In the last post, I covered two of five key success factors for Industry Cloud providers. In this post, I cover the next two. I’ll cover the final key success factor in a final post in this series.
#3. Understanding how to price in a two-, or multi-sided market.
Understanding pricing is so critical, so often botched up by start-ups and small companies, and so often mis-analyzed by pundits that it deserves its own series of posts. (Which I will do sometime in the future.) I attribute this poor understanding of pricing to the lack of pricing training in b-schools and also on the relative newness of the economics of two-sided markets. I encourage those interested in pricing in two-sided markets to take a look at the resources page of my website to find some of the latest information. Much can also be learned by reading the histories of Google, PayPal, credit cards, and other large platforms–even shopping malls!
In multi-sided markets, Industry Cloud providers need to decide, not just how much to charge (which is often hard enough), but who to charge! Industry Cloud providers must also consider how their pricing will affect access to their platform and the growth of participation. They must consider how pricing will be perceived by different players on the platform who derive different forms of value. This means, for instance, that pricing may use different metrics for different participants. They must also consider how this pricing may evolve over time through competition.
I see many small companies who do not spend nearly enough time thinking through these issues and hobble their growth as a result. I also see plenty of companies and pundits who are convinced that there is only one right answer–which is sometimes not the case. For example, in cell phone networks in the US both the caller and receiver typically pay for minutes, but in Europe just the caller typically pays (not surprisingly, rates are higher per minute in Europe.) In some industries, different competitors still have different pricing models, so theirs is a battle over the product and the business model at the same time. Some careful thinking about economics, game theory, and price elasticity can help Industry Clouds avoid a lot of self-inflicted wounds and choose a business model more likely to win out in the long-run.
#4.Consolidating the competition
Acquisitions are hard. They are especially hard for Industry Clouds because they inevitably involve integrating alternative technological platforms and potentially changing the user experience for thousands of participants. Sometimes though, the pain can be worth it.
Platform businesses need scale and participation by a large section of the industry if they are to provide any value to buyers, sellers, or intermediaries. If participants are split between multiple platforms, critical mass may never be reached without consolidation. iTradeNetwork participates in the foodservice industry which practically defines the word fragmented. Foodservice involves many manufacturers of different food types, many types of distributors, and many foodservice providers/segments–from fast food to prisons. iTradeNetwork succeeded, in part, by acquiring Amphire, Instill, ProvisionX (and maybe others I have forgotten). The core underlying strategy was a synchronized data pool to bring order to the madness of that industry, in part caused by the fragmentation. Concur, Real Page, Emdeon and other ICs in huge, fragmented industries have been successful serial acquirers as well. If you can’t beat ’em, buying sometimes works–but it takes making M&A a real core competency–both pre- and post- acquisition.
I’ve recently seen an industry where two players are battling for platform dominance. One started much later and smaller, but got its pricing and acquisitions right and the older, larger, first mover struggled on both counts. The #2 player is poised to become #1. Just because you build it first, does not mean they have to come (and stay)! You have to execute and executing on pricing and M&A are two of the most important KSFs.