Multisided Platform (MSP) Strategy

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Framework Primer
Multisided Platform (MSP)
Strategy
Presentation created by
1
Number of Sides
2
Platform Design
3
Pricing Structure
4
Governance

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Contents
 Overview
 Products to Platforms
 Multisided Platforms (MSP)
 Strategic Decisions
− Number of Sides
− Platform Design
− Pricing Structure
− Governance
 Templates
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This framework discusses the 4 critical strategic decisions that
Multisided Platforms (MSPs) need to analyze
Presentation Overview
Building and managing a successful platform is difficult.
Enabled by new capabilities in the Digital Age, many organizations are trying to shift from a
Products to Platform business model. The drive behind such a shift can also be attributed to the
huge success of platform companies—e.g., Amazon, Google, and Apple. These organizations
started out as a retailer, search engine, and computer manufacturer, respectively, but later
transformed into platform models.
These platforms are referred to as Multisided Platforms (MSPs). MSPs are technologies,
products, or services that enable direct interactions between 2 or more customer or participant
groups—and include some of the most successful companies in recent decades.
In crafting an MSP Strategy, there 4 critical strategic decisions to evaluate:
This framework discusses these strategic decision areas in depth. Additional topics discussed
include Cross-side Network Effects, Chicken-and-the-Egg Problem, Economies of Scale,
Switching Costs, among other topics.
This deck also includes slide templates for you to utilize in your own business presentations.
1 Number of Sides
2 Platform Design
3 Pricing Structure
4 Governance

4
Contents
 Overview
− Number of Sides
− Platform Design
− Governance
 Templates

5
Enabled by new capabilities in the Digital Age, many companies are
trying to shift from a Products to Platform business model
Products to Platforms – Overview
The focus is shifted from protecting intellectual property to balancing intellectual property.
The one-size-fits-all approach to products is changing. To meet the needs and preferences of a fragmenting
customer base, our company can build flexible product platforms to market tailored products faster with less
investment.
 A Product Platform is the creation of a
common core that invites third parties to
develop and market an increasing number of
product variants.
 In the Product Platform, the core product is
typically designed to be modular and flexible
– rather than tightly integrated and difficult to
leverage. This is to invite third parties to
rapidly customize and scale variants.
A diverse ecosystem of
innovative producers is
developed. This enables
producers to meet the needs of
a wide range of customers and
help improve the performance
of core products.

6
Transforming from Products to Platforms requires an understanding of
market conditions, catalysts, and challenges our company may face
For more information on Products to Platforms, refer to this framework:
https://flevy.com/browse/flevypro/products-to-platforms-primer-3267.
Products to Platforms – Conditions, Catalysts, Challenges
Source: Turn Products into Product Platforms, Deloitte, 2015
The process of transformation from Products to Product Platform requires our company to have a good sense
of existing conditions, catalysts, and challenges.
Conditions Catalysts Challenges
Where is it
playing out?
When?
Why is it difficult
to respond?
Conditions are where it
is playing out.
The catalysts are factors that precipitates changes,
while challenges are those we encounter that makes
our capacity to respond difficult.
Examples
CP – Home
appliances
Automotive
manufactures
Furniture Chemical
products suppliers
Commodities
food
More vulnerable More resistant
These conditions and challenges may have varying
degrees of influence or effect.

7
Contents
 Overview
− Number of Sides
− Platform Design
− Governance
 Templates

8
As the name suggests, Multisided Platforms enable interactions between
2 or more participant groups—AKA “sides”
Building and managing a successful platform is difficult—important strategic decisions
around platform design, pricing, governance, and number of sides need to be made.
Multisided Platforms (MSP) – Overview
Multisided Platforms (MSP) are technologies, products, or services that enable direct interactions between 2 or
more customer or participant groups.
Some of the largest and fast-
growing businesses of the
recent decades have been
MSPs. Examples include:
 Online marketplaces (e.g.
eBay, Amazon, Flevy,
Etsy, Airbnb, Uber)
 Social networks
(Facebook, Twitter)
 Gaming consoles
(PlayStation, Xbox),
 Merchants (American
Expression, PayPal,
Square)
 etc.
In crafting an MSP Strategy, there 4 critical strategic decisions to evaluate:
1
Number of Sides
2
Platform Design
3
Pricing Structure
4
Governance
Source: Strategic Decisions for Multisided Platforms, Hagiu, Harvard Business School, 2014

