Get Rich or Die Tryin: An introduction to Multi-Sided Platforms

As I wrote in an earlier post about Monday’s StartupQ8 Monthly Event, the phrase “multi-sided platforms” (or MSP’s) might sound dense and technical. However, some of the most successful ventures to come out of Silicon Valley are MSP’s, and with good reason. But before we get into the “why”, let’s establish the “what”.

Rather than focusing on a single customer group, multi-sided platforms bring together two or more customer groups. This is not the same as having two or more customer segments. EBay has two customer groups (buyers and sellers), and many customer segments (companies, home businesses, individuals, etc.). It’s about having multiple uses for your platform, not multiple user types. To illustrate the point let’s compare a multi-sided platform to a reseller. For this example, we’ll use eBay and FYE.

Let’s say I want to buy the album Born to Run*. If I search for it in eBay, I’ll find something like this:

As you can see eBay isn’t selling me the album. I am using eBay as a platform to buy a product from someone else. Note that the seller is a “Top Rated Plus” seller and eBay offers “buyer protection”. These are measures of what is called “quality certification” that eBay does to help you in your purchase decision. Yet eBay is not ultimately responsible for the product’s quality.

When I search FYE, I’ll find this:

I am buying Born to Run directly from FYE. They’re ultimately responsible for making sure the product is delivered and in good condition. It comes from their inventory.

So how do the business models of MSP’s differ from resellers? There are three key differences:

• Resellers typically keep inventory. MSP’s don’t keep inventory, their sellers do. As such, the capital required for MSP’s is much lower, and the potential return on invested capital is much higher.
• Resellers have more control over their profit margins. They get discounts on bulk orders and set their own prices. MSP’s have less control over their profit margins. They typically get a 5–10% margin on the transaction, but they also don’t lose as much if the product turns out to be low demand.
• Resellers are responsible for the product they sell. They must ensure the product’s quality. MSP’s are a platform for sellers, so it’s the seller who is ultimately responsible for the product’s quality.

MSP’s are both extremely challenging and rewarding. It is very difficult for startups to successfully become the best platform for whatever product/service it wants to sell. However, once you’re established as the industry leader, it becomes very difficult for a newcomer to replace you. Think of all the successful examples of multi-sided platforms, such as eBay, Airbnb, Facebook and Google (the customer groups for the last two are users and advertisers). Once they’ve established themselves they’re hard to displace. While they got rich, many of their competitors died tryin.

If you’d like to learn more about creating multi-sided platforms, join us at the StartupQ8 Monthly Event this Monday, May 27th. Details and registration can be found here.

*Before you guys point it out: Yes, I later realized it would have made more sense to use the album “Get Rich or Die Tryin” as an example :)