What is a Multi-sided Business Model?

The Multi-sided Model

In Crema’s previous post Dan discussed what makes Crema different as a technology firm. One of the key activities that makes us different is that we excel at software AND business creation. Our team is able to work with clients to build their product and implement the right model to support their business. The first model I will unpack in more detail is the Multi-sided Model. In this post you’ll gain clarity on the basic format of this model, the typical challenges you will face, and how Crema approaches those challenges with our clients.

Multi-sided model defined…

An application or solution that scales a primary user-base quickly, and generates revenue through a secondary (behind the scenes) customer.

Similar to On-Demand Marketplaces (the next post to come), the multi-sided model requires two parties: a Consumer and a Customer (i.e., Buyer). Within this model, the largest group by far are the consumers. This group uses the platform as part of their normal routine and pays the business with what Ash Maurya calls a derivative currency. In most cases, this currency is attention and routine usage of the application.

The other side of the model, the Customer, is a much smaller group but are equally important. This group is where the real currency, revenue in real dollars, comes from. The time and effort provided by the Consumer creates enough value for the Customer and they willingly pay for the data that comes from that activity.

A great example of this is Facebook. FB has around 1.8 billion active users on its platform, creating a wealth of consumer data and behaviors (the derivative currency).This information is then used to provide paying customers with valuable data used for marketing and advertising. Businesses pay fees to FB to advertise their products and services to consumers that fit their market segment.

Another example is a mobile application that our team built as part of our Innovation Lab. In the summer of 2016, our team created String. The premise was to provide a mobile concierge that would help you decide what you would do that day or evening. The application has a Conversational UI that guides you through a series of questions to learn your preferences and then make suggestions for things to Eat, Drink, or Do. Our initial hypothesis for a revenue model would be to scale the consumer side to a critical mass, and then create a proposition for the Customer in which they would pay for access to the Consumer’s data in the hopes of increasing business growth. String is not yet live in the market, but is still at the top of our internal list of projects. This type of business model is a long play and incredibly dependent on month-over-month, year-over-year consumer activation, acquisition, and retention. It also has the same challenge as On-Demand Marketplaces, in that it requires two different users in order for the model to be complete. The main difference, however, is that On-Demand Marketplaces have to have both sides immediately in order for the model to work. A Multi-sided model, on the other hand, can stay afloat for quite some time before the secondary customer becomes a necessity. This, however, completely depends on the amount of financial runway held by the company.

Challenges to be faced

If you were to boil the list of challenges down to a concise list, it would look like this:

  1. Multi-sided products require healthy consumer growth, which typically comes with little to no early revenue as the customer is not yet activated.
  2. Within this model, you have to constantly be acquiring, activating, and retaining customers to sustain high growth and minimize consumer churn. Key areas to pay attention to concerning your consumers include:
  3. Early Adopters. You must put a lot of your time and effort into capturing the attention of your first users, building an initial user base that is excited about the business.
  4. Referrals. The product must have high enough appeal and create enough value for the consumer to refer others to the app.
  5. Retention. Your product and model has to remain relevant and stay on top of the adjusting problems your consumers have. This requires tight feedback loops and intentional engagement.
  6. Refinement. You have to be able to add and refine functionality in a way that appeals to new consumers and doesn’t frustrate the early adopters.

Crema’s approach to these challenges

When we consult a client whose business fits this model, we utilize the following methods and processes to address these challenges.

Early customer Development

There is no better time to identify and understand your first customers than now. Better yet, start even before the first line of code or UI mockup is created. That is where we start with our clients. As we define the problem they are solving, the solution they want to create to address that problem, and the business model used to deliver the solution, we’ll take the proposition to their intended customers. Our goal is to understand the customer, the initial appeal of the product, and whether or not it provides high enough value for them to pay for it. Once we achieve a desired level of validation, we know who the early adopters are and what they need from the solution.

Prototyping and MVP releases

We believe in releasing early and often. Our team thrives on creating priority lists that are achievable in week long sprints, and are associated with your top business outcomes. Once these builds are approved by the client, they are released into the “wild” to the early adopters in order to test product-market fit. The goal is to create a high level of value, while minimizing technical debt and cash burn. Gaining feedback with a functional product in this phase is the truest way to acquire and retain users.

Feedback loops through tools like intercom and phone surveys

We are strong advocates for creating really tight feedback loops with your customers. Your customers are your primary source of feedback, and their input is as good as gold. However, you have to listen. It sounds exciting to set up feedback mechanisms through tools such as Intercom and Mixpanel, and it is. However, it is just as easy to start neglecting your customers even after you put time and effort into setting up the loops. Crema understands this and works hard to not let that happen. Our team sets up the channels and actively listens and engages your customers so that we can learn. We learn about what they like, what they don’t like, what they want changed, etc. Taking your foot off of the gas during this stage is recipe for increased churn…and that cannot happen in a Multi-sided model.

Start thinking about the buyer early

Even before critical mass is achieved, we encourage our clients to start identifying the secondary customer. This customer is the one who is interested in the audience and their activity, and will hopefully see enough value in the data to pay for it. The process is similar to understanding and validating the consumer, but still requires separation as the two sides are different.

What’s next?

Hopefully, you now have a much better understanding of the Multi-sided Model, its challenges, and how those challenges can be mitigated. This model is very common and can be executed well as long as each side of the model is understood and actively engaged, starting with the consumer. I look forward to unpacking the next model: On-Demand Marketplaces. This model is growing rapidly and is incredibly difficult to execute well. You’ll learn next week how Crema approaches On-Demand Marketplaces, and see first-hand how we have achieved success in this model.

Until then…cheers!