Background Note | HBS Case Collection | July 2007 (Revised March 2008)

Staging Two-Sided Platforms

by Thomas R. Eisenmann and Andrei Hagiu

Abstract

Firms that aspire to develop two-sided platforms face a formidable challenge. Prospective users on each side will not invest in the platform until they are confident there will be enough users on the other side. Traditional strategies for dealing with this dilemma--subsidizing users or securing their exclusive affiliation--are costly and risky. Describes less costly staged strategies for building two-sided platforms. With the "vendor to two-sided platform" strategy, a firm starts as a vendor selling products or services to customers on just one side of a potential--but not yet existing--two-sided network. Once the first side is firmly established, it proves easier to attract users to the network's other side during stage two. With the "merchant to two-sided platform" strategy, a firm starts as a merchant buying goods from many different suppliers and reselling them, in the process absorbing all the risk of platform failure. In stage two, the firm shifts risk and control back to some or all of its suppliers, giving them more responsibility for managing inventory, pricing, and merchandising their wares. Presents examples and offers guidelines for when to use each strategy.

Keywords: Business Model; Risk Management; Two-Sided Platforms; Supply Chain; Strategy; Retail Industry;

Citation:

Eisenmann, Thomas R., and Andrei Hagiu. "Staging Two-Sided Platforms." Harvard Business School Background Note 808-004, July 2007. (Revised March 2008.)