Multi-sided Platform Strategy - Part 1
Summary
TLDRThis script explores the dynamics of creating a two-sided marketplace, emphasizing the economic principles and network effects that drive such platforms. It delves into the challenges of balancing supply and demand across two distinct markets, using examples like Uber, Airbnb, and operating systems to illustrate the concept. The video also discusses the chicken-and-egg problem inherent in platform growth, highlighting the importance of network effects and the potential for exponential growth once the platform achieves ubiquity and standardization.
Takeaways
- 😀 Economics plays a crucial role in two-sided platforms, where supply and demand dynamics are managed for two separate markets simultaneously.
- 📈 The optimal price for a product or service can be found where the demand curve allows for maximizing profits, represented by the area of a blue square in the script's analogy.
- 🔄 Demand curves can be shifted outward by factors such as positive reviews or an increase in neighborhood population, affecting pricing strategies.
- 🛍️ Two-sided marketplaces have a demand side (customers) and a supply side (vendors), each with its own demand curve that influences the platform's pricing and access strategy.
- 🏬 Marketplaces are a type of platform, which can be exchange-oriented or infrastructure-oriented, like the iOS App Store.
- 🚗 Examples of two-sided platforms include Uber, Airbnb, operating systems, gaming consoles, and the PDF standard, each connecting different user bases.
- 🌐 The infrastructure of society is built on standards that started as two-sided platforms, facilitating collaboration among various parties.
- 🐣 The 'chicken or the egg' problem is a significant challenge for two-sided platforms, as they need to attract both buyers and sellers to initiate growth.
- 🔄 Network effects, or positive network externalities, are vital for two-sided platforms, where the value of the network increases as more people use it.
- 📊 Two-sided platforms aim to create virtuous cycles where the addition of users on one side attracts more users on the other side, leading to exponential growth.
- 📉 Negative network effects can also occur, such as when too many ads on a platform deter users, shifting the demand curve inward and reducing platform value.
Q & A
What is the primary focus of the video series on building a multi-sided platform?
-The video series aims to explain how to build a multi-sided or two-sided marketplace, focusing on the economics, network effects, and strategies for growth and management of such platforms.
What is the economic principle that dictates the optimal price for a product like a pizza in a single market?
-The optimal price is determined by the intersection of the supply and demand curves, which allows for maximizing revenue by finding the price point where the most possible people are willing to pay the highest price.
How can the demand curve for a product be shifted outward?
-The demand curve can be shifted outward by increasing demand through factors such as positive reviews, increased neighborhood population, or other market stimuli that make more people want the product.
What are the two separate markets that a two-sided marketplace addresses?
-A two-sided marketplace addresses the demand side, typically customers seeking goods or services, and the supply side, which consists of vendors providing those goods or services.
What is the difference between a platform and a marketplace according to the script?
-Marketplaces are a type of platform. Platforms can be exchange-oriented like marketplaces, or infrastructure-oriented, hosting value by some other party, like the iOS App Store.
Can you provide examples of two-sided platforms mentioned in the script?
-Examples include Uber, connecting transportation seekers with drivers; Airbnb, connecting travelers with homeowners; operating systems and gaming consoles like Xbox; the PDF standard; and Google's search platform.
What is the 'chicken or the egg' problem in the context of two-sided marketplaces?
-The 'chicken or the egg' problem refers to the initial difficulty of attracting users to both sides of the market when the platform is empty, as each side needs the other to be valuable.
What are network effects or positive network externalities?
-Network effects or positive network externalities are phenomena where the value of a network increases as more people use it, leading to a virtuous cycle of growth and value addition for all participants.
How do same side network effects impact the demand curve for a platform?
-Same side network effects can increase the demand for a platform's services if more users on one side attract more users of the same type, potentially allowing the platform to charge more.
What strategies can be used to build a growth strategy for a platform?
-Strategies for platform growth can include subsidies, pricing adjustments, platform openness, exclusive agreements, and understanding the dynamics that connect the demand curves of both sides of the market.
What are cross-side network effects and how do they influence platform value?
-Cross-side network effects occur when the value of the platform to one user increases with the number of users on the other side of the market, leading to a growth in platform value as it matches demands for both sides.
Outlines
🍕 Economics of Two-Sided Marketplaces
This paragraph introduces the concept of two-sided marketplaces and their economic principles. It starts with a simple analogy of a pizza business to explain supply and demand, and how an optimal price can be found to maximize profit. The discussion then shifts to the complexities of two-sided markets, where there are two distinct demand curves to manage—one for the demand side and one for the supply side. Examples of such marketplaces include Uber, Airbnb, operating systems, and even the PDF standard, which all serve to connect different user bases with specific needs and offerings. The paragraph emphasizes the importance of understanding the interplay between these two markets and the challenges of managing both simultaneously.
