UBER vs. LYFT: HOW PLATFORMS COMPETE ON INTERACTION FAILURE
This article is an excerpt from the book Platform Scale (Amazon #1 bestseller). Get the book here or download the first 3 chapters here.
Platforms may fail to scale when they fail to encourage interactions. Platform builders must track and measure early indicators of potential interaction failure. The growing on-demand economy serves as a great example to illustrate the importance of avoiding interaction failure.
THE ON-DEMAND ECONOMY
The on-demand economy is bringing together technology and freelance workers to deliver services in exciting new ways. We are increasingly using our cell phones as remote controls for the real world. In the past, one could sit on a sofa and flip through TV channels using a remote control device. Today, the phone works as a remote control for the real world, and one can request a taxi, get a home cleaned, or order a bite to eat at the click of a button. On-demand experiences are delivered by platforms — like Shyp, Uber, Washio, and DoorDash — that connect consumers with freelance labor or spare service capacity.
Two critical factors will determine the success of a company in the on-demand economy: multihoming costs and interaction failure.
MULTIHOMING COSTS AND WINNER-TAKES-ALL
As explored earlier in this section, multihoming costs determine a platform’s ability to develop strong network effects and achieve a winner-takes-all position in the market. The defensibility and competitive advantage of a platform business are very closely related to the multihoming costs that its producers and consumers incur. Multihoming costs vary for different platforms.
When developers co-develop for the Android and iOS platforms, they incur high multihoming costs. Multihoming costs are high for consumers as well because of the cost of mobile phones. Most consumers will own only one phone. However, multihoming costs for drivers to co-exist on Uber and Lyft are relatively low. Many drivers participate on both platforms. Given the ease of booking rides, multi-homing costs are very low for travelers/riders on these platforms as well.
This is an important consideration for on-demand platforms, especially those that compete off service providers with undifferentiated skills. With a limited supply of service providers available, multihoming may lead to a strong, ongoing competition between platforms for access to service providers. Producers can easily switch between platforms without allowing any single platform to develop a long-term competitive advantage and a strong network effect.
Multihoming can be a contributor to the eventual loss of platform scale when it leads to interaction failure on the platform.
INTERACTION FAILURE
Interaction failure occurs when a producer or consumer participates in an interaction, but the interaction fails to reach its logical, desired conclusion. Imagine a merchant setting up a listing on eBay that never gets any traction or a video enthusiast uploading a video on YouTube that fails to get a minimum number of views. These producers experience interaction failure. Often, these outcomes could be the result of poor-quality listings or videos, but they could also result from the platform’s inability to match supply with relevant demand. Producers and consumers who experience interaction failure become discouraged from participating further and eventually abandon the platform.
THE UBER–LYFT WAR
Interaction failure is especially important for on-demand platforms. Imagine a consumer requesting a service and never being served with a solution. Imagine, in turn, a producer receiving a request and preparing to fulfill that request, only to find that the request is cancelled. In both cases, the respective consumer or producer may become discouraged and decide to abandon the platform.
In some of the largest cities, drivers drive for both Uber and Lyft, as well as other competitors. It’s not uncommon for these drivers to switch between the two platforms multiple times a day. With a limited supply of drivers in a city and the cost for a driver to connect to an additional platform being so small, drivers multihome on both Uber and Lyft. This has naturally led to intense competition between the two companies, and Uber infamously resorted to a playbook to create interaction failure on Lyft using questionable tactics.
Uber decided to target interaction failure on Lyft by contracting third-party agents to use disposable phones to hail Lyft taxies. Before the Lyft taxi arrived at its pickup location, the Uber-contracted agent would cancel the ride. With so many cancelations on the Lyft platform, drivers would become frustrated driving for Lyft and, in some cases, switch to Uber. A smaller number of drivers on the Lyft platform meant longer waiting times for traveler. This would, in turn, frustrate travelers, eventually spurring them to abandon the platform.
When multihoming costs are low, producers and consumers may easily participate on multiple platforms. With multiple platforms sharing the same producers and consumers, it is difficult for a business to build defensible network effects. Thus, it is difficult for a clear winner to emerge in the market. With many platforms operating and defensibility low, interaction failure becomes a key factor in determining long-term winners.
PLATFORM SCALE IMPERATIVE
Platforms must define interaction failure scenarios and track metrics that help to determine the degree of interaction failure on a platform. Freelancers who don’t get business within X days, requests that don’t get satisfied within Y minutes, and products that aren’t liquidated within a certain period may all be indicative of interaction failure. The exact measure of interaction failure will vary by platform, and the importance of tracking interaction failure will, in turn, depend on the multihoming costs. Tracking and avoiding interaction failure is an ongoing discipline that all platform-scale businesses must embrace.
This article is an excerpt from the book Platform Scale (Amazon #1 bestseller).
Get the book here or download the first 3 chapters here.
For more such writing, check out the Platform Thinking blog.
