Understanding Multi-side platforms and Network-effect with Facebook and Tinder
Multi-side platforms work on the concept of network-effect. But makes it powerful, renders it weak too. Confused? Read on.
You may have come across words like multi-side platforms and network effects recently while reading about some new-age business models. This would have led you to wonder what these words mean and imply in real life? This piece will help you to understand these simple and often used (and sometimes abused) words with the help of companies and brands that exist around you.
But first, let us picture this. It is late 2000s and a friend reaches out to you to ask you if you would be interested in joining a new social network, called Facebook. The first question you’d have would be — “Who else is on that platform anyway?”, or “Are my friends going to be there?”. Right? What good is a social media platform, without the social currency i.e. the people on it? But when a new platform is trying to create a space for itself in a new market, there is a problem of ‘not enough social currency’, or not having enough people on the platform to connect with. Let us understand this better.
You would join this social media platform only if your friends are there on it. But your friends would join this platform, only when their friends (including you) are there on it. Do you sense a problem? Both you and your friend would join it only if the other person is on it. It is a classical chicken-egg problem.
Now if you are an executive from this company, your task is cut out. Somehow motivate one set of people (for e.g. you) to join the platform, even if it does not have the other set of people (for e.g. your friend) on this platform. This is usually the most difficult and often an expensive part. Once the first set of people (you) is already there on the platform, promote to the second set of people (your friend) to join the platform bringing in the FOMO (fear of missing out) aspect. Trust me, it is much more difficult to do than it sounds. But that’s what all social media platforms have to do.
You finally created an account on Facebook because your friend had an account there, and another friend of yours created an account on it because you were there. Thus, as more people create their accounts, it leads to an exponential increase in the number of users, as their friends create accounts too. What was once the challenge, becomes an opportunity. Eventually, as more people created accounts, the number of accounts rise like wildfire and voila, you cracked it!
Eventually, as more people created accounts, the number of accounts rise like wildfire and voila, you cracked it!
Facebook, in this case is a platform that brings together two sets of people (or customers) together who want to connect with each other. These two sets of people may be connected with each other for personal or professional reasons. That is why, Facebook is a multi-side platform that brings together two sides of customers for mutual benefit. But the definition of Multi-side platforms gets more interesting when we look at more platforms, which undertake similar endeavors.
Similar to Facebook in this regard is the online dating platform, Tinder. People use Tinder to connect with people who have similar interests and hobbies, to eventually meet with them. While Tinder can be used by people with different sexual orientations, for this example, we take two people with a similar sexual orientation — straight. Let us assume Mike is looking to meet a woman with similar interests to explore dating possibilities. For Mike to be on Tinder, it is important that there are enough women on Tinder so that he has more options to deliberate on, and choose to match with. Unless there are more women, the platform will not appeal to Mike. But what would lead to having more women on Tinder?
Going by the multi-side platform logic we discussed for Facebook, we know that there has to be enough number of men on the platform that would make it worthwhile for women to be on that platform. Hence, presence of one side of customers (in this case women) affects the interest and presence of the other side of the customers (in this case men like Mike). This phenomenon, where rise in one side of the customers leads to increase in the other side of the customers on a multi-side platform is called network-effect. It is called so because the growth of the platform is influenced by the network between two sides of the customers.
This phenomenon, where rise in one side of the customers leads to increase in the other side of the customers on a multi-side platform is called network-effect.
While Facebook and Tinder are both personal platforms, multi-side platforms are more prevalent in business applications. Since we now know what a multi-side platform actually is, we can identify more such companies which are multi-side platforms bringing together two sets of customers. In case of business application multi-side platforms simply bring together two sides to facilitate demand and supply function. Let us explore this further.
A new restaurant aggregator in the town reached out to you to join their platform and order food from it. You are excited for this new option in the town and join the platform only to see that there are hardly any restaurants on the platform. You now know the reason. This is because since there are not enough customers on the platform as yet, not many restaurants are interested to sign up for the platform. But if there are not enough restaurants on the platform, why will more customers sign up for it? You have to get customers on the platform for restaurants to sign up, but restaurants are not interested to sign up till you have customers. A chicken and egg story altogether again. Here again, the platform is acting as a multi-side platform bringing together two of its customers — the restaurant, and the customer. The network effect fuels growth of one side as the other side grows. Rising number of customers would automatically bring more restaurants to the platform and vice versa.
Finally, Uber offers a platform to connect drivers with commuters. Commuters want enough options around them, so that when they want to book a cab they see multiple options available around them. But this is only possible when there are many drivers who have signed up on Uber’s platform so that you’d always find more than one around you. However, what does a driver want? A driver would want enough customers around him so that he does not have to waste a lot of time waiting for a booking on his phone. Hence, unless many customers are using Uber, a driver will not be tempted to be on the platform himself. Yet again, you can have more customers, only when you have more drivers, while more drivers will sign up only when you have more customers. Deja vu?
To summarize, service platforms that take up the responsibility of bringing together customers from two different sides, and thus are aptly known as “Multi-side” platforms. They are in turn governed by what is called network effect, which encourages one side of the customers (the drivers from Uber, the restaurants from Zomato, men/women on Tinder) to join the platform when the other side of the customer joins too (those who want to order food, those who want to commute, the other set of men/women on Tinder). As one set of customers grows it encourages the other set to grow as well, which enhances the utility of the platform.
Multi-side platforms must move fast to build a critical mass where there is just right number of customers on both the sides to be able to transact and make the platform lucrative for the others on the both sides to join. Without this critical mass, neither the existing customers would be bake to transact, nor the new customers would be excited to join. When you interact with a multi-side platform the next time, try and imagine how it would have overcome the chicken-egg problem? Would love to see your answers in comments. Cheers,
