There are three major challenges which each two-sided platform faces. Let’s go through each with examples.
#1 Get the pricing right
For two-sided platforms, the platform provider needs to choose pricing for each side. The pricing strategy should consider the willingness to pay for each side and the impact of the growth of the number of members on each side, including the network effects.
- Subsidize quality and price-sensitive users: Adobe Acrobat provides a platform for PDF creators to create documents and PDF readers to access the documents. It charges only the PDF creators in terms of subscription fees to create these documents. However, Adobe does not charge any amount to the readers, thus, subsidizing the price-sensitive users. This allows Adobe to build a large user base of readers on one side, increasing the interest and willingness to pay for the document creators.
- Secure marquee users’ exclusive participation in your platform: When a new mall opens, what is the first store that starts operation? Any guesses? Yes, either a movie theatre or a supermarket. These initiate an inflow of crowd to the new mall, thus, further attracting more retailers to lease stores at a desirable price. This accelerates the growth of the mall.
#2 Safeguard against a competitor from becoming a monopoly
Due to having fat margins, one of the competitors might try to become the only player in the industry. How can we protect ourselves from such players?
- Should a single service be provided in the industry: Check if using multiple platforms would be costly for the users. Also, check if special features don’t increase value for the users. Eg: DVD players decided to come up with a single DVD format as it was costly for the customers to purchase different DVD players for different formats and costly for the media producers to supply in multiple DVD formats. Moreover, DVD players had to be connected to a television set, so there was a very limited scope of additional features with utility.
- Decide whether to share the platform or fight for proprietary control: By sharing, platforms can gain an increase in market exposure and reduce rivalry. This strategy was followed by DVD players as shared above. To get proprietary control, we need to have big pockets to fight the battle and a strong relationship with the users. Eg: when Adobe launched Acrobat, it won the whole market by reaching out to its existing user base for adoption, large enough to kill the competitors.
#3 Protect from Envelopment
Many platforms have overlapping user bases. Big players in the market might be tempted to expand and enter into the services provided by your platform. The strategy should be to pivot the business model at the right time. Eg: RealNetworks was the leading streaming media software. When Microsoft started entering the industry, RealNetworks utilized the existing relationship with the customers and music producers to launch Rhapsody, the first on-demand music subscription service.
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Resources to learn more about the Platform Ecosystem
- The Age of the Platform by Phil Simon (Kindle | Paperback)
- Matchmakers by David S. Evans and Richard Schmalensee (Kindle | Audiobook | Hardcover)
- Platform Scale by Sangeet Paul Choudary (Kindle | Hardcover)