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Most companies that serve equally intermediaries between buyers and sellers face a fundamental strategy conclusion: Should they exist resellers (like supermarkets), acquiring and then reselling products or services? Should they operate equally multisided platforms (like eBay), connecting buyers and sellers without controlling or owning the offerings being sold? Or should they blend the two models?

The past decade has seen a multisided-platform (MSP) bubble. I reason, undoubtedly, is the success of eBay—and of Rakuten and Taobao, eBay's counterparts in Japan and China, respectively. Some other is that multisided platforms expect financially more alluring than resellers. These marketplaces usually take a cut from each transaction, which goes virtually straight to the lesser line. As a result, their operating costs are low and their percentage margins are loftier. Because resellers must purchase and so sell their offerings, they typically accept higher revenues merely besides higher uppercase and operating costs and lower per centum margins.

The attractions of multisided platforms have enticed many companies, large and small-scale, to endeavour to apply the model in cases where the reseller model would accept had a amend take a chance of succeeding. For case, all attempts since the early 2000s to create an eBay-mode market place for patents have been shut down, redirected, or scaled dorsum and limited to brokerage and engineering-consulting services. Zappos, the online shoe retailer, started off in 1999 every bit a marketplace but by the mid-2000s had turned itself into a pure reseller, stocking inventory and taking full control of transactions with finish users.

Whether you're the founder of a start-up, a manager in an established business, or an investor, this commodity can help yous evaluate which model—or mix of models—will work best.

A business firm'due south position along the continuum between pure reseller and pure multisided platform is determined by how much control the company takes over transactions (run across the sidebar "How Companies Apply Different Sales Models"). To what extent does the intermediary control pricing, production presentation, and the other factors that influence buyers' purchasing decisions? To what extent does it take responsibility for fulfilling orders and delivering products?

Companies can take various positions on the continuum betwixt a pure reseller model (ownership and and so reselling products) and a pure multisided-platform (MSP) model (providing a marketplace in which buyers and sellers transact directly with each other). Here are examples of how companies in three industries have done that. In some cases, they have changed their positions over time.

Retail and E-commerce

Online marketplaces such as eBay and Taobao have always been pure multisided platforms: They take never exerted much control over buyer-seller interactions or owned the goods sold through their sites. In contrast, supermarkets, Walmart, 7-Eleven, and other retailers (online and offline) have largely been pure resellers. An important exception is when a retailer sells shelf infinite to a marquee supplier such as Coca-Cola and gives it control over pricing and the layout and stocking of the shelf.

Amazon started off equally a pure reseller: From its founding in 1994 until the early 2000s, it bought and resold products in its own proper noun. The visitor then started moving toward the MSP end of the continuum, allowing third-party merchants to sell products directly to Amazon users. In 2011 those sellers accounted for 30% of unit of measurement sales on Amazon. Within a given product category, Amazon may operate every bit a pure reseller, a pure multisided platform, or something in betwixt—for case, fulfilling orders but letting merchants control prices and the relationship with buyers.

Digital Content

Cablevision and satellite services (such equally Comcast and Dish Network), iTunes, and Netflix are resellers: Users' contractual relationships are with those services, not with the content providers, and the companies control pricing and delivery to users. Apple's App Shop and Google Play, a market for Android apps, are virtually the other end of the spectrum. In those marketplaces, users purchase apps from tertiary-party developers, not from Apple or Google. They are not pure multisided platforms, nevertheless, because Apple and Google exert some control over the quality and distribution of the apps—more than than eBay does over the offerings in its online market, for case. Other digital content services prevarication somewhere in between: When users buy movies and games on Xbox Live Marketplace and Sony'southward PlayStation Store, their purchase contracts are with Microsoft and Sony, yet game publishers and film studios maintain control over pricing.

Car Sharing

Traditional auto-rental companies (such equally Avis and Budget) and Zipcar are pure resellers: They own fleets of cars, which they hire out to consumers. In contrast, newer services such as Getaround, Lyft, RelayRides, and Uber just facilitate transactions between car owners and automobile users. None of these services owns a armada, and the auto owners prepare their ain rates except in the example of Uber, which imposes some standard rates. With Uber and Lyft, users can get a ride from professional drivers (Uber) or private individuals (Lyft). With Getaround and RelayRides, users can rent cars from private individuals.

Choosing the Right Model

Determining whether more than or less control over heir-apparent-seller transactions will let your house to create or extract significantly more value involves the consideration of four factors.

Calibration furnishings.

