Multi-sided Platform Strategy - Part 1

Summary

This 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

00:00

🍕 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.

05:02

🌐 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.

10:03

📈 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.

Keywords

💡Two-sided marketplace

A two-sided marketplace is a platform that facilitates interactions between two distinct groups of users, typically consumers and suppliers. It is central to the video's theme as it discusses the dynamics and economics of such platforms. For example, the script mentions Uber, which connects transportation seekers (demand side) with drivers (supply side), as a classic two-sided marketplace.

💡Economics

Economics is the social science that studies the production, distribution, and consumption of goods and services. In the context of the video, it refers to understanding the pricing strategies and market dynamics of two-sided platforms. The script uses the example of a pizza business to illustrate the basic economic principles of supply and demand.

💡Demand curve

The demand curve is a fundamental concept in economics that represents the relationship between the price of a good and the quantity of the good that consumers are willing to buy. The video uses the demand curve to explain how businesses can find the optimal price point to maximize revenue, as well as how it applies to two-sided platforms where both sides have their own demand curves.

💡Network effects

Network effects, also known as positive network externalities or demand-side economies of scale, refer to the phenomenon where the value of a product or service increases as more people use it. The video emphasizes the importance of network effects in two-sided platforms, explaining how they can create virtuous cycles of growth as more users on one side attract more users on the other side.

💡Supply and demand

Supply and demand is the economic model that explains how the price of a product is determined by the interaction between the quantity that producers are willing to sell (supply) and the quantity that consumers are willing to buy (demand). The video script uses this concept to discuss the optimal pricing strategy for a pizza business and extends the discussion to two-sided platforms.

💡Optimal price

The optimal price is the point on the demand curve where a business can maximize its revenue or profit. The video script explains that by finding this point, a business can ensure the most possible people are paying the highest price, which is a key strategy for both single markets and two-sided platforms.

💡Marketplace

A marketplace is a type of platform where buyers and sellers come together to exchange goods or services. The video script distinguishes between marketplaces and other types of platforms, noting that marketplaces are a subset of platforms and often operate on an exchange-oriented model, like eBay or Airbnb.

💡Platform

In the context of the video, a platform is a broader term that includes marketplaces and other types of systems that facilitate interactions between different groups. The script discusses two main types of platforms: exchange-oriented and infrastructure-oriented, with examples like the iOS App Store and operating systems.

💡Chicken or the egg problem

The 'chicken or the egg' problem refers to the dilemma of which one of two interdependent elements must come first. In the video, it is used to describe the challenge of getting a two-sided platform started, as attracting users on one side requires having users on the other side already present.

💡Virtuous cycles

Virtuous cycles are self-reinforcing loops that lead to positive outcomes. The video script describes how virtuous cycles are essential for the growth of two-sided platforms, as attracting users on one side of the platform can lead to more users on the other side, creating a cycle of increasing value.

💡Cross-side network effects

Cross-side network effects occur when the value of a platform for one group of users increases as more users from the other group join. The video script uses this concept to explain how the presence of buyers on a platform can attract more sellers and vice versa, which is crucial for the success of two-sided marketplaces.

💡Same-side network effects

Same-side network effects happen when the value of a platform increases for users of the same group as more members of that group join. The video script provides examples such as developers preferring to work on a platform with many other developers for better job prospects and gamers wanting more people to play with on the same console.

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