The Business of Catalysts

A new book looks at a new kind of multisided company.
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If you have a credit card, have ever "Googled," been to a shopping mall, or read the newspaper you have engaged with the business strategy that is the focus of Catalyst Code: The Strategies Behind the World's Most Dynamic Companies. Each of these businesses helps bring together customers who need each other. And in doing so, the platform -- or catalyst -- unleashes tremendous value by getting members of these customer groups to interact and exchange value.

Catalysts have been around for millennia. They range from the ancient village matchmaker to the Roman Forum and the timeless Lloyds of London. But back then no one knew they were catalysts. No one understood that they all followed the same business model in spite of being vastly different businesses, and no one really appreciated the complexity of their profit-making.

A catalyst is a species of business that was discovered a few years ago by two economists -- Jean Tirole and Jean-Charles Rochet. Their simple yet path-breaking insight was that businesses as diverse as

American Express

(AXP) - Get Report

and

Microsoft

(MSFT) - Get Report

, and newspapers such as

The Wall Street Journal

share a common business model: They create value by enabling two or more groups of customers who need each other to meet on a single platform. And they discovered that a new economics was needed to understand these catalysts and the industries they control.

You won't get very far as an economist if you try to use textbook theory to understand catalysts. Much of economics focuses on one-sided businesses -- catalysts are multisided businesses. And you won't get very far as a catalyst if you rely on standard business strategies. Much of the typical business school curriculum is about businesses that live in a one-dimensional, linear world. Catalysts live in a multidimensional, nonlinear world.

Catalyst Code

reports the results of a massive research project we conducted between 2004 and 2006. It examined the strategies that make catalysts successful, the causes of failure, and what makes a catalyst strategy a bad fit for some businesses and a great one for others. We researched hundreds of companies and industries around the globe and across history, interviewing dozens of entrepreneurs and executives who've started catalysts in the last couple of decades.

Two things became readily apparent: Catalysts don't abide by the "traditional" rules of economics when setting prices, designing their products and making profits. Much of the demise of the dot-com era can be attributed to catalyst-type businesses that did not understand this. Second, the velocity of catalyst business creation is steadily accelerating. Fueled by technology and connectivity, it is becoming easier to create catalyst businesses and for noncatalysts to implement such strategies to more effectively compete with their smaller, more nimble catalyst counterparts.

Once you recognize this new species of business -- these catalysts, these multisided platforms -- you also begin to see patterns within the species.

Catalyst Code

helps you understand how entrepreneurs have started and sustained profitable catalytic reactions. It isn't a cookbook for becoming a successful catalyst. Our deepest insight is that it is incredibly difficult to ignite a catalytic reaction. You have to get things just right. And if you are the new pioneer looking to disrupt an established industry, that is very hard to do.

But by studying this species of business we provide insights that can increase the odds of success for anyone thinking about starting a multisided business, evolving a traditional single-sided business into a catalyst or simply investing in one.

First, identify the platform community. Successful catalysts understand who needs whom and why. Next, get prices right. It's how customer groups are attracted and balanced. Most catalysts offer their services to one side on the cheap -- for free or at less than cost. Then, consider the critical element of design. The platform must attract customers who need each other and help them meet. Sophisticated search and matching tools are needed.

Focus on profitability. That may sound trivial, but one need just look at the dot-com bust to see that smart people forget that. The prices and design have to lead to a sustainable and profitable catalytic reaction. Compete strategically with other catalysts. Positive feedback effects tend to create monopolies. The only way to counter that is through differentiation. And watch out for competitors who give away what you charge for. That's one reason Microsoft is worried about

Google

(GOOG) - Get Report

.

Finally, experiment and evolve. Many of the successful catalysts we've studied have started with small, balanced platforms. They get the basics right before expanding. The dot-commers tried to get too big too quickly.

Catalyst Code

should excite you for at least three reasons. First, the economics is new, interesting and challenging, creating a flourishing area of work in the discipline. It is just starting to infiltrate the business school curriculum. Second, the business insights we've gotten from studying catalysts can be employed in practice. The tool kit we've created has been rewarding because I've been able to help some wonderful entrepreneurs solve challenging problems. Last, as consumers and citizens we're encountering these catalysts more frequently. Just as Google has become part of our lives, it's important to understand the businesses that are behind the Catalyst Age.