High-need products are sold more efficiently by i large reseller than past many small sellers. The reseller tin capitalize on economies of scale in purchasing, infrastructure investments (in warehouses and distribution centers, for example), delivery, customer support, and so on. These advantages, yet, don't apply to low-demand—or "long-tail"—products. That is why Amazon acts as a reseller for high-demand products merely every bit a multisided platform for long-tail products, which are available on the site from independent sellers.

Assemblage effects.

Some products and services have much higher value to buyers when bought together than when purchased separately from independent sellers. In those cases, resellers generally do better than multisided platforms—the latter may not fifty-fifty be feasible.

For case, most patents on technology products such as smartphones have footling, if whatsoever, value on their ain for potential buyers or licensees, considering private patents can be invented around, countered with related patents, or invalidated in court. This is one of the main reasons that multisided-platform business concern models for patent intermediation (Body of water Tomo'south alive auctions, for example, and online marketplaces such as yet2 and Tynax) have failed to proceeds much traction, while Intellectual Ventures and other patent aggregators—which buy patents, parcel them, and so sell or license the bundles—have thrived.

High-demand products are sold more than efficiently by one large reseller than by many small-scale sellers.

Resellers are also in a much better position to exploit complementary relationships between products. Having iTunes part more often than not as a reseller has allowed Apple to employ a "give abroad the blades to sell the razor" pricing strategy with the iTunes-iPod combination. The company set very low, uniform prices for music (99 cents or $1.29 per song) and realized huge margins on the sale of iPods. That strategy would not have worked if iTunes had been closer to the multisided-platform end of the continuum, giving record labels control over music sales and pricing.

Why didn't Apple employ the reseller strategy with its App Store? Whereas there are only a handful of powerful record labels, in that location are thousands of app developers. Consequently, Apple would have incurred exorbitant costs trying to bargain with all of them and gained footling past taking command of app sales: Fierce competition among developers keeps prices extremely low (28% of iPhone apps are gratuitous; the average cost of the rest is $4), increasing the value of the iPhone to users and allowing Apple to extract large margins from its sale. Equally a consequence, serving as a multisided platform makes a lot more sense for the App Shop.

Even when complementarities are limited, a reseller that aggregates products may be able to extract more value from buyers through strategies such as bundling and loss-leader pricing, which independent suppliers cannot achieve. For instance, ESPN might non be an obvious complement to the Discovery Channel, but by selling those channels together as office of the cable parcel, Comcast can obtain much college revenues from subscribers and advertisers than if it sold them separately. Costco, Target, Walmart, and other retailers lure customers into their stores with prices at or beneath price on certain appurtenances (for example, gas at Costco and loftier-definition TVs at Walmart), which they more than make up for with college margins on other products. Again, controlling products—especially their presentation and pricing—is necessary to attain this.

The buyer and seller experiences.

Multisided platforms generally create value by matching buyers with the right sellers and vice versa, and then enabling them to transact. In some contexts, however, ane side might not want to deal with multiple agents on the other side, which makes the reseller model preferable.

Zappos's shift from multisided platform to reseller was driven by that realization. At the showtime, Zappos relied entirely on partnerships with shoe manufacturers that held inventory and fulfilled customer orders directly. Simply the company soon discovered that buyers were more probable to complete transactions and come dorsum for more if they were offered a great retail experience: guaranteed fast commitment, an extremely favorable and universal render policy, reliable and standardized information almost product characteristics and availability, and then on. The realization that it could non provide this experience if information technology connected to operate as a marketplace led Zappos to build its own warehouses and have complete command over interactions with terminate users. Its successful strategy fabricated it an bonny acquisition target: In 2009 Amazon bought the company for most $1 billion.

Sometimes the demand to provide a good seller feel calls for the reseller model. Consider Gazelle, a leading online reseller of used electronics products. Gazelle buys items from individuals through its website and resells them through diverse channels, including export wholesalers and eBay, where Gazelle has earned the prestigious PowerSeller designation. It may seem ironic that the visitor makes a turn a profit buying from users and reselling on eBay. But Gazelle'southward key insight was that private, i-off sellers are at a tremendous disadvantage on multisided platforms: They lack the expertise, credibility, and time to compete with the professional person sellers in these marketplaces. In this context, the value proposition of resellers like Gazelle is transaction convenience and speed in substitution for a lower toll than sellers might have obtained through an eBay sale.

