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March 7 - April 24, 2017
Can any product or service become the basis of a platform business? Here’s the test: if the firm can use either information or community to add value to what it sells, then there is potential for creating a viable platform. This creates huge opportunities for a lot of firms.
they hit on the idea of using recipes and taste profiles to build a food-based platform. Wolfe and Wacksman used McCormick’s taste laboratories to distill three dozen flavor archetypes—such as minty, citrus, floral, garlicky, meaty—that can be used to describe almost any recipe. Based on personal preferences, the system can predict new recipes an individual is likely to savor. Members of the McCormick platform community can modify recipes and upload the new versions, creating ever-expanding flavor options and helping to identify new food trends, generating information that’s useful not only to
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The innovators who hope to create the great new platforms of the future need to focus on the core interactions in the marketplaces they hope to conquer, and analyze the barriers that limit them. Overcoming those barriers will enable the building of platform-based ecosystems in those markets.
In other words, user commitment was more important than user acquisition.
For starters, in the world of platform marketing, pull strategies rather than push strategies are most effective and important.
In this world of abundance—where both products and the
messages about them are virtually unlimited—people are more distracted, as an endless array of competing options is only a click or a swipe away. Thus, creating awareness alone doesn’t drive adoption and usage, and pushing goods and services toward customers is no longer the key to success. Instead, those goods and services must be designed to be so attractive that they naturally pull customers into their orbit.
That’s why platforms must attract users by structuring incentives for participation—preferably incentives that are organically connected to the interactions made possible by the platform.
In the U.S., startups have used a similar strategy by piggybacking on Craigslist. The new platform starts by “scraping” Craigslist, using automated data-gathering software tools to obtain information about merchants and service providers. It then posts this information on its platform, giving consumers the impression that these merchants are actually participating on the platform. When a consumer requests a certain service provider, the platform passes on the lead while inviting the merchant to join the platform.
In a variation on this strategy, a platform company may choose to purchase a marquee participant in order to obtain exclusive access to the seeds it produces.
So Facebook’s decision to launch in the closed community of Harvard University wasn’t simply a matter of convenience. It was a masterstroke that enabled Facebook to solve the chicken-or-egg problem.
The term “viral growth,” of course, contains a built-in
in metaphor: it analogizes the growth of the platform to the spread of an infectious disease. In nature, a disease spreads when four elements interact: a host, germs, a medium, and a recipient.
What is less well known is that Instagram achieved this rapid growth without employing a single traditional marketing manager. It happened because the company’s platform was carefully designed to make viral growth organic and practically inevitable.
Unlike its competitor Hipstamatic, Instagram didn’t simply allow users to save, organize, and filter pictures. It encouraged them to share their photos on external networks like Facebook, converting a single-user activity into a social, multi-user activity. Every time users engaged the app, they shared their creations. Every point of app usage became an instance of app marketing. In essence, Instagram converted all its users into marketers.
The external network. Many platforms grow on top of other networks. Instagram, Twitter, Zynga, Slide, and other platforms have achieved viral growth by leveraging Facebook as an underlying network. Airbnb spread on Craigslist;
One difference between platform businesses and traditional pipeline businesses is that, in the world of platforms, pull strategies designed to encourage virality are more important than the push strategies (such as advertising and public relations) used in conventional marketing.
In fact, rather than charging users to join the platform, the founders should be subsidizing their participation—perhaps by providing tools and services to make it easy, fast, and effective for them to complete their profiles.
How, then, could the founders monetize their platform model? The answer: They can charge users for the value they accrue from the ecosystem, but the charge should be levied on deal completion, not at the time of listing. They would make it possible for firms to post a deal risk-free by charging a fee only once the firms get what they need. The fee becomes performance-based, and it feels negligible because it simply skims off a small fraction of a transaction that’s occurring anyway.
the inherent value of a platform business lies chiefly in the network effects it creates.
Another version of this strategy is the freemium model, in which a free layer of service attracts users who eventually pay for an enhanced version. Many online service platforms, including Dropbox and MailChimp, work this way. Both the razors-and-blades model and the freemium model monetize the same user base, or portions thereof.
The problem was that consumers who visited Zvents expected to find a comprehensive listing of local events. If only a few of the available options were included, the interest of users would quickly evaporate. Which meant that Zvents didn’t have much leverage over the event organizers they hoped to charge. If they’d threatened organizers with having their listings pulled, the threats would have no teeth, since the whole value of Zvents lay in the completeness of its listings. Charging producers for access to the platform wasn’t going to work.
