Multisided platform dilemma: how to win the fight for network externalities

The multisided platform are becoming mainstream in the startup world due to the largely success of Airbnb and Uber. Startups search winners takes all market everywhere fighting for network externalities effect.

They ignore one big factor in order to succeed, and to increase the multihoming cost of their user base.

Let’s start from the beginning.

Airbnb is a perfect example multisided platform, aiming at of putting a connection between a demand side and a supply side. In this case home owners, with home’s short-term renter. A great case of a startup which finds the right market, create a great ecosystem and turn itself into a multi billion dollars business.

Many successful startup nowadays has adopted this kind of model, especially in sector where meeting demand and supply seems very complicate. In this case this process may be be long, the users have big search and multihoming costs, and building an online platform is supposed to make things easier.

So how a multisided platform in general innovate a sector?

They make a website with a good graphic and design, and then they try to make the process of meeting demand and supply in the smoothest possible way as much as they can on both sides of the platform.

In general this translates into presentation video, how to do videos, and millions of money spend in advertising, search engine optimization and customer acquisition.

A startupper will ask “Because the more people are inside my platform, the more my platform is going to win on the market over the competitors due to the network externalities, isn’t it right? So, when I will have enough user base I will be the one who takes all the profit of the sector correct?”

Well, not really. You can acquire a huge user base, get a big traction, but if you do not give them a valuable or proper reason to remain, your competitive advantage may be vanished in a matter of weeks.

Hereafter, these platforms introduce endless of verification process, peer to peer valuation and possibility for the users to implement and personalize their profile/offer, in order to lessen the lack of trust during the transaction.

The battle for network externalities

However this is not anymore sufficient and this model is quite easy to replicate. In reality this what basically happens: other startup found the profitability of the market, and they enters inside as a second mover; then comes the third one and so on … Since that moment great ads of the platform start coming out everywhere for the happiness of marketing manager and customers, who can often rely on formula such as coupon and “bring a friend for a discount” to gain some extra on their e-shopping.

The lower are the multihoming and switching costs for users, the more the scheme repeats itself. The examples are countless if you look around the startup world.

In Milan for instance now we are invaded by food delivery ads.

“Ok but what is the main factor that makes one platform gains audience and actually being successful in this marketing fight?”

The answers as often happens is depends. It depends from the sector, the type of product or service, the value given to the extra features of this product, the user expectation regarding the transaction and many others.

BUT there is often one big factor that make multisided platform succeed in the game at the early stage.

The commitment of the platform.

The platforms that actually gives some valuable and effective warranties to one of the sides are likely to win the competitive game and gain more tractions on the users more than the others.

The more risky is the transaction and the more money are involved in it the more this factor becomes important.

When I was writing my master thesis about sharing economy back in 2015, I was often realizing how the platform which actually get involved directly were likely to win the trust of the supply side faster and actually attract the best one of these.

The 1 big factor that makes Airbnb the number one

Let me clarify with an example. Airbnb was not innovative in back in 2008. There were already many website providing exactly the same service. I think for instance Roomorama was really the first mover in this sense to provide such type of service as clearly stated by Rachel Bootsman in her famous book “What’s mine is yours” .

Indeed as another article by Growth hackers clearly points out, the real boom and growth of Airbnb is dated back in 2011 when Airbnb was introducing its professional photography service.

Expensive? Too much effort? Maybe. But for a sharing economy service is just an expansion of what it does already with its core service: connecting people indeed.

However back in 2015 when I was attending the Airbnb Open in November the same CEO of Airbnb Brian Chesky says “We are many today (…)..but what is amazing is that half of you become host in the last year.” (You can watch the entire video of the conference here.)

So what happens back in 2014 to convince half of the host of the world’s most popular to join the sharing economy?

The introduction of an insurance service for the eventual damages created by guests arrived through the platform was starting in November 2014.

Airbnb was the first platform in the home rental sector to provide such type of commitment. Certainly, the sector was already booming together with Airbnb, thanks also to his referral to a friend program, but it was the only platform providing this sort of service and actually supporting the supply side in such a strongly way.

So when home owner discover these home rental services’ world, and they have to choose one of the many websites around they were always choosing Airbnb as the first choice because it was the only one providing a strong commitment during the deal.

The commitment factor and the competitive advantage

“Ok but an insurance may be very expensive for a newborn startup plus I risk many money”.

Did this system was successful and gain Airbnb many customers? Extremely! How many times they pay something because of some damages happened during the accommodation of some guests around the world. Quite rarely. Below 0.01% of the total transaction. Airbnb was actually very smart in implementing a system to low down the risk of accident to a minimum level, thanks also to the peer to peer pre-valuation, and many trust enhancement system they manage to establish.

Indeed here is the thing: if your platform is valuable and well designed, an insurance is just an excuse to convince the lagging users to join in your platform.

Moreover as the insurance business teaches, it is all about a game of statistical probability and price of the fee, that varies according to the issues you have in the past.

Something also curious happens: the good property owners, the ones with super luxurious houses, very jealous and careful about their products, select the only good property providing them enough insurance to rent their places.

Not only Airbnb manage to attract property owners from all around, but they also attract and fidelize the best ones. The curious thing is that at the same time TripAdvisor was entering inside the market with lower fees.

So what happen then to Airbnb? Well the guests have great experiences thanks to outstanding houses inside the platform, they refer a platform to a friend, who refer to another and so on…

But what really keeps the user base was and is mainly the good quality of the apartments you could only find in Airbnb. Of course Airbnb has tried in many ways to lock the hosts in using only their platform penalizing badly the ones who cancel a booking, but many of them won’t even try neither.

“Take care of your employees and they will take care of your customers too” Richard Branson used to say. While on the other say Brian Chesky stated “Our product at the end of the day isn’t technology. Our technology is a platform. What we actually offer are our hosts.”

Conclusion

In the end the critical aspect and the competitive advantage of a platform before the demand is actually the supply side. But actually ensuring these sides with valuable commitment from both parties will allow your platform to have a switching barrier that actually matter at little or no cost.

It is important to be customer centric but also it is important to be supply center. The only difference is that, if you provide insurance to your customers may not be enough to keep them inside the platform and depends a lot from the product. On the other side if you provide valuable insurance to the supply side you may be able to attract the most valuable one which will actually guarantees a great experience to your end users, who will likely recommend your platform not them. In the end your brand will win and this is what actually guarantees you a long term advantage.

Blabla car, another excellent startup examples takes some risky moving advantage and is now providing insurance for their travel. Furthermore, is among the few only car travel sharing app which actually provides a credit card payment in advance, and a system which protect both sides.

So, does Hello Alfred, a startup based in NYC which offer their concierges on demand, the status of employees, besides being only a sharing economy platform. Or Move24, a startup based in Berlin, which provide some sort of insurance for their moving services.

Now we see the proliferation of on demand food delivery and on demand gigs or freelancing platform. In my prediction the ones who will actually manage to offer some real and valuable warranties to their supply side, will actually be the ones to attract more users, to gain more traction, and succeed in their chicken and egg dilemma of their “winner takes all” market.

Please let me know what is your position on this. Is this the critical factor to success for multisided platform?

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