That said, some multisided platforms manage to reach the holy grail of providing great experiences for both buyers and sellers. For case, oDesk has created a leading online marketplace for virtual work that allows employers to find, hire, monitor, and pay individual workers. In stark contrast to traditional staffing agencies, oDesk is able to satisfy the needs of both sides without taking straight responsibility for either party or for their agreements.

Marketplace failures.

Left to their ain devices, marketplaces sometimes collapse. The nigh obvious cause of a market place failure is dubiety virtually product quality or about the reliability of sellers or suppliers.

Many multisided platforms have solved this problem without moving to a reseller model. Ebay, for example, instituted a feedback arrangement for buyers and sellers. Airbnb, which allows house and flat owners to rent rooms to complete strangers, provides not only a reputation machinery similar to eBay's but besides several other features that go on both sides honest. For instance, it releases the renter'south payment to the owner 24 hours after the renter has checked in and confirmed that the location is equally described. And it returns the renter'southward deposit afterwards the owner has retaken possession and confirmed that no serious impairment occurred.

It would exist a mistake, still, to conclude that such market-based mechanisms are always sufficient to ensure quality and reliability. Sometimes it is necessary to movement closer to a reseller model by exerting more control over transactions. This was the painful lesson learned by SellaBand, Bandstocks, and Slicethepie, which all hoped to disrupt tape labels past creating platforms where fans would exist able to interact with and fund their favorite bands. Too many poor-quality bands led investors to lose involvement, however, and all 3 companies failed (although SellaBand was resuscitated past a group of outside investors with a model closer to that of the traditional record labels). As SellaBand's former CEO told usa, "If you want to be successful in this field [music crowdfunding], y'all need to accept some kind of command over what happens on your site considering of the potential friction in goals and expectation between the ii dissimilar parties."

Another potential marketplace failure that multisided platforms cannot address is when one side has an information or bargaining reward over the other. Fearful of being exploited, the weaker party is unlikely to participate. The reseller model can help solve this. Intellectual Ventures (Four), the world's largest patent aggregator, has raised more than $five billion and spent in excess of $ii billion acquiring more than than thirty,000 patents. Iv typically acquires patents from universities, pocket-sized companies, and individual inventors and then resells or licenses them, generally to large operating companies.

In addition to the benefits of aggregation mentioned to a higher place, 4 creates value by correcting (to an extent) the huge power imbalance between small patent owners and large operating companies. Lacking the expertise and resources to bargain successfully or appoint in litigation, small patent owners accept traditionally been able to obtain only meager, if whatever, payment from large operating companies. The fundamental colonnade of 4's strategy is successfully negotiating with companies on behalf of the many pocket-size patent owners that are its suppliers—and in the process making a sizable turn a profit. Over again, a multisided platform could not attain this, which is why almost all attempts to create patent marketplaces accept failed. IV has already get the most influential patent intermediary in the technology sector.

Start-Upward and Growth

The considerations to a higher place are sufficient for almost companies to decide where to position themselves on the reseller-MSP continuum. Merely a company can't always become there immediately. Sometimes companies that should ultimately be multisided platforms need to start out as resellers and vice versa.

The catch-22 trouble.

Suppose y'all are a start-upwards or a large company entering a new industry and accept determined that the multisided-platform model is best for yous. The problem is that buyers will not join your platform if you don't take enough sellers; neither will sellers if y'all don't have enough buyers. Sometimes y'all can solve this by focusing on a small niche and growing from in that location, as eBay did with collectors of PEZ Candy dispensers. If yous are unable to notice such a niche, resorting to the reseller model for an interim period might be a wise movement. Amazon adopted exactly this strategy: Information technology bought and resold books and other products and established a substantial base of buyers before it tried to attract contained sellers.

Buyers will non join your marketplace if you don't have enough sellers; neither will sellers if you don't have enough buyers.

Karma—a start-upwardly that launched a mobile application in early on 2012 that allows users to select, buy, and send presents from a variety of sources—is taking a like approach. The cadre of its value proposition is the ability to provide souvenir recommendations based on data gleaned from users' social networks. Currently, Karma buys items from manufacturers and retailers and resells them for a small-scale profit. But the pure reseller model is probably not optimal in the long run: For most gift categories, the big retailers and manufacturers that supply the items to Karma take superior scale; Karma doesn't have to take possession of the items to create a keen experience for buyers; and because the gifts are typically well-known items from branded producers, consumers aren't going to exist concerned virtually quality or reliability. Yet, the company may accept had no choice simply to human action every bit a reseller at the kickoff in order to prove the value of its concept to manufacturers and retailers. In addition, the control offered by the reseller model gives Karma more elbowroom in experimenting with means to serve buyers. One time it figures out the best way to exercise that, it can showtime shifting toward a multisided-platform model.