🌐 The Dynamics of Network Effects
The second paragraph delves into the dynamics of network effects, which are crucial for the success of two-sided platforms. It discusses how marketplaces and network orchestrators can create high value and profit margins once they achieve ubiquity and standardization. The 'chicken or the egg' problem is highlighted as a significant barrier to entry for new platforms, as it's challenging to attract both buyers and sellers without an existing user base. The paragraph explains the concept of virtuous cycles and the importance of understanding the dynamics that connect the two demand curves. It also introduces the terms 'same side network effects' and 'cross side network effects,' providing examples of how these effects can influence platform growth and pricing strategies.
📈 Demand Curves and Platform Growth Strategies
The final paragraph focuses on the practical application of understanding demand curves and network effects to build a growth strategy for a platform. It discusses how to leverage subsidies, pricing, platform openness, and exclusive agreements to attract and retain users on both sides of the market. The paragraph also touches on the risks faced by platforms and the importance of modeling the system to understand how to shift demand curves effectively. The goal is to create a self-sustaining ecosystem where the addition of users on one side of the market increases the value for users on the other side, thus driving continuous growth.
Mindmap
Keywords
💡Two-sided marketplace
💡Economics
💡Demand curve
💡Network effects
💡Supply and demand
💡Optimal price
💡Marketplace
💡Platform
💡Chicken or the egg problem
💡Virtuous cycles
💡Cross-side network effects
💡Same-side network effects
Highlights
Introduction to building multi-sided platforms and the economic principles behind two-sided marketplaces.
Explanation of standard economics in the context of a pizza business and the concept of the demand curve.
The optimal price point that maximizes profit by balancing supply and demand.
Shifting the demand curve through factors like positive Yelp reviews or neighborhood growth.
Understanding two-sided markets where two separate markets with their own demand curves interact.
Differentiation between platforms and marketplaces, with marketplaces being a type of platform.
Examples of two-sided marketplaces including Uber, Airbnb, operating systems, and the PDF standard.
The role of infrastructure in society, with examples such as Wi-Fi, Bluetooth, and the power grid.
The high value and profit margins created by marketplaces and network orchestrators.
The 'chicken or the egg' problem in platform development and the difficulty of initiating user engagement.
The concept of network effects and their impact on the growth and value of a platform.
The exponential growth potential of platforms due to positive network externalities.
Practical examples of network effects in action, such as the telephone network.
The importance of understanding the dynamics connecting the two demand curves in a two-sided market.
Strategies for creating virtuous cycles in platform growth, attracting both buyers and sellers.
Different types of network effects: same-side and cross-side, and their impact on platform pricing and strategy.
The impact of platform openness, subsidies, and exclusive agreements on growth strategy.
Risks faced by platform businesses and how to model the platform system for success.
Transcripts
so you want to build a multi-sided
platform or a two-sided marketplace
how do you do it
that is um the question that i want to
answer with this set of videos
and so the first one
we'll chat about economics
how economics applies the two-sided
platforms some examples of that
and
network effects
so let's talk standard economics
let's say you run a pizza business
and you can make and serve pizza for
four dollars so how much did you charge
and
this is what uh supply and demand demand
economics teaches us is that there's a
thing called the demand curve
which says that if you charge a whole
lot there's not that many people that
will want it if you charge very little
then lots of people want it but you
won't make much money so
say you charge 50 for your pizza
you make a little bit of money but not
many people will buy it
and the same thing for
the low end you can charge five dollars
per pizza but you're not going to make
much money
so what supply and demand teaches us is
that there's an optimal price somewhere
along this demand curve which allows you
to maximize the area of the blue square
meaning
the most possible people paying the
highest price
such that you make the most money
but what this also means is that
you can shift that demand curve outward
and so if you're focused on a single
single market like a pizza business
you could have positive yelp reviews or
more people move to the neighborhood
meaning there's more demand for your
pizza
and that allows you to either continue
charging the same price and get more
people or charge more and
optimize again
but the same thing applies when markets
shrink or demand shifts to the left like
a negative demand curve shift
meaning
less people want your product and are
willing to pay less
so how does this apply to two-sided
markets and platforms
well it's that there are two separate
markets that you're addressing at the
same time with a two-sided marketplace
and both of these markets have a demand
curve that you have to manage and the
demand curves play off of each other
so typically you would call one side of
this at demand side and the other side
of supply side
so let's look at a traditional
marketplace
a traditional marketplace has customers
and vendors customers who demand some
sort of good or service that they're
shopping for and vendors who have a
supply of things to sell
and so if you're charging access to your
platform for both of these types of
users then there's going to be a demand
curve which will apply to that
and as an aside you might be thinking
well what's the difference between a
platform and a marketplace
really marketplaces are a type of
platform and platforms run in two main
types either exchange oriented with like
a marketplace or they're more
infrastructure oriented where they host
value by some other party like the ios
app store
and so let's look at some examples
because they're
they're so prevalent in our society and
some of the most impactful businesses
that we see day-to-day
and so
uber is one where they're connecting a
demand side of transportation seekers
with a supply side of drivers and it's
really more of an exchange type business
airbnb the same thing with travelers and
homeowners
but operating systems in general are
also an example of this type of platform
where you have computer users who want
to use software to solve some problem
for themselves
and developers who have to make some
investment of their time and energy and
build applications to solve those
problems
very similar as xbox or general gaming
