The Platform Edge
No industry and no geography is immune to the disruption caused by platforms. They have become a central part of the global economy and their influence will only grow with time. While software may have started the digital revolution, it’s platforms that are eating the world. The largest companies in the world by market cap run platform models: Apple, Amazon.com, Alphabet, Microsoft, Facebook, Alibaba. In 2017, 53 startups around the world attained unicorn status with a valuation of $1bn or more. The large majority of them are also platform businesses.
Rather than investing in production and aggregating large amounts of resources under one roof (with the supply chain as the central aggregator of business value), platforms build the infrastructure and tools to support and grow a networked marketplace or community. It’s these networks that connect businesses and individuals, enabling them to exchange value among themselves.
Orchestrating these large networks brings about new challenges. Traditional tools, whilst relevant for linear business, can’t be used to understand or analyse these companies, which operate on a different business model, supercharged by technology (e.g. more powerful chips, the internet, the world wide web, broadband communications, programming languages/operating systems, the Cloud). Platforms have, in turn, reconfigured value creation, value consumption and quality control, and transformed the whole structure of the business landscape by de-linking assets from value, re-intermediating markets and aggregating them.
Going back to basics, platforms help parties who have something valuable to exchange (tangible or not; goods, services or social currency) find each other, get together and do a deal. Don’t let the simplicity of this definition fool you into thinking that platforms have low business potential. On the contrary, investors have been on a quest to identify and support the platforms that they think have the potential to dominate entire industries.
It’s clear that platforms can’t be ignored, whether you are an investor, entrepreneur or consumer — we are surrounded by them, using them, investing in them, competing against them.
There are two categories of platforms: exchange platforms and maker platforms.
Exchange platforms provide value primarily by optimising exchanges directly between a consumer and a producer (e.g. Uber, Alibaba). These should focus on building liquid marketplaces that have sufficient overlap of supply and demand.
Maker platforms generate value by enabling producers to create complementary products and broadcast or distribute them to a large audience (e.g. iOS, YouTube). These are more focused on organically building ‘stars’ who can then act as powerful audience draws in these networks. Since the core transaction for maker platforms have a broadcast paradigm — a producer creates something and sends it out to many people — there doesn’t have to be direct interaction between the producer and the consumer.
A platform for success
While there is no universal recipe for creating a successful platform business, we can look at the main elements that should be considered when trying to understand and analyse a platform. The following insights are collated from three recent books on the subject, namely: Platform Revolution (by Geoffrey Parker, Marshall Van Alstyne, and Sangeet Paul Choudary), Matchmakers (by David S. Evans and Richard L. Schmalensee) and Modern Monopolies (by Alex Moazed and Nicholas L. Johnson).
What’s the friction?
The opportunity for a platform ordinarily arises when frictions keep market participants from dealing with one another easily and directly. Without a significant friction to address, no matter how great a platform’s technology, making a case for investing in it is difficult.
It is crucial to identify early on the type of participants that would benefit most from eliminating that friction. These early customers often have the power to guide the strategy for growth and thus shape the platform in a significant way.
Remember that timing matters too; it’s not just what friction is being tackled, when a friction is being addressed can be a decisive factor in the success of a platform.
What’s the core interaction?
In a nutshell, all platforms do two things: reduce transaction costs and enable innovation in complementary products or services. Getting the core interaction right is the most important piece of platform design, as the platform will need its users to repeat this process over and over to generate and exchange value. Looking carefully at how the platform is designed to do this can provide clues as to the likelihood of success.
Although multiple platforms might tackle the same friction, the way they approach the core interaction can shape niches (e.g. addressed at underserved groups within the incumbent networks) where they can get an edge over the competition.
Successful platforms begin with a single core interaction that consistently generates high value for users. One of the biggest mistakes founders of platform startups can make is to try to build multiple core transactions from the start. These new interactions can be layered on the top one, but only after the core interaction is finessed.
Chicken or egg?
Platforms relying on two or more types of users (e.g. creators and consumers) often face a ‘coordination problem’, wherein neither group will agree to use the service unless the other group does too. This tends to occur with matchmaker/exchange platforms; there is no product for one group if the others don’t show up.
Solving the chicken-and-egg problem always looks easy in retrospect. In fact, it is one of the hardest problems any business ever faces. Platforms overcome the chicken-and-egg problem when the value to new users of participating in the platform exceeds the cost of participation. (The point when this occurs is called critical mass.) Once a platform scales past critical mass, network effects are accretive and help the business gain a majority market share.
‘If you build it, they will come’
Every platform has to have a strategy for making the trek to critical mass. The founders must be realistic about the challenges involved and have developed tactics for getting enough of the right participants, in the right proportions, on board before the investment runs out or the platform’s reputation is compromised.
One of the biggest mistakes platform entrepreneurs make is to embrace the ‘if you build it, they will come’ fallacy, as a platform doesn’t generate any value for anyone unless the right participants join it. Once a platform or any business gets a reputation for being sub-par, it is hard to fix.
The more, the merrier
Network effects are a double-edged sword. The same network effects that drive growth also make platforms much harder to build. Positive network effects are the main source of value creation and competitive advantage in a platform business. The key to minimising most negative network effects is quality curation.
Go big or go home
The real benefits of a platform business emerge at a very large scale. Most platforms either make it big or don’t succeed at all. Technology alone is not enough, especially when the platform has little value without the participation of other users.
The data layer
Continual improvement of data acquisition and analysis methods is an important challenge for any organisation seeking to build and maintain a platform. What does the platform’s data acquisition strategy look like, and how is it likely to develop?
Money money money
Founders should think about potential monetisation strategies from day one and plan their design decisions so as to keep as many monetisation options as possible open for as long as possible. Platforms don’t usually generate revenue straight away, owing to the chicken-and-egg problem, but as a platform’s network grows, revenues should far exceed costs.
Be aware that multi-sided platforms don’t hold to the logic of traditional economics. Traditional economics holds that it’s never profitable to sell products at less than cost; multi-sided economics shows that even paying customers rather than charging them anything can be profitable in practice.
While all businesses should learn from and respond to the market, this is especially critical for multi-sided platforms. Attaining critical mass is a particularly difficult problem that often requires adjusting initial plans in light of how participants actually behave.
It’s inevitable that participants will use the platform in ways the entrepreneur never anticipated. Platform designers should always leave room for serendipitous discoveries, as users often lead the way to where the design should evolve.
In general, user commitment is more important than user acquisition. What matters is activity — the number and rate of satisfying interactions platform users experience — therefore, platforms must attract users by structuring incentives for participation. Interaction success attracts active users and thereby enhances the development of positive network effects. Watch for the ‘leaky-bucket’ problem in any developing platform business — i.e. the need to keep bringing in new users to fill demand because existing customers keep leaving.
Watch what you measure
The metrics platforms should focus on vary their life cycle.
During the startup phase, platforms should concentrate on tracking the core interactions on the platform (including liquidity, matching and trust). A platform’s goal is not simply to pump up the numbers of participants and interactions; it must also take steps to encourage desirable interactions and discourage undesirable ones.
During the growth phase, focus on metrics that are likely to impact growth and enhance value creation (e.g. relative size of various portions of the user base, lifetime value of producers and consumers, and the sales conversion rate).
During the maturity phase, look at metrics that drive innovation by identifying new ways to create value for users, as well as those that identify strategic threats from competitors. Maturing platforms often evolve in the direction of greater openness. This demands the continuous evaluation and adjustment of processes to ensure a consistently high quality of platform content and service value.