Limited uppercase.

If your business should ultimately be a reseller but needs to grow fast in the curt run and lacks the resources to do so, operating every bit a multisided platform, which enjoys lower capital and operating costs, might be a good interim solution.

Gome, Red china's largest electronics retailer, employed that strategy. Since its founding, in the early 2000s, Gome has sold or rented space in its stores to suppliers, which operate as de facto independent concessions. This means that products in Gome stores are organized by brand, not by category, and 80% of the salespeople are employed by the manufacturers. Given that this model doesn't provide a swell customer feel, information technology'due south hard to imagine that it can succeed in the long term. But the company lacked the resources to attain its goal—to be the first to open electronics stores in all major Chinese cities—if it operated as a traditional retailer. Indeed, Gome has expanded at a much faster charge per unit than its competitors. Although it has been struggling financially and has recently closed some underperforming stores, the issue seems to be a lack of capable senior managers, not the company'southward business concern model. In fact, Gome's closest competitor in China, Suning, uses the same model and is thriving.

Disruption and Disintermediation

The framework we've offered to a higher place is likewise useful for identifying disruption opportunities or, if you're an existing intermediary, threats.

Connecting buyers and sellers without ever owning the product is a seductive business model: Capital and operating costs are low, and margins are high. Nevertheless, being a reseller often proves to be a better option. If you answer aye to whatever of the questions below, then reselling (or a hybrid approach) is probably a amend bet for your company.

i. Are there significant economies of scale to be exploited?

2. Can your company create and extract much more value by bundling or by selling complementary products?

three. Practice buyers derive significant benefits from aggregation?

4. Is your company able to create a better heir-apparent or seller experience past taking control of transactions?

5. Exercise buyers need to be protected from sellers or vice versa?

6. Does one side accept a asymmetric data or bargaining advantage?

In the typical disruption scenario, emerging marketplaces displace incumbent resellers. Indeed, the multisided-platform model has become particularly powerful and widespread with the rise of the internet and mobile-advice technologies. New marketplaces are created every day, which makes it easier for buyers and sellers to interact directly, bypassing traditional middlemen. EBay rendered collectibles stores obsolete. ODesk and similar sites are displacing staffing agencies. Amazon's Kindle and other online self-publishing and distribution platforms are challenging volume publishers. Peer-to-peer automobile-sharing services such as RelayRides and Getaround are challenging established motorcar-rental companies as well every bit Zipcar (all of which role as resellers, buying their own cars and renting them to users).

It would exist a mistake, still, to assume that all resellers are subject to disruption past online or mobile-based multisided platforms. Li & Fung, the world's leading middleman for dress fabric, has functioned every bit a reseller since its founding, in 1906. Although a well-designed online platform could provide a convenient one-stop store, information technology would lack the advantage that Li & Fung achieves by aggregating demand from many clients: the power to obtain lower prices from suppliers, brand faster deliveries, and help suppliers better use their capacity.

In the typical disruption scenario, emerging multisided platforms readapt incumbent resellers.

Similarly, the proliferation of internet-based video marketplaces such equally Hulu, YouTube, and Xbox Live Marketplace, through which users buy content direct from providers, has non rendered cable and satellite aggregators obsolete. Aggregators utilise bundling to extract much higher revenues from viewers and advertisers than content providers can by selling their products independently through online marketplaces; the aggregators so share those college revenues with content providers.

We are beginning to see a contrary disruption scenario, in which upstart resellers are challenging established multisided platforms. Gazelle is an example. This suggests that successful multisided platforms inevitably create opportunities for resellers to aggregate demand or supply in specific markets or to offer a ameliorate experience for a segment on either side of the market.Multisided platforms accept emerged over the by decade as some of the well-nigh powerful and valuable business models around. It is important, nevertheless, not to overestimate their attractiveness relative to the more traditional reseller model. Before jumping on the multisided-platform bandwagon, managers and investors should advisedly consider where on the reseller-MSP continuum an intermediary belongs and understand that it may take one or more than moves to get there. They must then be diligent about reevaluating that positioning as the competitive landscape changes. Otherwise, they may wake upwardly to discover that their seemingly secure business has been upended by a disrupter from either terminate.

A version of this commodity appeared in the March 2013 issue of Harvard Business Review.