The lesson? Network effects as measured by numbers of visitors alone don’t necessarily reflect the monetary value of a platform. The interactions facilitated must generate a significant amount of excess value that can be captured by the platform without producing a negative impact on network effects.
As we’ve discussed, 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. Meetup’s monetization model helped it achieve exactly that. By discouraging organizers who weren’t serious about their objectives, the pricing mechanism created a culture of quality on the platform.
Because buyers and sellers are charged only when an actual transaction occurs, they are not discouraged from joining the platform and becoming part of the network. Of course, if the transaction fee is excessive, it may discourage transactions.
So to monetize the site, Dribbble has invited third parties to pay for access to the community. In this case, companies looking for designers are charged to post employment listings on the site’s jobs board.
This form of monetization creates interactions that benefit both parties. Designers are motivated to put up their best work on Dribbble, since these may generate leads to new gigs, while companies get access to top-flight designers whose portfolios have already been curated by the creative community.
Charging all users. As we’ve noted, platform businesses rarely charge all their users the way pipeline businesses generally do. Charging all users would, in most cases, discourage participation, thereby reducing or destroying network effects.
In other words, only after a value unit has been created and exchanged with results that are satisfactory to both the producer and the consumer should the platform business itself seek to capture a share of that value.
Instead, when transitioning from free to fee, strive to create new, additional value that justifies the charge.
From the time of launch, a platform should be architected in a manner that affords it control over possible sources of monetization. This directly impacts how open or closed the platform is.
it’s true that, the more open a system becomes, the more fragmented it becomes. An open system is also more difficult for its creator to monetize, and the intellectual property that defines it is more difficult to control. Yet openness also encourages innovation.
When Facebook launched Facebook Platform to help developers create apps in May 2007, the big shift began. An ecosystem of partners willing to extend the capabilities of Facebook quickly took root.
As we explained there, a platform is fundamentally an infrastructure designed to facilitate interactions among producers and consumers of value.
you don’t want to let an outside firm control a primary source of user value on your platform. When this happens, you need to move to take control of the value-creating app—most often by buying the app or the company that created it.
defining exactly who should have access to the platform and precisely how they can participate is an enormously complex issue with ever-changing strategic implications. That’s why the question of openness needs to be at the top of every platform manager’s agenda—not just during the initial design process, but throughout the life of the platform.
Always create value for the consumers you serve; • Don’t use your power to change the rules in your favor; and • Don’t take more than a fair share of the wealth.
Governance is the set of rules concerning who gets to participate in an ecosystem, how to divide the value, and how to resolve conflicts.2 To understand good community governance is to understand the set of rules for orchestrating an ecosystem.
Good governance is important in both nation-states and platform businesses because absolutely free markets, in which people and organizations interact with no rules, restrictions, or safeguards, can’t always be relied upon to produce results that are fair and satisfactory to those involved.
The focus here is on the information asymmetry arising from the separation of ownership and control—a critical element of governance design, but far from sufficient.18 Information asymmetry between the community of users and the firm also matters, and their interests too must be aligned.
A broader view of platform governance uses insights borrowed from the practices of nation-states as modeled by constitutional law scholar Lawrence Lessig. In Lessig’s formulation, systems of control involve four main sets of
tools: laws, norms, architecture, and markets.
Thus, individual platform participants usually have to bear the downside risk, at least as far as national and local laws are concerned. (We’ll return to this topic in chapter 11, on regulation.)
The underlying principle: Give fast, open feedback when applying laws that define good behavior, but give slow, opaque feedback when applying laws that punish bad behavior.
Norms. One of the greatest assets any platform—indeed, any business—can have is a dedicated community.
Nir Eyal, who has worked in both advertising and game development, describes behavior design as a recurring sequence of trigger, action, reward, and investment.
Having a person’s name and email address on a membership list doesn’t promise success for a platform. What matters is activity—the number of satisfying interactions that platform users experience.
These tools, in their varied ways, help to measure the same thing: the efficiency with which value flows through the pipeline. A successful pipeline business is one that produces goods and services with minimal waste of resources and then delivers a large quantity of these goods and services to customers through well-managed marketing, sales, and distribution systems, thereby generating revenues that are more than sufficient to recoup costs and produce profits to reward investors and finance future growth.
In specific, platform metrics need to measure the rate of interaction success and the factors that contribute to it.
In particular, firms in the startup phase must track the growth of their most important asset: active producers and consumers who are participating in a large volume of successful interactions.
