Presentation 5: Platform pricing and monetization

Platform launch, monetization and value

Explain the Normal Demand Curve.

• Profit/Revenue: Prie x Quantity

• Consumer Surplus (CS) (Überschuss):

  • Value of the purchase beyond the price

  • Willingness of consumers to pay more

→ Difference between willing to pay and actually pay (e.g max willingness:100€; actual price: 70€ → CS: 30€)

• Deadweight Loss (DWL):

  • Opportunity Costs

  • Consumers priced out by the product

→ Some customers would have bought the product at €60 but not at €70 (Those trades never happen → loss of value called DWL)

Normal Demand Curve (Optimized one product):

• If the price is

  • too high → high margin but few customers.

  • too low → many customers but little money per customer.

  The optimum is somewhere in the middle

Explain the Interdependent Demand Curve and the Interdependent Demand Curve Collectively.

Iterdependent Demand Curve (Optimized one side of a platform):

• Two-sided platform

• Consumer demand is influenced by the number of developers (apps), and developer demand is influenced by the number of consumers

• Optimize only one side

Interdependent Demand Curve Collectively (optimized entire platform):

• Two-sided platform

• Platform owner optimizes both sides together

• May subsidize one side to maximize total platform profit

• Uses cross-side network effects

→ Platforms should not optimize each market separately

→ Because of cross-side network effects, the best decision for one side (e.g., maximizing Mac profits) is not necessarily the best decision for the entire platform ecosystem.

What is the difference between pricing a traditional product and pricing a two-sided platform?

Traditional product:

• One demand curve

• Optimize the price of one product

• Goal: maximize the profit of the product

• no (or few) network effects and no subsidies

Two-sided platfoms:

• Two interdependent demand curves

• Optimize prices on both sides

• Goal: maximize the total platform profit

• Strong cross-side network effects

• Often subsidize one side to attract the other

Name and explain pricing strategies.

Symmetric Pricing:

• Make money on (or subsidize) both consumers and complementors side

• Subsidy = Price does not cover the platform cost

• e.g. amazon: consumers pay price and complementors pay fees

• e.g. Uber (2014-2017): consumers and complementors were subsidized

Asymmetric Pricing:

• Make money on one side and give subsidy to the other

• When something is free to your side, you are subsidized

• Subsidy on one side can lead to maximization of total profit

• e.g. Microsoft (1990er): consumers paid and complementors get SDKs free

• e.g. Facebook: users free, advertisers pay

  • Subsidy Pricing as a pricing decision within an asymmetric strategy

    • One side is intentionally priced below cost (or free) to stimulate network effects and maximize total platform profit

What two questions are important for subsidy choices?

1. Which side to subsidize?

2. How long to subsidize?

Explain why the Subsidy choices depends on the strength of Network Effects.

Which side to subsidize?

• Subsidize the side that creates the largest positive cross-side network effect

• Charge the side with the higher willingness to pay

• Impacted by low marginal costs

• Always consider the cross sided influence of the price

• Goal: maximize the total platform profit, even if it means to lose money on one side → not profit on each side

How long to subsidize? → Depends on the Strenght of Network effects

• If network effects remain strong, the subsidy may need to remain permanent

• Removing the subsidy too quickly can cause users on the subsidized side to leave the platform

  • this reduces cross-sided network effects, decreases the platform´s value for the other side , can lead to the collapse of poth sides of the platform

    • e.g., making users pay for a previously free service could scare them away, in turn hurts ad revenue and reduces total profit

• Transition to symmetric pricing needs to be carefully planned and is best implemented slowly

Explain the difference between Pricing Strategy and Monetization Pattern.

Pricing Strategie: Who pays?

• Symmetric and Asymmetric Pricing (inkl. Subsidy)

• e.g. Spotify: Consumers pay; Artists don´t (asymmetric)

→ setting prices

Monetization Pattern: How does the platform capture revenue / earn money?

• 6 Strategies (Transaction fees, Pay for Tool…)

• e.g. Spotify: Subscription, Advertising

→ revenue mechanism

Describe why network effects are robust.

• Without network effects:

  • Two seperate markets with two prices

  • Independent most profitable price

• With network effects:

  • Cross-sided effects

  • Price on one side changes demand on other side

  • Scalling the Network effects via mathematical specifications

Why is price more important in network markets?

