Question

When a platform owner offers a service at a loss to one group to attract a high-value segment that drives the platform&#x27;s revenue, what is this pricing strategy called?

Accepted Answer

This pricing strategy is called a subsidy-based model or a two-sided market pricing strategy. In this model, a platform connects two distinct groups, often referred to as sides of the market. The platform owner provides a service at a price below cost or even for free to a price-sensitive group, which is known as the subsidy side. By doing this, the platform attracts a large volume of users from this group, which increases the value of the platform for the second group, known as the money side. The money side consists of users who derive significant value from interacting with the large base of subsidized users and are willing to pay a premium for that access. The revenue collected from the money side covers the costs of the entire platform, including the losses incurred from the subsidy side. A common example is a search engine: the platform provides free search services to everyday users, who are the subsidy side. This massive user base attracts advertisers, who are the money side, and pay the platform for access to those users, thereby driving the platform&#x27;s revenue.

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When a platform owner offers a service at a loss to one group to attract a high-value segment that drives the platform's revenue, what is this pricing strategy called?