Since the ancient times, the world economy has evolved by efficient marketplaces. The traces could go as far as civilizations like Mohenzodaro to Roman Empire. It dates back to the era of barter for goods and services in ancient societies. With each era, societies progressed and the role of matchmakers also transformed and changed over this period.
The economists started taking note only in the early 2000 with large number of companies trying to resolve many frictions between the producers and consumers of product and services with democratization of internet. Its not a new phenomena sweeping the world today, earlier invention of Telegraph in mid 19th century and invention of electric bulbs also had their own speed and impact on the society and economy.
The book 'Matchmakers' by two accomplished economists David Evans and Richard Schmalensee, essentially explores the rising of behemoth companies by harnessing the power of matchmaking platforms in several areas. Last two decades the world around us has changed in many ways by which we define and understand the platform based businesses. There are multiple case studies which elucidate the concept of matchmaking very eloquently. One of the cases of the company Opentable, which started simply over a weekend get together of a family, where the First Lady of the house, had to take pains of going through the yellow pages in calling the restaurant for booking of the table and could not still successfully get what she wanted.
Opentable today brings together millions of customers to thousands of variety of restaurants across various cities in multiple countries. The book demystifies the essential strategies in decoding how these matchmakers evolved and successfully built large global corporations. At the heart of the matchmaking firstly, lies the economic theory of friction and value pie that can get created in the process. In the case of Opentable, the friction that was addressed was sea of customers suffering in getting through the table on one side and empty and vacant seats at the restaurants on the other.
The second aspect is the value pie generated through the process of matchmaking. In cases of restaurants, the value lies at the inflection point of vacant seats and pain and time taken to book a table for the customers. Opentable, created a value for the diner and restaurant in a way that both benefited. Its essential to evaluate, who pays and who gets the subsidy in growing the network efficiently? Opentable, started with onboarding the restaurants initially, but cost seemed high. They came up with fee for installation of software and rather than loading with the cost of hardware, they started leasing the machines.
Once the platform is established, the third aspect then is, the right critical mass at each end of the service and supplier to arrive at formula, such that, the network keeps growing automatically. This is a complex problem that each matchmaker has to strategies and resolve by addressing both ends. In case of Opentable, they adopted a strategy of only reaching to the top restaurants in every city before broad-basing the customer base to provide value for both of them. Imagine the situation of late 90's and the dot com bubble, most of the companies, only focused on eye balls overlooking the model of economy behind these massive number of visitors on their sites. Some of the investment banks including Goldman Sachs predicted that B2B economy would reach to $4.3 trillion in less than three years, but they just collapsed. The key reason behind this collapse was absence of insight and strategy to consistently engage with multi sided participants in right proportion.
In case of YouTube, when the first video was uploaded, they reached out to their friends to upload more videos. But, they did not get the response. After struggle of a year or so, they realized, they needed push on both sides, the interesting videos to get uploaded as well as viewers for these videos. The changes and modifications later were made with tools such as, 'like', which generated lot of interest in viewing as well as uploading. At some point of time, the platform itself has to become sustainable by the participants. YouTube, today is the second largest search engine worldwide and the largest for video uploads and viewing. There were many who came and launched the platform but failed in getting the formula right to consistently ramp up the critical mass required for it to go to next level of growth.
In case of Facebook, the network started from Harvard University to bring friends together on the campus eventually evolving as one of the biggest social networks globally. Not that, others did not try in doing so. Take the case of MySpace, it could not manage the behavior of the masses operating on its platform. This in fact, became the key to success of Facebook. Each platform, also allows the participants to freely communicate with each other, but then the owners of platforms have to necessarily exercise administration. In an open society, as a business, they can not police or sentence people with bad behavior, but they certainly can create a robust framework under which the code of behavior is defined and exercised judiciously. Facebook, despite of a small workforce, dedicated half of its workforce, in mending the behavior of participants, by blocking and punishing the bad ones. This in return, gave them high credibility and brought more people to communicate on the platform. Over a period of time, the participants on the platform, themselves became vocal of punishing the bad behavior and today they have an army of participants who do it for them.
The growth of these platforms, is not only limited to the networking, but has helped solve the most complex economic problems like banking for all in poor countries like Africa where, the infrastructure development is still far from normal standards. Take for example, Kenya, rural area has one of the highest migration towards cities, which are connected by poor road infrastructure taking almost days to reach. In Kenya, the farming income is not enough and the money sent by the migrating member is the key to survival. There were less than 1000 bank branches across the country leaving the entire country poor and under served.
Explosion of Mobile phones got used as great tool for empowering people and expanding the banking needs to now more than 75% of the population. M-Pesa, is a platform for swift money transfers. The journey, though has not been easy. Initially, the network had to find people, who would be the agents to convert the digital money to real cash and vice versa. Only by finding that critical mass at both ends of the demand was it possible to make the platform successful. Today, the app ensures the payment of utility bills and is now emerging towards a full banking, where one gets interest income on the balances also.
All these matchmakers have something in common that can be attributed to the exponential growth. It's their ability to turbocharging the growth of their networks. Think of AirBnb, Uber, Facebook, M-Pesa, each of them not only cracked the code of value drivers and critical masses but also turbocharged the growth at every stage of the platform by balancing the external drivers.
Think of Amazon, it came as a broker for book selling and now sells almost A to Z disrupting the entire retail industry. While, we may think retail is going through the disruption and would soon become extinct. That may not be complete truth, if we look at the data, the American retail industry still commands more than 90% of share in retailing. Though, what has started changing is the concept of retailing which itself is one more bright example of Matchmaking. The foot falls in malls is receding, necessitating them to find reasons to address the challenge. One of the possible reason could be various online retail formats, which allow customers to have a look at key aspects such as design. The customers, may not have completely shunned the physical format but are necessarily savvy enough to save time and be clear with their choices than erstwhile era of walking around the mall and then making the choice of purchase. This requires change in design and attitude both, for most of physical formats of matchmaking.
It is essentially important to have a guiding set of questions for entrepreneurs who are set to go ahead with their journey as starting up or scaling their existing businesses using the concepts which would work as a compass for their success. The entrepreneurs essentially need to ask themselves these six questions and find an answer in their quest to scaling their organizations exponentially;
What's the friction, how big is it, and who benefits from solving it?
Does the platform design reduce this friction, balance the interests of participants on all sides, and do it better than other entrants?
How hard is the ignition problem, and does the entrepreneur have solid plan for achieving critical mass?
Are the costs justified for ignition and growth to enable the platform to make money?
How is the matchmaker going to work with others in the broader ecosystem, does it face related risks, and has it dealt with them?
Is the entrepreneur ready to modify his/her design and ignition strategy quickly in response to market reaction?
In context of Indian economy there are various matchmakers at play currently. The quest of resolving the problem of inequality and lack of banking infrastructure will throw open multiple matchmakers and their success would largely be driven by the understanding of critical mass with different backgrounds and ethnicity. It would be an interesting guide for those buzzing entrepreneurs attempting scale.