, the firm persuade customers to invest several hundreds of dollars buying the PlayStation 4 thanks to a strong marketing campaign about future videogames, that Sony would directly developed, and an exclusive partnership with Spotify.