In traditional markets: Price only influences the demand → Demand curve stays fixd

In Network markets: Price influences demand and value → Demand curve shifts

The entire demand curve can change with price

→

Why is price more strategic in two-sided networks? Why is two-sided network pricing important for the adoption?

In two-sided platforms, prices are used not only to maximize revenue from one side but also to drive adoption, stimulate cross-side network effects, and maximize total platform profit

Does free make sense?

Yes—if the free side generates value for the paying side

• e.g. Google: Users are free but advertisers pay

• e.g. Windows SDK: Developers free → More Windows applications → more Windows sales

→ free =/= no revenue

→ free = strategic subsidy

Explain what flows are in platforms.

• Three key flows: Goods/Services, Money, Information

• Ensure as many travel through platform as possible

• Danger: you can´t monetize whatever travels off platform

  • e.g. On Uber the ride happens off-platform, but the money and data stay on-platform

  • On UpWork/Fivver, the service, $ and data happen on-platform but next exchange may happen off-platform

Name six monetization patterns for generating revenue.

1. Transaction fees (Commission/Take rate)

2. Access fees (Subscription/Membership)

3. Revenue Sharing

4. Advertising (Monitize attention and data)

5. Ranking/Promotion fees (Match or Ranking Influencing (Advertisement))

6. Pay for Tools (Saas/Enablement)

Explain the monetization pattern of transaction fees.

• Charge fee (eine Gebühr erheben) for facilitating transaction

• Some charge users, some charge complementors, some charge both

• most of the time a cut from a one-time payment tha is hidden from the user

• Transaction between both sides goes through platform

• Example: eventbrite, Uber, upwork, AppStore, airbnb, amazon

Explain the monetization pattern of access fees.

• Pay for access to platform infrastrcture

• Charge fee for facilitating lead generation

• Usally the side is charged that needs the other more

• Can be in many forms as in subscription or one-time payment

• Example: DatingWebsites, Lead Generation, AppStore

• e.g. Complementors and consumers pay for access to the platform and platform provides infrastructure for complementors and consumers

Explain the monetization pattern of Revenue sharing.

• Platform owners share the revenue with complementors

• Customer pays, and the platform shares part of the revenue with complementors according to an agreed revenue-sharing model

• Can be a fixed percentage or decided with a sliding scale

• Example: Twitch

Explain the monetization pattern of Advertising.

• Monetizing through user attention and data

• Company pays the platform to show their ad

• Advertisers pay for access to users' attention, often based on impressions, clicks, or conversions

• Do not clutter the transaction

• Money goes to the platform but can also go to the complementors

• Advertiser pays for advertisement to complementors and/or platform owner and than consumers attention is monetized

• Example: Youtube, Instagram, X, TikTok

Explain the monetization pattern of Ranking/Promotion fees (Match or Ranking Influencing (Advertisement)).

• Charge for sponsored search or recommendations (is used to influence recommendations to be seen by more consumers)

• Typically auctions

• Do not clutter the transaction, keep network effects in mind

• Complementors pay for better visibility within search results or recommendations

• Can be paid by percentage cut or per promotion

• Example: amazon, AppStore, Immo,Scout24, ebay

Explain the monetization pattern of Pay for tools.

• Charge fee for better/upgraded tools → Users/Complementors pay for additional platform tools or capabilities

• Basic versions often free to test/use

• Can be in many forms as in subscription or one-time payment

• Example: SAP, LinkedIn, X

Explain, using two platforms as examples, how differently they make their money.

Uber:

• Pricing strategy: Asymmetric pricing

  • drivers and riders may be subsidized during growth

• Monetization pattern: Transaction fees

  • Uber earns a comission from every completed ride

Instagram:

• Pricing strategy: Assymetric pricing

  • Users acces the platform for free and advertisers pay for advertisements

• monetization pattern: Advertising

  • dvertisers pay Instagram to reach users, so user attention and data are monetized

Why should a platform use subsidies?

• To overcome the Chicken & Egg problem

• attract users

• strengthen cross-side network effects

• increase platform adoption

• and maximize total platform profit

• e.g. Google: free Search to users → Millions of users attract advertisers → Advertisers pay Google ==> The subsidy (free search) creates much higher overall profit.