The Era of Platform Businesses
Networked markets and economies
Recently, we have seen how platform businesses like Facebook, Airbnb, Uber, and Snapchat have emerged and risen to dominance. These businesses greatly rely on and thrive in networked markets. Networked markets facilitate the creation and exchange of value between individuals, organizations, and resources.
In less than a decade, Airbnb has garnered a growing segment of customers from the traditional hospitality industry without owning a single hotel room of its own.
In March 2009, Uber launched its ride-sharing and ride-hailing service in the city of San Francisco. Ten years later, it is disrupting and replacing the traditional taxi business in over 200 cities worldwide — all without owning a single taxi.
The giant media company, Facebook, was founded in February 2004 by Mark Zuckerberg, along with fellow Harvard College students and roommates. Over 1.5 billion people visit Facebook regularly to read the news, look at photos, listen to music, and watch videos — all without producing a single piece of original content. A report in 2018 revealed that Facebook made over $55 billion in annual advertisement revenue.
The examples we have mentioned are only a few from a list of disruptive platform businesses including Alibaba, Paypal, Youtube, Amazon, eBay, Wikipedia, Instagram, Pinterest, and many others.
The ability of these businesses to invade, conquer, and dominate existing traditional markets in a short time is uncommon in other business models. How do they do it? The answer is in the power of the platform.
What is a Platform?
According to the authors of Platform Revolution: How Networked Markets Are Transforming the Economy and How to Make Them Work for You, a platform is a business model that connects people, organizations, and resources through technology. Possibly, in an interactive ecosystem, invariably creating an environment that facilitates the creation and exchange of value.
Practically, any industry in which information is vital is a candidate for the platform revolution.
Additionally, platforms can host a variety of users.
Platform businesses attract and connect people of different backgrounds, orientations, and interests to foster a unified form of interaction and value creation that pertains to each platform.
For instance, Amazon is bringing together buyers and sellers and enabling the retail of goods and services worldwide. Similarly, Facebook focuses on enabling interactions between people and sharing messages in the form of images and videos across borders.
Networked Markets
To fully understand the power of the platform, one ought to understand the effects of a network on platform businesses. Platform businesses thrive in networked markets.
Network effects refer to the impact that the number of users on a platform has on the value created for each user. Network effects can either be positive or negative.
The ability of a large, well-managed platform market to produce significant benefits to each user on the platform refers to positive network effects.
On the other hand, negative network effects refer to the possibilities that the growth of a poorly managed platform market can reduce the value produced by the platform for each user.
Positive network effects are the primary sources of value creation and competitive advantage in platform businesses.
Most platform businesses typically attract two-sided network effects with positive feedback. For example, in the case of Uber, riders attract drivers, and drivers attract riders. Similarly, with Airbnb, hosts invite guests, and guests draw attention to hosts.
The value of these effects is so great for stimulating network growth. Sometimes, businesses spend resources on attracting users on one side of the platform, which in turn attracts users on the other side.
Designing A Successful Platform
Building a platform that ensures participation and creation of significant value for all its users is usually a challenge. Often, platform designers find it a challenge to identify a logical starting point because platform businesses are new and more complicated than pipeline businesses.
However, it is always recommended to design a platform by focusing on the fundamentals. For the creation of value in a platform, there must be interactions between the producers and consumers.
Platform interactions usually result in the exchange of three things: information, goods or services, and some form of currency.
Some platforms allow direct interactions between users — the case of social networks. While others establish mechanisms for the exchange of value. For instance, on Youtube, videos published by content creators are delivered to viewers without any direct interaction between them.
The Core Interaction
Platforms are designed one interaction at a time. Most importantly, the design of a platform should start with the design of the core interaction.
The core interaction is the single most important form of activity that takes place on a platform — the exchange of value between producers and consumers that attracts users most to the platform.
The core interaction consists of three components:
- The Participants: These are the users of the platform. Every core interaction has two participants: the producer who creates value, and the consumer, who receives the produce.
- The Value Unit: The basic unit of value exchanged on the platform between producers and consumers.
- The Filter: A filter is an algorithmic mechanism used by the platform to enable the exchange of appropriate value units between the producers and consumers. A well-designed platform filter ensures that users only receive relevant and significant value units.
In most cases, platforms do not create value units. Producers do.
