Two-sided strategies help two (or more) distinct customer groups create value, stimulate innovation, and unleash profits by getting these customers on board a common platform and facilitating the interaction between them.

Our TSS Framework^sm provides a useful tool for developing these strategies. It is the cornerstone of our work with platform companies as well as the distinct customer groups that the platform brings together.

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		Getting both sides on board is essential to the success of a two-sided strategy. Successful platforms know which customer groups need who and why. Coordination of these customers requires an extensive evaluation of the market, clear identification of potential customers, and an understanding of their interdependencies. For instance, the deep insight that the father of the modern payment card had back in 1949 was that merchants and shoppers both wanted a more efficient payment method and needed each other to accomplish that goal. Cards were worthless unless there were enough merchants that accepted them, merchants weren’t interested unless they knew that they would have enough customers to make their acceptance of cards a profitable venture. Companies must engineer their product with a view to how the customer interdependencies must be aligned for success.

		Pricing is the function that attracts and balances the different customer groups. Successful platforms set prices according to who needs whom the most and not by the typical cost-plus model, or value-added pricing, or penetration pricing as other marketers do. In essence, two-sided pricing structures charge different sets of customers different prices, collecting a disproportionate share of revenue from one set of customers than another. Platforms can’t insist on making profits from every group. Sometimes this means offering one side a product or service at low or no cost, sometimes even at below cost. eBay is an online platform that brings together buyers and sellers by charging sellers insertion and value fees while buyers pay only for shipping. Getting the prices right so that platforms get the right mix of customers on board – and maximize profitability - is one of the most difficult challenges they face.

		Platforms must create an environment - physical or virtual - where their customer groups can interact. It must be safe, secure, easy to reach, and easy to navigate. More importantly, successful platforms must design their platform so that it compels the distinct groups of customers to interact with each other. Reducing the cost of finding and transacting with the platform is essential. Traditional shopping mall design – known as the dumbbell model – features marquee anchor stores on each end that forces shoppers to walk by rows of smaller merchants as they make their way from end to end. Newspapers use a different strategy. Its advertisers want people to look at their ads so the newspaper encourages reader “interaction” by spreading articles across its pages thereby making readers flip through more of it. Having a design that is scalable yet and capable of adapting to various customer needs is essential.

		Creating a successful platform means having an organization in place that allows platform leaders to work easily across business units and job functions. Successful two-sided strategies are highly dependent upon internal incentives that make it easy for internal groups to look beyond their own individual profit and loss objectives and grow a vibrant community. In most organizations, incentives reward management on profit and margin goals, forcing each business unit to recover its costs on its individual contribution to the platform. This forces the platform to price the product not for overall profit, but individual business unit success. Such incentives lead to bad pricing which leads to failed platform ventures. Xbox learned this lesson the hard way when its manufacturing division priced its console too high for creating a critical mass of users which was essential for attracting game developers. It soon adjusted its internal incentives so that hardware makers were rewarded on achieving sales goals while roughly breaking even.

		Successful platforms are rarely first to market and almost never begin with the assumption that if they build something, everyone will beat a path to its door. They grow deliberately, experimenting and evolving their products and services. They recognize the interdependencies of their customers and therefore the impact of even the slightest change in pricing structure or product design. Starting slowly and scaling deliberately allows the platform to tailor its product to customer demand in increments, growing as the market dictates. Manheim, the world’s largest and most successful automobile, waited many years before embracing the internet as a selling platform, preferring instead to evaluate its options and experiment with certain aspects of their auction before implementing on a larger scale almost a decade later.