Product Development in two-sided markets

Submitted by Jaap Jan Nienhuis on Mon, 01/23/2012 - 20:16 in
Jaap Jan Nienhuis's picture

Normally at Innopay we write blog articles about topics we are specialised in. Topics like e-payments, e-identity, mobile payments, SEPA and e-invoicing. But we rarely talk about what exactly it is that we do in these areas and how we do it. 

Every day we are busy working on new, innovative products and services that define how e-commerce is being done tomorrow.  

We call it product development in two-sided markets. Such products have the characteristic that they solve a problem for two (or more) parties which interact with each other. For example, a payments service which allows a payment from a buyer to a seller, or a newspaper that allows advertisers to interact with readers. 

Such two-sided markets can be supported by service providers in various ways: 

3-party model: there is a single service provider that offers services to users on both sides of the market. All users of the service are somehow customer of that single service provider. (Example: Paypal)

Multi-party (4-corner) model: different sides of the market are served by their own service providers. These service providers interact with each other to deliver the requested service. (Example: Visa/Mastercard). Such a model is attractive from a market perspective, because each side of the market can choose its own service provider, and the reach of the service is not limited to your own service provider.

3- and 4-party models

If a number of service providers want to organise themselves into a 4-corner model, they need to create a set of rules, operating procedures, interaction models and potentially technical facilities to establish multi-lateral interaction between all service providers involved. Such a model is often called a ‘scheme'.

For such a scheme a number of design practices need to be followed,  the most important of which are:

  1. Solid understanding of the needs of the different sides of the market is key.
  2. There should be a business model that balances the benefits for both sides of the market, and if applicable their service providers (positive business case for all players).
  3. The design process should be driven by an independent party to ensure neutrality and impartiality.
  4. The solution should remain as flexible as possible to enable service providers to define their own unique differentiating propositions towards their customers (competitive services on top of the collaborative scheme).
  5. The solution should, where relevant, define appropriate strong branding that communicates the common characteristics of the solution to end-users, such as reach (size of the network), basic user experience, etc.
  6. The solution should strive to remove unnecessary frictions on network growth, such as high entry barriers, etc. 
  7. The solution should, were appropriate, foster both same-side and cross-side network effects as much as possible, especially during the growth stage of the network.

In other words: designing a service in a two-sided market, especially in the form of a multi-party model, is not just about creating interoperability between service providers. It goes much further, and involves thinking about the business model, the possible basic user propositions (without intruding in the competitive space), the branding strategy and the network effects, and all of this in a sensitive, collaborative – competitive environment.

That is what we are passionate about.


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