Platforms — from Steemit to OpenBazaar pt.1
Soon i will post an article on Steemit and OpenBazaar analysis. These products are good examples of platforms. So let’s start with the Platform Basics first.
I highly recommend reading the “Platform Scale: How an emerging business model helps startups build large empires with minimum investment” book.
Next is the short condensed version of this book, so all credits go to Sangeet Paul Choudary.
Platform Basics
“We are not building a software. We are enabling interactions”
“The ecosystem is the new warehouse”
“The invisible hand is the new iron fist”
“Today, the AppStore is the reason iPhones sell”
“Users First, Revenues Later”
“Interaction-first! Not a technology-first!”
Pipes (internal + control)
Pipes focus on consumers only. Firms compete on the control and ownership of internal resources.
A traditional manufacturing chain is a pipe. It is pushing value from producer to consumer. Early digital business models also followed the pipe design.
Pipes scale by aggregating internal resources toward efficient value creation and delivery to consumers. Pipes focus on optimizing process flow.
Platform (external + interaction)
Platforms must build virtual interaction spaces.
- Enables producers and consumers to connect and interact. Allows (external) participants to co-create and exchange value with each other. Platform does not create the end value, but only enables value creation
- Curate and govern. Create better trust. Without strong curation, greater content can actually lead to a poorer user experience leading to reverse network effects.
- Enables plug-and-play business model. Other businesses can easily connect and build products on top of the platform.
Platforms scale by ability to orchestrate a global connected ecosystem and optimization of value-exchange interactions.
From Pipe to Platform
3 forces
- Increased connectedness
- Decentralised production
- Rise of artificial intelligence
3 shifts
- Shift in markets: from consumers to producers
- Shift in competitive advantage: from resources to ecosystem
- Shift in value creation: from processes to interactions
Organizations must shift from dollar absorption to data absorption.
Liquidity — ensuring enough overlap between supply and demand.
Core value unit — minimum standalone unit of value that is created on top of the platform. Its a scaling variable.
Platform Manifesto
- The ecosystem is the new warehouse
- The ecosystem is the new supply chain
- The network effect is the new driver for scale
- Data is the new dollar
- HR -> Community management
- Inventory control -> Liquidity management
- Quality control -> curation, repetition
- Sales funnels -> user journeys
- Destination -> distribution
- Loyalty program -> behaviour design
- Business process optimization -> data science
- Sales commission -> social feedback
- Algorithms are new decisions makers
- Market research -> real-time customisation
- Business development -> plug-and-play architecture
- “The invisible hand is the new iron fist”
3 basic platform configurations
- Marketplace/Community-dominant: AirBnB, Uber, Facebook, Alibaba, Reddit
- Infrastructure-dominant: Android, Wordpress, Dropbox
- Data-dominant: Jawbone, Nest
Principles of building a platform
You know you have a platform when the users can shape their own experience
- Plug-and-play business design. Open participation and strong filters
- Balancing value creation for both producer and consumer
- Strategic choice of “free”
- Pull, facilitate, match
- Layering on new interactions
- Enabling end-to-end interactions
- Creation of persistent value beyond the interaction — ratings and reputation, etc.
Challenges
Replicating the technology of AirBnB or YouTube is considerably smaller challenge compared to replicating their respective communitites of hosts and video creators.
- “Chicken and egg problem” — no producer means no consumer means no producer…
- “The ghost town problem” — ensuring that producers produce, and create value
- “Double company problem” — platform is two-sided, so building it is twice as difficult
- Interaction off the platform — client may want to continue interaction off the platform (see Upwork).
How to solve chicken-and-egg problem?
One of the ways of solving this problem is to ensure that the product has a ‘standalone mode’. Essentially, a user should be able to derive value out of the product even when other users aren’t on it.
The ‘off-platform’ reputation of the producers should attracts the consumers to the platform.
Beg, borrow, steal is how platforms build traction
- Find a (inorganic) bait to start the loop
- Ensure there is no friction in the feedback loop
- Minimize the time it takes for the startup to reach critical mass
- Incentivize role that is more difficule to attract (“Lady’s night is when free drinks is offered for ladies”)
- Staging the creation of 2-sided markets — OpenTable gets 1st-side of platform by providing restaurant management software (the bait, standalone mode, creation of value units) before any 2nd-side consumers signed up.
- Fake contents (like dating sites do), fake interactions (like PayPal did), fake supply…
- Design your platform so that producers can bring large-number of consumers to the platform
- Start as a producer on your platform
Staging (attracting only one side fiest) is not possible in some cases (i.e. payment mechanisms). In such scenario the solution is to provide backward compatibility (like e-mail service).