9
MSPs have 2 key
characteristics:
Each “side” (i.e.
participant group) are
customers of the MSP
in a meaningful way.
The MSP enables a
direct interaction
between or among
the sides.
To better understand MSP, let’s clear up the differences between MSP
and other similar business models
Due to its role as an intermediary, the MSP can have a very privileged, influential role
within its industry.
MSP – MSP vs. Product Platforms vs. Resellers
There are key defining characteristics that distinguish MSP from other types of businesses.
1
2
Product Platform
Product platform
Multisided Platform Reseller
vs vs
Side A
Side B
Sale of
essential
input
Sale of
final
product
Side A
Multisided
platform (MSP)
Side B
Affiliation
with the
MSP
Affiliation
with the
MSP
Direct
interaction
or
transaction
Side A
Side B
Sale of
goods or
services
Sale of
goods or
services
Reseller
The Product Platform violates
the first key characteristic, as
the end consumer is not a
direct customer of the platform.
The Reseller model violates
the second characteristic, as
there is no direct interaction
between the sides.

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 Cross-side Network Effects, also called Indirect Network Effects, refers to how the value to
customers on 1 side of the platform increases with the number of participating customers on
another side.
– For instance, if you look at a traditional marketplace, the value to customers increases
when there’s a large number of vendors. Likewise, the value to vendors increases when
the platform has engaged a large number of customers.
– In fact, a platform requires a minimum of customers on a given side to reach critical mass.
Prior to reaching critical mass, there is little value offered through the MSP to the other
side(s).
 Thus, a platform should try to increase its customer base across all sides. This can be difficult
to achieve in the early stages due to the chicken-and-the-egg problem.
– One solution is to stage multiple launches, where each launch is geared towards a different
customer group.
– For instance, when launching a traditional marketplace, we can gear the marketing and
website messaging of the initial launch to vendors. Clearly communicate the expectation
that the buyer-side launch won’t be until a later time.
– Then, when we launch the buyer-side, buyers are more likely to join knowing we have
already acquired a number of vendors and offerings on our marketplace.
There are 3 primary barriers to entry that an MSP can erect to protect
itself from competition—the first is Cross-side Network Effects
There is a limit to the value created by Cross-side Network Effects—at a certain point, the
incremental gain from an additional customer becomes marginal.
MSP – Barriers to Entry (1 of 2)
For a MSP to be successful, it should try to erect a number of barriers to entry.
Cross-side
Network Effects
1

11
 The concept of economies of scale refers to how the average cost to serve a customer (on a
given side) declines as the total number of customers increase. To put it another way, the
incremental cost for a new customer decreases with each new customer.
 These economies typically exist for software MSPs, where the initial fixed costs are very high,
but the marginal cost for new users is practically 0. For instance, there is no new cost to
Facebook when a new user signs up to the social network.
 Economies of scale provide bigger players a tremendous advantage over new entrants.
 Cross-side Networking Effects alone don’t guarantee high barriers to entry. To keep rivals at
bay, we need to create high switching costs.
 Switching costs, also called switching barriers, refer to the disadvantages or expenses
customers feel they experience when switching to an alternative platform or competing
offering.
 Once a customer joins our platform, which should create disincentives for them to leave for a
competing platform.
Two other barriers including Switching Costs and Economies of Scale
The MSP should try to create 2 of 3 of these barriers to entry.
MSP – Barriers to Entry (2 of 2)
Switching Costs
2
Economies
of Scale
3

