Platforms or Two-sided markets

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This lecture describes the Platform model or Two-sided Markets. Platforms serve multiple customer groups and benefit from network effects that take place with and between those groups. Businesses based on Platforms are able to adopt innovative pricing structures in which one side subsidizes another. When the marginal costs are near zero it can be practical to drop the subsidized price all the way to zero.

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  • http://hbr.org/2006/10/strategies-for-two-sided-markets/ar/1
  • Platforms or Two-sided markets

    1. 1. (Stanford BUS-21) Martin Westhead Mastering Marketing Platforms – Two/multi-sided markets How to make money by giving things away
    2. 2. Overview  Theory of Two-sided markets (Platforms)  Platform Examples  Strategic Challenges  Free Platforms
    3. 3. THEORY OF TWO SIDED MARKETS Strategies for Two-Sided Markets by Thomas Eisenmann, Geoffrey Parker, and Marshall W. Van Alstyne http://en.wikipedia.org/wiki/Two-sided_market
    4. 4. Two-sided market  Platforms with two (or more) user groups  Provide each other with - beneficial network effects Market Side 1 Market Side 2 Multi-Sided Platform (MSP)
    5. 5. How Platforms are Different Multi-Sided Platform (MSP) Conventional business Market Side 1 Market Side 2 $ $ Supplier Customer $ $
    6. 6. Externalities  Negative - Air pollution - Competing vendors  Positive - Number of users of Facebook An externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit - Wikipedia
    7. 7. Network Effect  A kind of externality where value of the product changes with number of users  Examples - Telephone - Facebook - Twitter  Can be negative - e.g. Traffic congestion  Scale network effect business - Cost fall with scale (nothing special) - Also value increases  Leads to dominant vendors
    8. 8. Two-sided Market Interactions Market Side 1 Market Side 2 Cross-Side Network Effect Same-Side Network Effect Multi-Sided Platform (MSP)
    9. 9. Network Effects for MSPs  Same side - Positive – more players => more online interaction - Negative – more sellers => more competition  Cross side - Positive – more games available to players - Negative – more adverts in programs  Must capture cross-side network effects - Avoid: subsidize a side that uses someone else’s paid - E.g. Netscape browser NOT tied to servers
    10. 10. Multi-Sided Platform (MSP)  Platform that facilitates interactions - Architecture – product design and infrastructure - Rules – terms of engagement and pricing  Platforms can be shared e.g. cars and gas stations - Usually no subsidies in shared platforms - Internet makes it easier to own both sides  MSP is not a reseller - Must facilitate direct interaction between markets  Typically, each side has verydifferent requirements - E.g. Credit card customers vs. merchants - Providers may specialize in serving a single side  Key feature: novel pricing and business models - Often one market side subsidizes the other - E.g. Adobe PDF needed to drop reader price to $0 to succeed Hagiu A., Wright J. "Multi-Sided Platforms" Harvard Working Paper 12-024
    11. 11. PLATFORM EXAMPLES
    12. 12. Platforms: HMO Platform HMO Doctors Patients Care facilities
    13. 13. Platforms credit cards Platform Credit card networks Card holder Bank Vendor
    14. 14. Platforms Games Console Platform Games Consoles Players Games writers
    15. 15. Platforms: Shopping Mall Platform Mall Shopper Store
    16. 16. Shared platforms Platform Standards for car fueling Cars Gas Station
    17. 17. Why is CNG not more popular?  Compared to gasoline - Cheaper - Safer - Much cleaner - White carpool sticker  Too few fueling stations - Reduced cross-side network effect
    18. 18. PRICING IN TWO-SIDED MARKETS
    19. 19. Pricing in Two-Sided Markets  In TSM one side can subsidize the other  Traditionally price is bounded - Min: Marginal cost per unit - Max: Customer’s willingness to pay  Look for the biggest rectangle under the demand curve Price Quantity
    20. 20. Independently maximize each market Price Quantity Price Quantity Neglects critical network effects Side 1: Consumer Side 2: Business
    21. 21. Collectively maximize both markets Price Quantity Price Quantity Side 1: Consumer Side 2: Business Leverage network effects Network Effects Total of red boxes must exceed blue
    22. 22. STRATEGIC CHALLENGES IN TWO- SIDED MARKETS
    23. 23. Strategic Challenges 1. Which side to subsidize? - Who pays and how much? 2. Winner-takes-all or shared? - How to manage winner-takes-all dynamic 3. Threat of envelopment - Competitors can come at you sideways
    24. 24. Challenge 1 Which side to subsidize?  Users that are price sensitive  Users that are quality sensitive - Charge users responsible for quality – eliminates low quality users  Marginal costs - If marginal costs of subsidy side are low (~$0) pricing becomes easier - Counter example: FreePC
    25. 25. Other Factors  Same side network effect - Consider excluding users to avoid negative network effects - Examples - Covisint – failed due to seller competition - Autobytel – succeed by offering only 1 dealership in a region  User Brand Value - Marquee users can be key - Celebrities for Twitter/Ning
