Recipe
Also called: Two-sided Market, Broker, Platform, Multi-Sided Platform
See also: Affiliation, Auction, Hidden Revenue, Leverage Customer Data, Peer-to-Peer, Shop in Shop
| Key Partners | Key Activities | Value Propositions | Customer Relationships | Customer Segments | |||||
| Key Resources | Channels | ||||||||
| Cost Structures | Revenue Streams | ||||||||
How: Facilitate interactions between multiple complementary groups of customers for mutual benefit.
Why: The embedded network effect can help increase the platform exponentially while costs grow linearly, if at all.
This business strategy is part of the Business Model Patterns printed card deck.
Proven business models that have driven success for global leaders across industries. Rethink how your business can create, deliver, and capture value.
Get your deck!Indirect network effects
Multi-Sided Markets refer to platforms that facilitate interaction between two complementary groups for mutual benefit through an intermediary. These markets are characterized by indirect network effects, where the increased use of the platform by one group makes it more attractive to the other group, and vice versa. The goal of operating such a platform is to optimize indirect network effects and thereby bind customers to the company. It is also possible for a multi-sided market to involve three or more customer groups.
In a multi-sided market, there are usually two or more groups of customers who interact with each other through a platform or intermediary. These groups can have complementary needs and can benefit from interacting with each other.
Before a multi-sided market can be successful, the so-called “chicken-and-egg problem” must be addressed. This refers to the fact that neither group has an incentive to join the platform so long as there are no customers using it. To overcome this obstacle, platforms must achieve speedy visibility through extensive advertising campaigns and special offers.
Where did the Multi-Sided Market business model pattern originate from?
Multi-Sided Markets have a long history, with some of the earliest instances dating back over 600 years. Stock exchanges were among the first applications of this concept, with the first such exchange that resembled the current model being established by the Van der Beurze family in the 15th century. This family owned an inn in the Flemish city of Bruges, which was a major European trade hub at the time and attracted influential traders who engaged in trade and financial activities at the inn, connecting buyers and vendors. Today, stock exchanges continue to be important examples of Two-sided Markets.
Applying the Multi-Sided Market business model
To implement a successful Multi-Sided Market business model, it is necessary to first understand who the relevant stakeholders are and how they are connected. This understanding serves as the foundation for designing a model that is appropriate for the company in question.
Multisided platforms serve as intermediaries, facilitating the exchange of goods and services between various parties. They do not produce or offer these products or services themselves, but rather create value for their participants by providing a platform for exchange. This can take the form of a digital environment for social media and content platforms, or a transaction platform for e-commerce and sharing platforms.
Indirect vs direct network effects
Multisided platforms often rely on network effects to create value for their participants. These can be either direct (same-side) or indirect (cross-sided) network effects.
- Direct network effects occur when participants on one side of the network affect each other, as is the case with social media platforms.
- Indirect network effects, also known as cross-sided network effects, occur when the participants on one side of the network affect those on the other side.
This is typically seen in multisided markets where there is a balance of supply and demand.
Revenue streams of the Multi-Sided Marketplace
There are several ways that multisided platforms can generate revenue, including transaction fees, charges for access or enhanced access, and advertising. However, these platforms also face a number of challenges, including the need to balance the interests of various participant groups, managing regulatory compliance, and navigating shifts in the market. Despite these challenges, multisided platforms can be highly lucrative for those who are able to successfully navigate them.
Players in the Multi-Sided Market business model
- Buyers. Multi-sided marketplaces offer a number of benefits for buyers, including ease, speed, and cost savings. As an example, consider the pre-Uber process of hailing a taxi. This often involved standing on the street or calling a dispatch number and waiting for a ride, with no information about the driver and uncertainty about the final cost. In contrast, Uber’s platform allows users to easily request a ride through a mobile app, with shorter wait times and transparent pricing. While Uber’s model is not perfect, it has been successful in attracting a significant number of users away from traditional taxis and other modes of transportation.
