Recall last weeks post about Multisided platforms through the example of Classpass. We very lightly touched on their business model which was formed by a money side and a subsidy side, where consumers were the money side and gym/studios were the subsidy side. This week we will dive deeper into the complications of building, igniting and designing a multisided platform.
Classpass’s business model is just one common way to configure a money and subsidy sides of a platform. While this model may work for them, it would not work for a company such as Spotify. Spotify connects music artists with listeners. We as consumers pay a low price to listen to our favorite bands, but what about the artists? If artists didn’t get paid to post their music, would they be incentivized to team up with Spotify where other company’s like iTunes will? Clearly not, so how does it work? Well, Spotify pays artists who join a particular amount per play of the song. Although it may be something around say 50 cents per play if the song is played 1000 times that artists make $500. And there are several other configurations of money and subsidy sides that businesses can use in order to build their platform. However, this is not easy.
Opportunities to begin to build a multisided platform are pretty rare. They arise when frictions keep market participants from interacting with each other directly. As we can see from our two examples above, those interactions may not be happening for tons of reasons. “Entrepreneurs can identify opportunities for starting a matchmaker by looking for significant transaction costs that keep willing buyers and sellers apart and that a well-designed matchmaker can reduce.”[1] This leads us to a critical element of igniting a multisided platform, the quantity of people wanting to participate in this transaction.
Multisided platforms cannot function off a few buyers and sellers. This model not only needs a large amount on both sides but also needs a similar demand on each side. For obvious reasons if there are not enough buyers participating but a lot of sellers the transaction cost for sellers is not worth it and vise versa. On top of getting both sides, onboard the company needs to create its own value. This is considered one of the hardest problems to solve in the process. Entrepreneur’s need to make sure these frictions are large enough in order to persuade both buyers and sellers to participate. If they are successful in this step, the next challenge lies in determining the pricing structure (aka money and subsidy sides).
This challenge has a lot of small components that need to be addressed.
- Is this pricing structure profitable? It is critical for the company to maintain the stability of their own in the long run.
- Does this structure work for the parties involved? The company must be able to work in with both sides of the markets, creating realistic incentives and terms.
- What will the transactions look like physically? A company must be able to create an environment that suits needs of both sides.
- Most importantly how are participants going to interact with each other? Transactions between both sides must be healthy and defined.
Building a multisided platform is not easy. There are several components that need to be fulfilled in order to develop and create a fully functioning platform.