ANDREI HAGIU PDF

In many ways, online marketplaces are the perfect business model. Since they facilitate transactions between independent suppliers and customers rather than take possession of and responsibility for the products or services in question, they have inherently low cost structures and fat gross margins. They are highly defensible once established, owing to network effects. Most entrepreneurs and investors attribute this to the challenge of quickly attracting a critical mass of buyers and suppliers. But it is wrong to assume that once a marketplace has overcome this hurdle, the sailing will be smooth.

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Five of the 10 most valuable companies in the world today—Apple, Alphabet, Amazon, Facebook, and Microsoft—derive much of their worth from their multisided platforms, which facilitate interactions or transactions between parties. And even if they do realize it, they often wander in the dark searching for a strategy to achieve this transformation.

In this article, Hagiu and Altman provide a framework for doing so. They lay out four specific ways in which products and services can be turned into platforms and examine the strategic advantages and pitfalls of each: 1 opening the door to third parties; 2 connecting customers; 3 connecting products to connect customers; and 4 becoming a supplier to a multisided platform. These ideas can be used by physical as well as online businesses. By becoming a multisided platform MSP that facilitates interactions between parties, a company may be able to provide new revenue sources while also preventing competitors from stealing market share from its product or service.

Here are four scenarios whereby regular products or services can become MSPs. The authors take into account the advantages and pitfalls of each and the resources, relationships, and organizational changes that would be required. Five of the 10 most valuable companies in the world today—Apple, Alphabet, Amazon, Facebook, and Microsoft—derive much of their worth from their multisided platforms MSPs , which facilitate interactions or transactions between parties.

Here we provide a framework for doing so. It lays out four specific ways in which products and services can be turned into platforms and examines the strategic advantages and pitfalls of each. These ideas are applicable to physical as well as online businesses.

Why seek to transform products and services into MSPs in the first place? Fear refers to the danger that existing and incoming competitors will steal market share from your product or service.

But many companies would benefit from adding elements of a platform business to their offerings. Our goal is to help managers discern how their products or services could become multisided platforms—and what challenges and opportunities might arise—so that they can decide whether or not to make the change. Our framework derives from our combined experience studying and advising more than a dozen companies including several mentioned below during product-to-MSP transformations.

Managers might want to use this article as the basis for a corporate-strategy offsite at which everyone is given the task of articulating MSP strategies around existing company offerings. That assignment should include answering questions such as: 1 Are there benefits to turning some or all of our products and services into MSPs?

The reason regular products and services are not multisided platforms is that they do not serve multiple groups or facilitate interactions between customers or groups. In this article we discuss four ways in which regular products and services can bridge this gap and become MSPs. In this scenario your product or service has a big customer base that third-party sellers of other offerings are interested in reaching. You become an MSP by making it possible for those third parties to connect with your customers.

The third-party products may be independent of your product or service or may be apps or modules that work in combination with your offerings. Intuit is the leading seller of financial management, accounting, and tax software products for consumers and small businesses in the United States.

In the past six years or so it has taken significant steps to turn QuickBooks, its flagship financial-accounting product for small businesses, into an MSP. Those products leverage data about small-business finances provided by QuickBooks. Since QuickBooks has also enabled its customers to apply directly to several third-party financial institutions for loans through a service called QuickBooks Financing. Health clubs are increasingly renting space inside their gyms to specialty studios so that the latter can serve health club members.

This allows a club to offer a greater variety of classes, which helps it retain existing members and attract new ones. The Lawson chain of convenience stores in Japan started in the s to turn its shops into MSPs that facilitate transactions between its customers and third-party service providers. Today Lawson customers can pay utility bills and insurance premiums, ship and pick up parcels through postal service providers, and claim items ordered from e-commerce sites just by visiting their local convenience store.

For your product or service to become a true MSP in this scenario, at least some of the connection between your customers and third parties must be made through your product. Intuit could simply have sold aggregated and anonymized QuickBooks data to third-party developers and financial institutions.

That would have added a potentially profitable new offering for Intuit, but it would not have turned QuickBooks into an MSP that could exploit network effects. It serves a baseline need for many customers, yet leaves a large number of heterogeneous customer needs unserved. You can encourage and enable third parties to fill those gaps with products and services that are typically complementary to yours.

It generates frequent customer interactions. That makes it a good candidate to become a one-stop shop for other, not necessarily complementary products and services. One is that customers who come to you primarily for a product or service may object to the advertising of third-party offerings, especially if they are paying for yours. Intuit faced this when it started exploring services to offer through QuickBooks. As a result, the company is very careful to allow only offerings that align well with the needs and desires of QuickBooks customers and to obtain explicit consent to participate in tests for targeted third-party offers.

Lawson customers can pay insurance premiums at their local convenience store. Another possible pitfall is that because you have an existing provider relationship with your customers, they may hold you responsible for the quality of their interactions with third parties. By enabling those parties to interact with your customers, you are implicitly endorsing their offerings—to a greater extent than does a company born as a multisided platform.