- Sellers. Multi-sided platforms generate significantly more demand for sellers than they would be able to achieve on their own, as well as providing useful tools for managing listings and transactions. For example, Airbnb offers a simple and effective platform for listing vacation rentals, with powerful tools for managing bookings, fees, and profiles. This has attracted a wide range of supply, including individuals who may not have previously considered renting out their properties. Overall, the benefits of using a multi-sided marketplace often outweigh the cost of any fees or commissions for sellers.
- Facilitators. Multi-sided marketplaces have the potential to grow rapidly through network effects and cross-side demonstration virality. Network effects occur when the value of a product or platform grows as more people use it, creating a virtuous cycle of increasing demand, supply, selection, and competition. This can lead to a drop in user acquisition costs and the ability to capture more value from each transaction as the platform grows. In the Peer-to-Peer sharing economy, cross-side virality can also significantly boost network effects by bringing in new buyers who also have the potential to become sellers on the platform. These dynamics can create a powerful growth engine for marketplace entrepreneurs.
Challenges of the Multi-Sided Market business model
Implementing the Multi-Sided Market model comes with a number of challenges:
- Solving the Chicken-and-Egg Problem. The chicken-and-egg problem refers to the challenge of attracting both sides of a multi-sided market platform to join and use the service. It is often recommended to focus on aggregating the harder side to attract the easier side.
- Achieving Liquidity. To reach liquidity, it is important for a multi-sided market platform to find a balance where the size of one side is sufficient to serve the other. Focusing on a small, specific niche and gradually expanding can help achieve this balance.
- Building Trust. Establishing trust is essential for a multi-sided market platform to succeed. Features such as a review system and mechanisms to create social proof can help build trust among users. Additionally, owning the transaction process, from messaging to payment, can smooth the user experience and prevent disintermediation, or the bypassing of the platform for transactions.
Your initial marketplace offering should spend as little resources as possible on the facilitating product, as resources are better invested in marketing, community building, and user research. These efforts can help achieve liquidity, solve the chicken-and-egg problem, and set the stage for network effects to take hold.
Examples
Spotify
Distributing 70% of total revenue to its music rights holders lets Spotify stream music to both paying customers and free users.
eBay
The Platform allows sellers to list products for a small fee, while buyers can discover and bid on products they desire.
JCDecaux
Advertisers pay for prime locations and media opportunities to reach users, while users benefit from access to cross-subsidized merchandise. By providing city authorities with free or reduced-cost street furniture in return for exclusive advertising rights.
Metro newspapers
Finances production and distribution through the sale of advertising space, providing advertisers with access to a wide readership.
Diners Club
Bring together cardholders on one side and retailers on the other. Cardholders pay an annual subscription fee, while merchants are charged a percentage of each transaction. To succeed, it is necessary to attract a critical mass of both cardholders and merchants.
Trigger Questions
- How would Google manage our business?
- Will you be able to offer economic advantages to all sides of the transaction?
- Is there a fragmented supply base?
- What are the key stakeholders in our industry, and how are they currently interconnected?
- Who is currently left out of these connections, and why?
- What value streams (including products, services, and money) flow between different players in the industry?
- How does our company fit into this value network?
- Is it possible to create a multi-sided business model that connects all players in a more innovative and value-added way?
This business strategy is part of the Business Model Patterns printed card deck.
Proven business models that have driven success for global leaders across industries. Rethink how your business can create, deliver, and capture value.
Get your deck!- Business Model Navigator by Karolin Frankenberger and Oliver Gassmann
- The two-sided marketplace strategy by Sharetribe
- The Framework To Build A Successful Two-Sided Marketplace by Gennaro Cuofano
- A Dozen Things I’ve Learned about Multi-Sided Markets (Platforms) by Tren Griffin
- Multisided Platform Business Model by Daniel Pereira
- Two-sided marketplace by Juho Makkonen