Instead, platforms establish the base infrastructure for the exchange of value. The interactions that take place on social media platforms like Facebook and Youtube — as mentioned earlier — are perfect examples.
The Principal Functions of Platform Design
There are three principal functions that platforms must perform to drive a high volume of valuable core interactions: pull, facilitate, and match.
Pull
Producers and consumers must be pulled by the platform to encourage interactions between them. Unlike pipeline businesses, attracting users to a platform brings forth challenges like:
- The Chicken-Or-egg Problem: Unless a platform has value, users won’t be attracted to it. Similarly, a platform won’t have value if no users are using it.
- Maintaining the Interest of Users on the Platform: The core interactions of a platform derive the most relevant value units. Users will keep on using a platform unless it stops enabling them to obtain these value units dynamically. For example, Facebook realized that users only found the platform useful after they had reached a threshold number of connections. Until then, they were likely to stop using the platform. So, Facebook focused more on helping users build meaningful relationships rather than attracting new members.
A powerful tool that drives users to continue using a platform is the feedback loop. The feedback loop may take several forms, all of which attempt to create a constant stream of self-reinforcing activity.
In a typical feedback loop, the flow of value units incites a response from users. If the units are valuable, users will be drawn to the platform, generating a further exchange of value units and driving more interactions.
Facilitate
Platforms must facilitate interactions between producers and consumers by assisting them with tools and rules that ease connection and drive valuable exchanges.
In contrast to pipeline businesses, platform businesses do not create value. Instead, they establish infrastructures and outline principles for the creation and exchange of value. For example, Vimeo provides cloud storage services and tools for producers to publish high definition video content for consumers.
Also, facilitating interactions may involve reducing barriers to usage. A few years ago, a Facebook user who wanted to share their location with a connection had to obtain it from Google Maps. Now, users can easily share their location while messaging on the Facebook platform without accessing an external service.
Match
Above all, platforms should be able to match producers and consumers effectively using information about each to connect them in mutually beneficial ways. For effective matches:
- Platforms should be exposed to more information about producers and consumers.
- The platform filters — algorithms used to collect, organize, sort, parse, and interpret data — have to be accurate.
For a platform to be successful, all three functions: pull, match, and facilitate, are necessary. However, not all platforms excel at the three. Some platforms thrive for a while, mainly due to their strength in only one particular function.
Take, for example, the case of Vimeo and Youtube in the video-sharing business. Youtube uses pull and data analytics to match content producers and consumers. On the other hand, Vimeo relies on facilitating value creation by providing tools for hosting and serving high definition videos.
Launching A Successful Platform
There are many ways to launch a platform.
Often, it happens that the launch strategy used for one platform may not yield the same success for another. A successful launch strategy requires that platforms should analyze and respond to their rivals’ business design.
The Chicken-Or-Egg Problem
The main problem businesses face while attempting to launch a platform is deciding how to begin building a user base for a two-sided market. In most cases, each section of the market depends on the prior existence of the other.
The best way to address this problem is to avoid the chicken-or-egg problem altogether. Instead, an existing pipeline business should be the foundation of the platform.
The Follow-the-Rabbit Strategy
Set up a non-platform project or pipeline business to model success and attract producers and consumers to a new platform.
Amazon never faced the chicken-or-egg problem. It began as a pipeline retail business that used online product listings to attract customers. As its customer base grew, it transformed into a platform business by attracting external producers.
The Piggyback Strategy
Connect with users from an existing platform. Then, establish an infrastructure that facilitates the exchange of value units to attract participation from those users in your business.
A typical example is how Youtube built its user base by attracting indie bands that were members of the Myspace social network with its powerful video tools.
The Seeding Strategy
Create value units that will appeal to at least one set of potential users. When they get on board, they’ll attract interaction from the others.
When Quora began, the editors would ask questions and then answer the questions themselves, to stimulate activity on the platform.
The Marquee Strategy
Identify a core user base and motivate them to be on the platform.
In most cases, there is one set of users that is vital to the platform. Its participation can either make or break the success of the platform. Therefore, it makes sense if the platform can incentivize their participation either through cash payment or other benefits.
The Single-Side Strategy
Create a pipeline business around products or services that benefit a single set of users. Later, transform it into a platform by attracting another set of users who are willing to interact with the first set.
