Disruptive Innovation: The Multi-Sided Platform

Multi-sided platforms (MSPs) that bring together two or more distinct and independent groups of customers are gaining prominence as disruptors in many industries. Startups like Grab, Spotify, Netflix and AirBnB, are growing into multi-billion dollar enterprises, but these companies all have one thing in common: information technology. With IT, companies gain the ability to build larger and more powerful platforms with expanded scope and complexity.

So why are some companies able to be successful but others are not?

According to Andrei Hagiu, an associate professor at Harvard Business School:

Although many companies play up the platform card, surprisingly few rigorously analyse the underlying drivers of their MSPs, instead relying on vague statements about “platforms” and “network effects” in order to capture attention.

Understanding the Multi-Sided Platform

An MSP facilitates interactions and/or transactions between the two or more groups of customers that it serves such that members of each group is more likely to utilise the platform when more members of another group does so. This is generally the chicken and egg problem that many companies face in designing a multi-sided platforms. Let us use Taobao as an example.

Taobao (淘宝网) is a platform that connects merchants and manufacturers retailing millions of products to customers. The more merchants that Taobao is able to draw onto its platform, the more comprehensive and appealing its e-commerce platform becomes from the consumer point of view. As a result, more customers increase user traffic to the e-commerce website, which then makes it more valuable to the individual merchant. This is a classic example of a constructive chicken and egg cycle.

So what is does a multi-sided platform do? At the most fundamental level, a multi-sided platform does 2 things: reduces search costs before the transaction and; reduces transactional costs.

Reducing search costs

Search costs are incurred by the various customer groups before they transact and are usually to determine the best “deals” they can get. For example, Tinder, both sides are searching for each other, and this search requires the platform to reduce the two-sided asymmetric information, which makes “sampling” of potential partners before a match easier. In contrast, television or newspaper advertising helps to reduce audience search costs by putting their content in front of them. Similarly, Google does exactly that when people search for content and advertisers pay to have their sponsored links appear at the top.

Reducing transaction costs

The second function of an MSP is to reduce (or eliminate) transaction costs after the search is over and the transaction is to occur. For example, Shopee, a Southeast Asia-focused consumer-to-consumer (C2C) mobile-first online marketplace, has a payment system built into the mobile app which significantly eases transaction costs between buyers and sellers by protecting the interests of both buyers (payment is only released to sellers after the buyer has received the item) and sellers (payment is made by the buyer but held in escrow by the platform).

Transitioning Existing Businesses into an MSP

Many existing businesses tend to cater to only one customer group, but may have the potential to undergo transformation into an MSP through offering one or both of the aforementioned values (i.e. reducing search costs and/or reducing transaction costs). The key is to identify new customer groups that can be profitably linked to your existing operations.

Case in point: 7-11 is arguably Singapore’s largest convenience store chain and it partners with other companies to provide services through their dense network of stores. Some of the key partnerships are with NETS and EZLink to provide top-up services, and TA-Q-BIN, a leading B2C parcel delivery service subsidiary of Yamato Transport. Such partnerships created tremendous convenience (i.e. cost savings) by allowing consumers to refill their cashcard and transit cards, as well as pick-up their online purchases from 7-11 (open 24-7) in front of their homes. In exchange, 7-11 receives a small fee from the partner companies to perform the service. These are only 2 of the many other services that 7-11 offers.

The benefits in transforming an established business into an MSP is that doing so allows the business to side step the inherent chicken-and-egg problem. Anyone who has tried to introduce a peer-to-peer marketplace (e.g. Carousell) knows it is exceedingly difficult to get both merchants and customers to adopt it at the same time—one side will not come without the other. The key is to leverage on a business’ established strength and then identify a new facet that can be capitalised on to create a strong network effect built on top of the existing one.

Designing an MSP or transitioning an existing business into an MSP can be a complex endeavour, but the most sustainable MSPs are those that are constantly evolve. Defining and redefining their boundaries, shaping industries standards and achieving profitable growth in the process. With a generous amount of creativity and technology, even traditional businesses can become MSPs, but the devil is in the details in defining new activities that will serve new customer groups through providing the largest possible search or transaction cost savings.

ABOUT THE AUTHOR

Marc Sng is a Business Strategist and specialises in organisational excellence and strategy. His interests are in business model innovation, operational strategy, leadership, change management, negotiation and dispute resolution. Marc holds a Bachelor of Business Administration from the National University of Singapore Business School, with a major in Management, and a minor in Technology Entrepreneurship from the University of Pennsylvania. Marc is also an associate mediator with the Singapore Mediation Centre, Singapore Academy of Law.