    26. 26. Price is all about perception  Tom Sawyer - Persuaded his friends to pay him to paint There are wealthy gentlemen in England who drive 4-horse passenger-coaches 20- 30 miles on a daily line in summer because the privilege costs them considerable money but if they were offered a wage for the service that would turn it into work and they would resign – Mark Twain
    27. 27. Reversible business models  From Derek Sivers, founder of CD Baby  Night clubs in LA - Pay to play - Bands crave exposure more than money  Doctors in China - Paid by the healthy - Payment stops when you get sick  Gym in Denmark - Don’t pay if you go every week - Pay when you miss a week
    28. 28. Challenge 2 Winner-takes-all or shared platform?  Critical strategic decision either: - Try to dominate the whole market or - Share the platform  Examples - Windows at the turn of the century - Xbox and PS - Betamax vs. VHS standards battle - DVDs
    29. 29. Winner-takes-all market characteristics  Multi-homing costs are high - For at least one side  Network effects are positive and strong - At least for the side with high multi-homing costs  Neither side’s users require special features - Differentiation is difficult or irrelevant
    30. 30. DVDs look like winner takes all  Multi-homing costs are high - Both for consumers and producers  Network effects are strong and positive - More content is attractive to consumers - More consumers is attractive to content producers  Opportunity to differentiate limited - By TV standards  So why did the industry collaborate on a standard? - To avoid replay of VHS vs. Betamax war - Consumers held off purchase until winner declared - Marketing cost to participate in war very high
    31. 31. To win the battle  Require differentiation or cost advantage  Plus three other factors: 1. Preexisting relationships with market side(s) 2. Reputation for winning 3. Deep pockets  First-movers can have an advantage  So can late-movers - Learn from mistakes of others  Move fast, but not too fast - Don’t grow user base faster than you can scale - Manage cash carefully
    32. 32. Challenge 3 Threat of Envelopment  Rival platform with same users offers your functionality - Bundled as part of a bigger offer - Blurs market boundaries => convergence  Examples - Netscape vs Internet Explorer - Real Player vs Windows Media Player
    33. 33. Defenses against envelopment  Change business model - Real changed subsidy market - Charged consumers and provided content “Rhapsody”  Find a “bigger brother” - Real partnered with broadband TV, cellphone co.  Sue - Anti-trust law still open in this area - Real sued Microsoft for $760M - Time-Warner (Netscape) similar awards
    34. 34. FREE PLATFORMS
    35. 35. Economics of Free Service Adding a user - Increases value of Platform - Adds costs When Value > Costs It makes sense to offer service for free Value of adding a user Cost of servicing a user
    36. 36. Understanding the value of new users
    37. 37. Use Case: Adobe PDF  Leveraged existing user base for PostScript  Initially charged for both reader and writer  Moved reader to Free - Over 500 million users - Very attractive to content creators - Everyone has reader
    38. 38. Use Case: Glam Media Audience Advertiser Blogger Content $ Content Attention $ Attributed syndication - Site owner - Content creator -Referrer - Network
    39. 39. SampleLab: The Store Where Everything is Free  SampleLab (p60) - Store where everything is Free - Can take up to 5 items per visit - $13 membership - $2000 shelf rental for 2 weeks (90 items) - Focus groups – sell survey data
    40. 40. Practice Fusion Free medical records software  Freemium + Advertizing - $100 for ad free version - 10% adoption  Sell access to data - Longitudinal health records - $50-$250 per patient per study - 250 patents per doctor
    41. 41. Kill Bill Free Billing Software  Open Source Software - Available for free - Build a community  Network effects - User base creates credibility - Support network  Make money by - Selling SaaS service - Commercial plugins (App store) - Verification program Kill Bill
    42. 42. PLATFORM BUSINESS MODELS
    43. 43. Platform business models Give women free admission, charge men Bars, singles clubs Give children free admission, charge adults Museums
    44. 44. Platform business models Give away travel services, get a cut of rental car and hotel reservations Travelocity Charge sellers to be stocked in a store, let people shop for free “slotting fees” in supermarkets
    45. 45. Platform business models Give away content, make referral fees Amazon associates Give listings charge for premium search Match.com
    46. 46. Platform business models Give away content, sell stuff Slashdot/ThinkGeek Give away content, charge advertisers to be featured in it Product placement
    47. 47. Platform business models Give away resume listings, charge for power search Linkedin Give away limited “Green” house plans, charge builders and contractors to be listed as green resources Free Green
    48. 48. Summary  Theory of Two-sided markets (Platforms)  Platform Examples  Strategic Challenges  Free Platforms

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