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 Running an MSP is extremely complex.
 The MSP needs to deftly manage conflicting interests from multiple stakeholder groups. It is a
balancing act.
 The complexity increases as we incorporate more sides into the MSP.
 Key potential MSP participants—particular entrepreneurial entities—may be reluctant to join the
platform if they feel they will be beholden to a new and powerful MSP.
 Participants may want more entrepreneurial autonomy than what the MSP offers.
MSPs commonly encounter 3 key challenges—chicken-and-the egg
problem, resistance from key participants, and complexity
Despite the prominent examples of successful MSPs—successful MSPs are the exception,
not the norm.
MSP – Key Challenges
Chicken-and-the-
Egg Problem
1
Complexity
3
 As alluded to earlier, the chicken-and-egg problem refers to the willingness of participating groups to
join the platform when the other side(s) have not reached critical mass.
 As described earlier, one potential workaround is to launch the platform in stages, with each launch
focused at acquiring a customers of a specific side.
 Here are 5 additional potential solutions:
1. Subsidize the other side.
2. Increase the standalone value of the platform.
3. Become a seller—i.e. supply the product or service yourself.
4. Invite big end users to join your platform on either side.
5. Connect users from an existing platform.
MSPs can extremely lucrative businesses, but can be difficult to build. There are 3 key challenges MSPs encounter.
Resistance from
Key Participants
2

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Contents
 Overview
− Number of Sides
− Platform Design
− Governance
 Templates

14
Industry
segment Industry
segment
Let’s look at our first strategic decision—the choice on number of sides
(i.e. participant groups) to MSP should support
Increasing sides will diversify our revenue streams.
Number of Sides – Overview
Number of Sides
STRATEGIC
CHALLENGE
KEY QUESTION How many sides should our platform have?
DETAILS
 Most MSP only have 2 sides, where the 2 sides are customers and sellers.
 The decision on number of sides can be obvious in some situations, as it can be constrained by
the industry.
– An example would be eBay, which has the 2 relevant sides of customers and sellers.
 There are also situations where the MSP may begin with 2 sides and more sides emerge as the
MSP evolves.
– An example would be Facebook, where the initial 2 sides were its users and 3rd party
applications (e.g. Zynga). Over time, Facebook realized its key to profitability was through
advertising; and developed a sophisticated advertising platform for advertisers.
 Additional examples include:
– LinkedIn is a 3-sided platform: users/professionals, advertisers, and recruiters.
– iOS is a 2-sided platform: users and 3rd party apps.
– Android is a 3-sided platform: users, cell phone manufacturers, and 3rd party apps.

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This decision on number of sides involves 5 main tradeoffs and
challenges to ponder
Increasing the number of sides offers many benefits, but also comes with numerous
tradeoffs and challenges.
Number of Sides – Tradeoffs & Challenges
 The most obvious tradeoff is the exponential increase in complexity as we increase the sides.
Increased
Complexity
1
 Our business model becomes dependent on all sides functioning. In other words, it may not
be economically viable for 1 or multiple sides to exist independently.
Economic
Dependency
2
 There are often conflict of interest among the sides and the MSP. With more sides, these
conflicts could be exacerbated and more difficult to manage.
Conflict of
Interests
3
 With more sides—i.e. stakeholder groups—involved, it becomes difficult for the MSP to
introduce new, innovative, possibly disruptive features. This is because the MSP must
maintain the balance in the platform and cater to all sides.
Lowest Common
Denominator
Issue
4
 Back to this pesky problem. The chicken-and-the-egg problem is also made more difficult with
more sides.
Chicken-and-the-
Egg Problem
5

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Contents
 Overview
− Number of Sides
− Platform Design
− Governance
 Templates

17
Industry
segment Industry
segment
The second set of strategic decisions involves MSP design—specifically,
decisions around core features to include
Poor design decisions are incredibly costly—and have the potential to kill the MSP.
Platform Design – Overview
Platform Design
STRATEGIC
CHALLENGE
KEY QUESTION What core features should we include?
DETAILS
 Making design choices on what features and functionality to or not to include can be as simple
as a straightforward cost-benefit analysis.
– In such cases, the decision is just based on determining whether the value created for the
multiple sides served exceeds the cost of building (or acquiring) and implementing the
feature.
 MSP design decisions can be much more complex, however. The most difficult design
decisions revolve around features that put the interest of different sides of the MSP at odds with
each other (or with those of the MSP).
– These types of features create strategic trade-offs, meaning they create value for some
side(s) and destroy value for other side(s).
 Sometimes, we must make sacrifices with short-term revenue impact in order to appease the
participants whose utility has been diminished by the new design feature.

