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Matchmakers by David Evans and Richard Schmalensee

Key Takeaways

  1. Matchmakers operate under a different set of economic rules as their raw materials aren’t commodities but the different groups they bring together and the access they give to other groups

  2. OpenTable pursued a faulty strategy early on by getting a handful of restaurants in many cities. They soon shifted to a more critical mass strategy by focusing on getting as many restaurants as possible in four cities. This soon fueled the flywheel for both restaurants and customers. Charge restaurants a monthly fee, a cut of each reservation, make it free for diners and even incentivize with small rewards. This free usage for diners is strange according to traditional rules of economics but works because this solves the chicken and the egg problem – restaurants will be compelled to join if there are enough diners on the platform. The new business model takes into account that demand from producers and consumers are interdependent.

  3. The economic key lies in attracting at least two or more different types of customers and facilitating valuable interactions. This business model has existed for centuries but was only recently noticed – night clubs facilitate interactions between men and women via a physical space, music and lighting; shopping malls connect shoppers and retailers. A tell tale sign is if something seems too good to be true for one side of the market is when a great service is free – the business is monetizing your attention, data or something else so you can access their content or other customers/producers

  4. The great network effects mistake was that it assumed multi sided platforms followed the same rules as one sided network effect companies where there was only one type of customer when in fact there are many. Multi sided platforms have indirect network effects where an additional diner benefits restaurants rather than other diners. Build share first and fast doesn’t apply as much to multi sided platforms and in fact most of the times the first movers die

  5. The same person can play different roles at different times like when someone uploads a video to YouTube and then watches videos

  6. Important to recognize that indirect network effects also work negatively and therefore dominance can dissolve relatively quickly. Important to not only have a lot of customers on both sides but also the right customers whom the other side wants to interact with (a lot of restaurants and also the right restaurants)

  7. Multi sided platforms also can charge below cost where traditional businesses can’t because must balance interests of all sides and demand for each group depends on the demand from the other side. It may or not make sense to subsidize one side like OpenTable does with diners. It often does if the platform removes so much friction that one side is willing to pay more to get the other side on board

  8. Matchmakers have taken off recently because the cost of connecting customers has decreased significantly and the reach is larger than ever. This trend will only continue meaning matchmakers will likely play an increasingly important role

  9. YouTube gained critical mass by encouraging uploads which encouraged views which encouraged further uploads. It took them only a little over a year to have more than 100m videos and people spent more time on their site than any other. They made it free for both publishers and viewers with the hope that if they did reach critical mass, they could begin charging advertisers

  10. Platforms have to take into account the relative pricing on all sides of the platform, how much to charge and how much to earn on each side relative to the other side. One side tends to be subsidized and figuring out the price structure is crucial. They can often make more overall profit by actually losing money on one side. Price sensitivity, whether to charge access or usage fees or both are important to consider. Charge those who are least price sensitive

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