consoles
and developers again as well as an
interesting one around standards
themselves if you think of the pdf
portable document format standard which
is nearly ubiquitous across the web
today
it started out in a very similar way as
a demand side of people who wanted to
consume high quality content
and people who wanted to create content
that allowed them to
distribute that easily and
have a wide access to a user base
and google is another interesting one
where they
have people who are looking for things
so searchers on one side and
um a supply of people who are selling
things on the other side
and lastly credit cards are something we
see every day
but oftentimes don't think of as a
platform
where they're really connecting um
people who need to buy things with
people who are selling things and making
it easier
and one thing that's so fascinating
about these types of businesses is that
if you look at the infrastructure of our
society a lot of it is these sort of
standards that
allow lots of parties to come together
and collaborate
and so if you look at
just day-to-day life wi-fi dvd vhs
bluetooth
phones in general and from cellular
networks
and the market listing service in in
real estate
on the ac power grid
a lot of these things started with the
demand side and the supply side and took
an incredible amount of energy and
effort to
to get the market to sort of standardize
on a single way of doing things
and there's tons more there's a great
article that hbr
did called strategies for two-sided
markets
that i recommend
and
maybe more interesting or why you're
interested in this is that marketplaces
and network orchestrators
create
some of the highest value and highest
profit margins in a business because
once you
you reach this level of ubiquity and
standardization that
you have a very defensible and
monopolistic in many cases business
so why doesn't everybody do it
well it's because there's a significant
problem in getting these things going
which is the chicken or the egg problem
or really it's that if you have an empty
platform with no
buyers
and no sellers like this guy then it's
very hard to get these sort of flywheels
in motion
and
each of these users has their own sets
of demand curves but in the beginning
you don't have any users on either side
and so what you need to do is to
understand what are the dynamics that
connect these two demand curves
and what we're optimizing for is
creating these virtuous cycles meaning
it's like when buyers join the platforms
you get buyers coming to your retail
shop then sellers actually have a reason
to come there and take their time and
set up their things
and then and then once you have those
sellers there then that encourages more
buyers to come and join
and when you have more buyers then you
can attract more higher quality sellers
and
people who have studied these types of
businesses have broke them down into
the effects called network effects
you might have also heard of them as
positive network externalities
demand side economies of scale
and basically what that means is the
value of the network increases as more
people use the network so a classic
example is the phone network
if just you and one friend have a phone
then it's it's sort of valuable but
every additional person who buys a phone
adds value to everyone else in the
network and so the network tends to grow
exponentially
and this is also why we only have one
phone system and you don't have to have
10 different phones in your house
and so a good quote around this is with
two-sided network effects
the platform's value to any given user
largely depends on the number of users
on the network's other side
value grows as the platform matches
demands for both sides
so what this looks like in practice is
that you attract one side of the market
say buyers which attracts sellers which
allows you to get more buyers which
allows you to get more sellers which
allows you to get more buyers and so on
and so forth
and this back and forth motion
and
ways of shifting the demand curves on
either side or one side solely can be
broken down into a couple of different
effects same side network effects and
cross side network effects
and if we were to take some examples of
those we can look at positive cross side
network effects or things like say a
vendor wants to affiliate with a network
with a large scale customer bases
so with ebay for example lots of people
want to sell there because there's tons
of people buying there
and the same thing for developers who
want to build software for an operating
system or for a new mobile platform or
for a new gaming system
um they know that they can recoup their
investment if they go to a platform that
has lots of demand side users
and this also applies on the negative
side so if you think of tv and radio as
a platform
if content creators and content
consumers
if the platform
controllers add too many ads in then
less viewers actually want to partake in
that platform
and some positive examples on the same
side network
our developers want companies using the
same language that they're familiar in
because they're more employable that way
and gamers using game consoles want more
people or more of their friends using
the same console so that they can play
together
and very commonly on the negative side
vendors want to be the only provider of
their good or service in the platform so
they can maintain high margins with less
competition
similarly if goods are scarce shoppers
prefer less competition so they have a
higher likelihood of attaining those
goods
and
another unique example is like exclusive
clubs that have value based on how
exclusive they are well more people join
so if we look at each of these
specifically with the demand curve
perspective
we can start to compare the demand curve
on one side of the market with the other
and so if a positive cross side network
effect means you increase
the quantity of users on buyers
then that shifts the the demand curve
out
for the sellers and allows you to charge
more
and the same thing with the negative
side if you have more ads a higher
quantity of ads then your demand curve
shifts in and you have less potential to
charge money and less people that are
interested
and for the same side network effect if
you have more gamers
who attract more gamers that they want
to play with then that allows you to
make more money
and the same thing for if you have too
many sellers saying selling the same
goods or service then
they have a lower margin and they're
willing to pay less to be on your
platform
so we can start to to build this mental
model of how these types of effects
apply
uh broadly
and so in the next section we'll talk
about how do we use this understanding
to
build a growth strategy for a platform
utilizing subsidies pricing
openness of the platform exclusive
agreements
as well as look at risks that others
have faced and how to model
the system itself
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