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 Related to Strategic Tradeoffs, this refers to whether a design decision should be
in favor of the side that brings in the largest share of revenues.
 In general, we should make design designs to benefit the side that is the most to
the MSP’s long term success.
 These refer to features that create value for one side at the expense of another
side.
 A great example is any advertising-supported medium (e.g. YouTube, Google,
Facebook). The tradeoff here is whether to display more or less ads. Displaying
more ads benefits advertisers and the MSP, but will negatively impact the
customer experience.
Effective platform design revolve around make decisions on key strategic
tradeoffs
Understanding and assessing these design decisions is imperative to avoiding potentially
irreversible design mistakes.
Platform Design – Tradeoffs & Challenges
Revenue vs.
Customer
Experience
2
2
Strategic
Tradeoffs
1
1

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Contents
 Overview
− Number of Sides
− Platform Design
− Governance
 Templates

20
Industry
segment Industry
segment
The next strategic decision is on pricing structure—how much should we
charge each side of the MSP (if any)?
By not charging 1 side, we can acquire more participants and drive more revenues from
the other side(s).
Pricing Structure – Overview
Pricing Structure
STRATEGIC
CHALLENGE
KEY QUESTION How much should we charge each side (relative to the others)?
DETAILS
 Each side of the MSP is a potential revenue stream.
 Despite this, it is common for MSPs to offer its services for free or a at subsidized price for at
least 1 side of the platform. Profits are then generate from the remaining side(s).
 If a side is not being charged for the service, the MSP must find others way to derive value from
that side. As the saying goes, “If you are not paying for it, you're not the customer; you're the
product being sold.” This is true for many companies:
Facebook. Facebook users use the platform free, but are being monetized through
advertisements.
Robinhood. Robinhood retailer traders are not charged any commissions, but their order
data is sold to market makers.
 In determining how to structure pricing, it is important to evaluate the price sensitivity of each
side.
1
2

21
Multisided Platform
Let us look at the pricing structures of numerous types of MSPs
Note that the users are not always on the loss-leader side.
Pricing Structure – Comparison
Advertising-supported media
(newspapers, over-the-air TV networks,
Facebook, Google)
Alibab.com, eBay, Rakuten
Payment systems
(American Express, Visa, Square)
Video game consoles
PC operating systems (Windows, Mac OS)
Ticketmaster
Loss-leader side
Users
Buyers
Users
Users
Application developers
Venues/event organizers
Profit-making side
Advertisers
Sellers
Merchants
Game developers
Users
Users
Users
Movie theatres
Fandango
vs

22
In figuring out the optimal pricing structure, we should follow 3 key
pricing principles
Pricing Structure – Pricing Principles
Charge more to the
side that stands to
gain the most from
the presence of the
other side(s).
2
 This principle should be followed when there is no priced transaction between the sides.
 Here are some examples to illustrate this principle:
– For business conferences, attendees and sponsors are charged, but not speakers.
– For social networks, advertisers are charged, but not users.
 This principle should be followed when there is a priced transaction between the sides.
 The rationale is if a side is already extracting little value from the transaction, if the MSP were to add
another surcharge, the remaining value may not be enough incentive to warrant participation.
 Here are some examples to illustrate this principle:
– For marketplaces (e.g. Amazon, eBay), the sellers are charged by the platform, not the customers.
– For food delivery services (e.g. Grubhub), restaurants are charged fees and typically not the
customers.
Charge more to
the side that can
extract more value
from the other
side(s).
3
 In following this guiding principle, we treat each side independently.
 The price sensitivity of a side can be gauged through a variety of factors:
– Availability of substitutions
– Industry standards
– Profile/demographic of the participants (e.g. business vs. consumer)
– Bargaining power of the side
Charge a higher
price to the side
with less price
sensitivity.
1

