Understanding Platform Pricing Architecture
Beyond Price Points
Hi everyone! Garvit Sahdev here. Today I want to talk about something really important for anyone building or working with platforms - how to think about pricing.
Garvit Sahdev enjoys understanding the ideas that shape our world. The Thoughtful Tangle is an initiative to share this journey and experience with friends who love to do the same. He selects one idea and dives deep into it to understand its basics, relevance, impact, and opportunities around it.
In my last blog, we talked about the challenges of platform pricing. As a quick reminder, pricing for platforms is tricky because you're dealing with multiple user groups that depend on each other. Today, I want to dig deeper into how platform pricing actually works by breaking it down into two simple parts.
Price Level vs. Price Structure
When we talk about platform pricing, there are two main things to think about:
Price Level - This is the total amount of money your platform collects from all users combined. Think of it as the whole pie.
Price Structure - This is how you divide that money between different user groups. It's about who pays what portion of the pie.
Let me explain with a simple example. Imagine you run a food delivery app with two sides: restaurants and customers. Your price level is all the money you collect from both sides. Your price structure is how much you charge restaurants versus how much you charge customers.
Here's the key: you can keep the same total price level but completely change who pays what. For example:
Option A: Charge restaurants 20% commission + charge customers a $2 delivery fee
Option B: Charge restaurants 30% commission + give customers free delivery
Option C: Charge restaurants 10% commission + charge customers a $5 delivery fee
All three options might give you the same total money, but they split the costs very differently.
Tilted Pricing Strategies
One really interesting thing about successful platforms is that they rarely charge both sides equally. Instead, they use what we call "tilted pricing" - where one side pays more than the other.
In fact, many platforms even go as far as making one side completely free or even paying that side to join! This is called "subsidizing" that side of the platform.
Some examples you might recognize:
Google search: Free for searchers, advertisers pay
Credit cards: Rewards for shoppers, fees for merchants
Gaming consoles: Affordable consoles for gamers, fees for game developers
Job boards: Free for job seekers, employers pay to post
This "tilting" isn't random - it's strategic. By making one side cheaper or free, platforms can grow that side quickly. This makes the platform more valuable to the other side, who will then pay more.
Determining Which Side Pays More
So, how do you decide which side should pay more? There are a few important factors to consider:
Decision Power: The side that makes the decision about which platform to use typically pays less. For example, shoppers choose which payment methods stores accept, so credit card companies charge merchants higher fees.
Price Sensitivity: The more price-sensitive side (will leave if prices go up) usually pays less. Students are very price-sensitive, so student discount programs charge businesses more to reach them.
Value Creation vs. Capture: The side that gets more value from the platform often pays more. Real estate agents get significant commission from each sale, so they pay more to list on property websites than home searchers do.
Industry Patterns: Different industries have established patterns. Dating apps typically charge men more than women. Media platforms charge advertisers but not viewers.
The Profit Puzzle
Here's something that might surprise you: the side that brings in more revenue isn't always the side that generates more profit.
Some platforms deliberately lose money on one side as part of their strategy. For example, gaming console makers often sell the actual console at a loss, but then make significant profit from game royalties.
This means you need to think about both short-term and long-term pricing:
Short-term: How do we make enough money today to keep the business running?
Long-term: How do we build the right user base and value over time?
Sometimes it makes sense to charge less now to grow faster, which can lead to more profit later.
Conclusion
When you're thinking about your platform's pricing architecture, remember these key points:
Consider both your overall price level AND how you distribute those charges
Don't be afraid to tilt pricing heavily toward one side
Identify which side is less price-sensitive and can pay more
Look at long-term profit potential, not just short-term revenue
Continuously evaluate and adjust as your platform grows
The most successful platforms are constantly testing and refining their pricing models. They understand that pricing isn't just about making money - it's about creating the right incentives that make the whole platform more valuable.
I hope this helps you think more clearly about platform pricing! What questions do you have about pricing your platform? Let me know in the comments.
Until next time, Garvit
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