Platform Revolution: a review for start-ups

Platform Revolution has been the talk of the platform town since its publication last year. Having worked in platforms businesses for years and studied Platform Competition under the great Austan Goolsbee at Chicago Booth, I still found new insights and a clarification of ideas.

The book has great info for mature platforms like Facebook, M&A bankers and regulators, but since I run a start-up and am most frequently contacted for start-up advice, I’m going to summarize the bits I found useful so other budding platform builders could take note:

1) First, some microeconomics. Platforms are NOT pipelines. A pipeline business employs a step by step arrangement for creating and transferring value with producers at one end and consumers on the other. Most traditional businesses are pipeline businesses, for example the auto-industry and supermarkets.

These businesses grow and prosper if they have Supply Economies of Scale. In our car industry example, if Ford makes lots of cars, the unit cost of producing each car falls.

Platforms, on the other hand, dominate if they have Demand Economies of Scale. This is another term for network effects, i.e. the more participants you have on a platform, the better the experience becomes for each participant. For example, Whatsapp is useless if your friends aren’t on it and there is no point in being the only person with a phone.

Source: Platform Revolution, Sangeet Paul Choudary, Geoffrey G Parker, James Foster

2) When building a platform, identify who plays each role in the following equation:

If you understand how this applies to your business clearly, you can align your strategy with it.

Below, you will see how this applies to LinkedIn:

When LinkedIn first launched, they were focussed on getting new users to as many connections as possible in the first few days. If a new user saw that their professional network widened and made them better connected, they would continue to be an active user (and bring their networks to the platform).

Here’s the Style Counsel example:

The value to our users is getting and giving answers to photo questions. This means that without photo questions, we cannot provide value. Consequently, as a new platform, our focus is on enabling frictionless creation of value units, i.e. we make it very easy for users to ask questions.

Putting thought into this has had results: over 20% of our user base has asked a question (which is 20x the 1% rule described here:

3) Build your monetization strategy early, even though you do not have to monetize from the start. The main idea is that monetization must not add friction to your core interaction. For example, if you grow your user-base by giving them a free service and then try to get them to pay for it, they will leave (and they won’t like you).

Monetization should be frictionless and not annoy users. The book gives a good example of how MySpace was pushed by its investors to monetize quickly, so they crowded the site with adverts. Facebook, a competitor at the time, did not have the same pressure and we all know what happened next.

This does not mean you shouldn’t think about monetization! The model of building a big audience and then scrambling to work out how to get money out of it isn’t attractive to investors anymore.

If you have no plan to make money, you’re not building a business.

A successful strategy is to build the architecture for frictionless monetization into your platform from the start, way before you intend to deploy it.

Style Counsel’s main monetization strategy is to offer consumer insights to retailers through analytics and trend reports. We are already building the architecture, even though selling this analysis is some way off. Planning from the start means we won’t have to bolt on bulky technology or create an emergency monetization plan out of desperation.

4) Bake marketing into the platform: pull strategies work better than push strategies in platform businesses. This means your product should include something that makes its participants want to share it. Instagram is a great example: I first found out about Instagram because my friends were sharing beautiful photos on Facebook and I wanted to find out how they did it. You can also structure incentives for participation into the product, just like Airbnb does when it offers you cash to invite new users.

5) Good governance must be at the heart of the system from the start. Think about what kind of behaviour you want to promote on the platform and design the architecture as a recurring sequence of trigger, action, reward and investment. For example, Pinterest’s governance means that great design is rewarded by public adoration and monetization.

Clearly defined boundaries and public rewards for good behaviour create surplus value that makes users want to return to the platform. For example, Airbnb users with positive reviews are far more likely to use the platform than those with bad reviews. Twitter’s inability to deal with online bullying is an example of the lack of enforced governance rules, and is partly to blame for their user growth and revenue problems.

I hope you find this summary useful, but it is no substitute for the book.

Whatever industry you are working in, platforms are disrupting it, so understanding platform fundamentals is now as essential as reading a P&L.

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