23
Contents
 Overview
− Number of Sides
− Platform Design
− Governance
 Templates

24
Industry
segment Industry
segment
The final strategic decision centers around governance rules—decisions
around who can join and what they can do
It is important for governance rules to be clearly communicated and for users to feel they
are treated fairly and equally—i.e. the same rules for all participants (within their side).
Governance – Overview
Governance
STRATEGIC
CHALLENGE
KEY QUESTION There are 2 key questions:
1. Who is allowed to join?
2. What are the various sides allowed to do?
DETAILS
 The success of the MSP is dependent on it having governance rules in place to properly
regulate the various sides, so that third-parties are acting as expected.
 The non-price governance rules fall into 2 buckets:
Rules around access to the MSP (these address the question, who is allowed to join?)
Rules around interactions on the MSP (these address the question, what are the various
sides allowed to do?)
 There can be significant variance across MSPs in terms of how tight their governance rules.
This is true even for platforms operating in the same industry.
– In fact, MSPs can differentiate through their governance rules. E.g., the more open platform
with looser rules vs. the more exclusive platform with tighter rules.
1
2

25
In dealing with governance, we have surfaced 3 key trades and
challenges
Governance – Tradeoffs & Challenges
Lemons Market
Failure (LMF)
2
 We need a certain level of quality assurance and transparency to avoid the Lemons Market
Failure (LMF).
 LMF refers to the situation where the platform is flooded with low-quality suppliers, which
drives out high-quality suppliers, thus also driving out customers.
 If the MSP allows too many participants in a single side, this may result in an overabundance
of participants.
 Too much competition must disincentivize participants to invest in innovations or developing
any capital-intensive offerings.
Too Much
Competition
3
 At the highest level, the question around how tight governance rules should be is a decision
around quantity vs. quality. Having looser rules will allow more participants who are qualified
to join (thus driving quantity); whereas higher tighter rules allow a more selective group of
participants (thus driving quality).
 Note the strength of the Cross-side Network Effects is a function of both quantity and quality.
 We also need to evaluate the benefits of higher quality against the increase costs of
implementing tighter governance rules. The costs can be both operational and technological.
Quantity vs.
Quality
1
Having poor governance may lead to actions that spiral into a market failure.

26
Contents
 Overview
− Number of Sides
− Platform Design
− Governance
 Templates

27
Insert headline
Insert bumper.
Strategic Decisions of Multisided Platforms (MSP) – TEMPLATE
1
Number of Sides
2 Platform
Design
3 Pricing Structure
4 Governance
• Insert filler text, filler
text, filler text, filler text
• Insert filler text, filler text,
filler text, filler text

28
Insert headline
Insert bumper.
Strategic Decisions of Multisided Platforms (MSP) – TEMPLATE ALTERNATE
1 Number of
Sides
2
Platform
Design
3 Pricing
Structure
4
Governance
filler text, filler text. Insert
filler text, filler text, filler
text, filler text. Insert filler
text, filler text, filler text,
filler text,
text, filler text.
text, filler text.

29
Insert headline
Conditions, Catalysts, Challenges – TEMPLATE
Insert bumper.
Source: Turn Products into Product Platforms, Deloitte, 2015
Conditions Catalysts Challenges
Where is it
playing out?
When?
Why is it difficult
to respond?
Conditions are where it
is playing out.
The catalysts are factors that precipitates changes,
while challenges are those we encounter that makes
our capacity to respond difficult.
EXAMPLES
CP – Home
appliances
Automotive
manufactures
Furniture Chemical
products suppliers
Commodities
food
More vulnerable More resistant

30
Insert headline
Insert bumper.
MSP vs. Product Platforms vs. Resellers Comparison – TEMPLATE
Product Platform
Product platform
Multisided Platform Reseller
vs vs
Side A
Side B
Sale of
essential
input
Sale of
final
product
Side A
Multisided
platform (MSP)
Side B
Affiliation
with the
MSP
Affiliation
with the
MSP
Direct
interaction
or
transaction
Side A
Side B
Sale of
goods or
services
Sale of
goods or
services
Reseller

31
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