As a result, you must curate third-party products and services much more carefully than a company born as an MSP has to. Finally, some third-party products and services may cannibalize your offerings. The natural inclination would be to allow only those that are either complementary or unrelated to yours. But that approach can be misguided. In some cases it may make sense to coopt offerings that compete somewhat with yours and capture some of the resulting value to your customers.

The Forum Athletic Club has replaced its own cycling classes with the Cyc Fitness classes offered at its gym. The underlying logic is that if substitution from third parties is inevitable, bringing them onto your platform may expand its overall appeal to your customers, resulting in more demand and opportunities to sell your own services. In this scenario you are selling a product or service to two distinct customer segments that interact or transact with each other outside your offering.

You can become an MSP by modifying or expanding your offering so that at least some element of those interactions or transactions occurs through your product or service. QuickBooks is used by both small businesses and accounting professionals. Intuit is in the process of adding a matchmaking function within QuickBooks that would enable small businesses to find and contact accountants with relevant expertise in their geographic area and would allow already-matched business-accountant pairs to exchange documents through the product.

Garmin and other fitness wearables are used by both consumers and personal trainers. Many companies that offer these products also host online systems Garmin Connect, for example to store fitness-training and health data. Garmin could enable users to share their data with personal trainers, thereby enhancing the interactions between those two groups. This scenario highlights how different customer segments of the same product or service can become customer groups on an MSP. For example, men and women are customer segments for a hair salon no interaction between them is facilitated by the salon , but they are customer groups for a heterosexual dating service.

An entrepreneurial hair salon that started offering matchmaking services to its customer segments could convert men and women into customer groups. Intuit connects small businesses with accountants who have relevant expertise. There are two pitfalls associated with this strategy. First, you run the risk of wasting resources on a feature that ultimately creates little additional value for your customers or your company.

Worse, the MSP feature can be a detriment if customers perceive it as misaligned with the value of your underlying product or service. Having noticed that Diablo players were routinely trading digital items on eBay and other external platforms, Blizzard created the Auction House in to make those transactions easier.

It quickly became clear, however, that this feature created perverse incentives. Other players strove to accumulate game items for the sole purpose of selling them in the Auction House. Realizing that this behavior was undermining the value of the game itself, Blizzard shut down the Auction House in If yes, can our product or service enhance those interactions in a significant way?

How will our customers react to the addition of an MSP feature, and how will that feature affect the way they interact with the original offering? The second pitfall, as in scenario number one, is that although your offering is now simply facilitating a connection or a transaction between two parties, if one party is dissatisfied with the other, you may be held partly responsible. That means you need to put governance mechanisms in place to minimize if not eliminate the likelihood of unsatisfactory interactions.

Intuit will have to carefully curate the accountants it recommends to QuickBooks customers through its matchmaking feature. In this scenario you are selling two products or services, each to a different customer base, and the two customer bases interact outside your offerings. You can become an MSP by modifying or expanding your offerings so that at least part of those interactions occurs through one or both of your offerings.

The popular game Cards Against Humanity lets players complete fill-in-the-blank statements with humorous and often tasteless words or phrases printed on physical playing cards.

Its creators continue to sell the game and its numerous expansion packs to consumers, but they have also created Blackbox, a separate website through which they sell back-end fulfillment services credit-card processing, customer service, shipping to independent artists who want to sell their products—including third-party developers of other card games.

Currently these are separate offerings, but the company could create an MSP by linking them. A more sophisticated implementation would allow Blackbox customers to test game concepts on willing Cards Against Humanity users, who would provide feedback. Credit bureaus such as Equifax, Experian, and TransUnion offer a suite of services for consumers access to credit scores, identity theft protection, and so on and a suite of services for financial institutions credit reports on consumers and businesses.

These suites are based on the same data, but the two types of customers interact outside the services as when a consumer applies for a mortgage ; the credit bureaus do not directly facilitate those interactions.

Credit bureaus could create online MSPs where consumers could obtain their credit scores and receive targeted offers from financial institutions. This is the business model of start-ups such as Credit Karma and Lendio. These MSPs could go further and enable consumers to create and manage a digital data profile that they could then use to apply directly for financial products at participating institutions similar to the way Intuit allows QuickBooks customers to apply for financial products through QuickBooks Financing.

This scenario highlights how a multiproduct company can become a multisided platform that benefits from network effects. For example, by increasing sales of credit and identity-theft-protection products to consumers, credit bureaus can improve their offerings for financial institutions which leverage consumer data , thereby achieving greater cross-product economies of scope.

While that alone might be valuable, credit bureaus could create and capture even more value by linking the two kinds of products to facilitate interactions between consumers and financial institutions as described above. This would create an MSP and generate network effects: If more consumers use the credit and identity-theft-protection products, that increases the value of the offerings for financial institutions, which can then transact with more consumers more effectively and vice versa.

Van Alstyne, Geoffrey G. Parker, and Sangeet Paul Choudary April Yoffie April Eisenmann, Geoffrey G. Parker, and Marshall W. Van Alstyne October Two risks are associated with this strategy. First, as with scenario number two, you may waste resources on a feature that ultimately creates little value for your customers or your company relative to the underlying product or service. Second, optimizing for interactions between customers of different products may lead to design choices that limit the growth potential of one or the other product on its own.

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Andrei Hagiu

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