In the case of redBus — an Indian bus reservation system, it initially provided bus operators with a seating inventory management system. Then later, it opened the platform to consumers once bus operators had started using the platform.
The Producer Evangelism Strategy
Design your platform to attract producers, then their customers will ultimately become users of the platform.
Often, platforms that provide businesses with customer relationship management (CRM) tools attract producers. The producers then take up the task of bringing in consumers from their customer base.
The Big-Bang Adoption Strategy
Traditional push marketing strategies can drive a high volume of interest and attention to a platform. At launch, businesses should strive to deliver their message to potential users without them developing the interest to interact on the platform.
The MicroMarket Strategy
Target a small, existing market, and make useful matches.
Stackoverflow began as a question-and-answer community for programming topics. After users requested cooking as a second category, it expanded its topic list. Today, Stackoverflow has a voting mechanism that allows its users to choose topics of interest.
With the strategies suggested above, businesses can solve the chicken-or-egg problem and launch successful platforms. Once the platforms begin attracting viral growth, they can then focus on maximizing profit and staying above their competitors.
Monetizing a Platform
As we have learned, the real value of a platform business is in its network effects. However, platforms still find it a challenge to monetize network effects.
Network effects help in creating self-reinforcing feedback loops that attract users. However, some users become discouraged in interacting on platforms that charge fees to access and exchange value. Besides, access fees may cause users to avoid the platform altogether.
Also, charging for production may reduce value creation, making the platform less attractive for consumers. Additionally, charging for consumption reduces consumption, making the platform less attractive to producers.
How then can a platform monetize its network effects without discouraging participation from users or destroying the value it creates?
The Freemium Model
Providing a free layer of service attracts users who may eventually pay for an enhanced version.
Many online platforms work this way. At TechTimez, we started with the free version of Grammarly, which helps us in checking the grammar, spelling, and readability of our articles. At the time of this writing, we are considering migrating to a premium plan.
Two-sided Market Pricing
Some platforms choose to offer free services to one group of users while charging full fees or a rate from another group.
Online freelance service platforms mostly use this strategy. For instance, Upwork charges freelancers a percentage of the amount they bill their employer. While posting jobs is free for employers.
Choosing the Right Strategy
Some platforms make profits by charging for access, production, and consumption of value units. But to achieve success while launching a platform using any of those strategies could be daunting. That is why we recommend platforms at launch to either use the freemium or two-sided market pricing models.
We also recommend reading Platform Scale, by Sangeet Paul Choudary. It gives a comprehensive view of how to use an emerging business model to scale and build startups with minimum investment to acquire enormous profits.
The Future Of Platform Businesses
We have discussed the power of the platform and also seen how platform businesses are disrupting economies globally. Platform businesses are taking over product businesses and driving small startups to rise quickly to global dominance.
Education
The learning industry is information-intensive and also a potential sector that is ready for platform disruption. Educational institutions are highly fragmented, with each having their unique standards. As a result, there is no general criteria for quality checks.
The drive to build and sustain educational platforms is forthcoming as companies like Coursera, Udemy, Skillshare, Pluralsight, and many others imply.
Besides, institutions like MIT, Harvard, Stanford, and many others are already offering massive open online courses (MOOCs) through partnerships with companies like Coursera and edX.
Healthcare
Like education, the healthcare industry is also information-intensive, highly fragmented among hospitals, laboratories, clinics, pharmacies, and solo-practitioners.
Disruption in this sector can be caused by introducing platforms that enable healthcare to be readily available on-demand anytime, anywhere. Just like Uber has done in the case of transportation.
Even more, the impact of the platform model on medicine can go beyond one-off interactions. The platform revolution offers many opportunities for connecting medical practitioners and patients in a way that encourages seamless data collection for research, diagnosis, and treatment.
Others
The platform business model can be used to disrupt economies in all industries. Some other prominent sectors that could experience viral changes soon include finance, energy, logistics and transportation, labor and professional services, government, Internet of Things.
Key Takeaways
Platforms create infrastructures that permit the exchange of value between producers and consumers. The interaction between producers and consumers defines a networked market, in which platforms thrive.
In designing a successful platform, businesses must consider the three principal functions of any platform business: pull, facilitate, and match.
Platforms are usually characterized by viral growth. But without an effective monetization strategy in place, the business could run out of resources or be unable to compete against rivals.
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