Solving chicken-and-egg problem on such platforms requires solving quality control issues, rather then gunning for critical mass of users.
Quality control
Quality = moderation + algorithms + social signals
Controlling quality in an open and participative environment.
Controlling quality with minimum friction.
Controlling quality through processes that scal non-lineary.
Platforms must be designed in a manner that optimally balances the quality and quantity of interactions by balancing traction and friction. In the early days of the platform friction is often reduced.
“Craigslist, the king of quantity, suffers on quality. It does not have a reliable method of determining a user’s reputation”. But AirBnB built a reputation system.
Trust
Trust is the critical factor on the platform. Platform requires creation of alternate trust mechanisms:
- Confirmed identity
- Centralized Moderation — in it’s early days every platform uses centralized moderation in some form
- Community Feedback — comments, votes, ratings, reviews, replies
- Codified Behaviour — implicit rules
- Culture
- Completeness
- Insurance
Values
- Physical goods (eBay)
- Virtual goods (Medium, Youtube)
- Standardized services (Uber)
- Non-standardized services (Upwork, TaskRabbit)
- Data (Waze, Nest)
Capturing Values can be done in different ways:
- Charging one side to access another
- Charging 3rd party for advertisement
- Charging for premium tools
- Charging consumers for access to high-quality curated producers
- Charging producers for ability to signal high quality
At least one side is usually subsidized to participate on the platform. Producers may even be incentivized to participate. Dating sites are a great example of two-sided markets which, often, rapidly build out traction on one side but fail to get any uptake on the other. Typically, such markets are asymmetrical with one side that is harder to attract (the ‘hard’ side) and the other which is relatively easier to get traction on (the ‘easy’ side).
Platform Thinking: We’ve got to figure who creates value and who we charge for that.
Consumers can offer in return:
- Attention
- Reputation
- Influence
- Goodwill
- Money
Monetization options
- Transaction cut (fee) — requires a mechanism for owning end-to-end interaction (i.e. don’t allow you users to buy off-the platform). So the platform must create more value than they capture
- Advertisement
- API/data licensing
Business Model Options:
- “Subscription-based” revenue model — dating web-sites, B2B platforms
- “Paid placement” revenue model — classifieds
- “Lead generation” revenue model — financial comparison engines
Platform advantage
- Better marginal costs. Example: value creation for AirBnB is very cheap.
In general, platforms allow producers to obtain market access without commensurate investment. Platforms may also provide access to tools for free that may have been expensive to access before. - Network effects. 1 + 1 = 3. Network effect guarantee repeatable interactions.
- Community culture
- Learning filters
- Virality. More users bring more users
- Platforms, by their very nature, enable abundance.
i.e. “Long tail”
Today network effect is reached by “cummulative value” — value that scales as the producer/consumer uses the platform more often. Cummulative value takes 4 forms:
- Reputation
- Influence
- Collections — a larger collection creates increasingly higher feedback for a producer
- Learning filters — platform becomes more useful with usage
Core Interaction
Platform architecture should be organized around core interaction.
- Creation
- Curation — is critical on an open-access platforms
- Customisation
- Consumption
A platform must enable all 4 actions. Keys to platform scale lie in simplifying these actions. To power the core interaction platform must leverage all 3 layers of the business model.
Ask these questions to design core interaction:
- What is the core interaction that the platform enables?
- What is the core value unit?
- Who is the producer? What motivates him to produce?
- Who is the consumer? What motivates him to consume?
- How does the producer create the core value unit? What channels are used to create core value?
- How does the consumer consume the unit? What channels are used to consume core value?
- How is the quality of unit is determined?
- What is the filter used to serve the unit to the consumer?
- What consumer actions help to create the filter?
- How does the consumer consume relevant units?
- What tools and services should the platform provide to enable interactions?
- What curation and customization tools and services should the platform provide?
(algorithmic, social, editorial curations) - What consumption tools and services should the platform provide?
- How these tools and services help platform to pull, facilitate, match?
- What currency does the consumer provide in return for the value?
- How does platform capture some portion of this currency for itself?
Conclusions
Please stay tuned if you are curious how and why Steemit business model works (or doesn’t work), how OpenBazaar is trying to solve ‘chicken-and-egg’ problem, and why ‘money-for-posts’ is not really a good idea.
Soon i will post an article about that.
Anton.
