Platform Revolution: How Networked Markets Are Transforming the Economy and How to Make Them Work for You: How Networked Markets Are Transforming the Economy―and How to Make Them Work for You

by Geoffrey G. Parker

A platform is a business based on enabling value-creating interactions between external producers and consumers. The platform provides an open, participative infrastructure for these interactions and sets governance conditions for them. The platform’s overarching purpose: to consummate matches among users and facilitate the exchange of goods, services, or social currency, thereby enabling value creation for all participants.

Platforms beat pipelines because platforms scale more efficiently by eliminating gatekeepers.

One reason is that pipelines rely on inefficient gatekeepers to manage the flow of value from the producer to the consumer.

Platforms beat pipelines because platforms unlock new sources of value creation and supply.

Whereas the leanest traditional businesses ran on just-in-time inventory, new organizational platforms run on not-even-mine inventory.

Platforms beat pipelines by using data-based tools to create community feedback loops.

Strategy has moved from controlling unique internal resources and erecting competitive barriers to orchestrating external resources and engaging vibrant communities.

Demand economies of scale are driven by efficiencies in social networks, demand aggregation, app development, and other phenomena that make bigger networks more valuable to their users.

The problem is that price effects are evanescent. They disappear the moment the discounts end or another firm offers a better price.

Brand effects are stickier. They arise when people come to associate a particular brand with quality. But brand effects, like price effects, are often difficult to sustain. They can also be extremely expensive.

Frictionless entry is the ability of users to quickly and easily join a platform and begin participating in the value creation that the platform facilitates. Frictionless entry is a key factor in enabling a platform to grow rapidly.

The founders originally thought they were in the web services business, selling consulting to firms who needed websites. But selling web consulting didn’t scale: each project had to be negotiated individually, each project required dedicated staff, and after completion, no project could be resold without modification.

The reason Instagram sold for $1 billion is not its thirteen employees; the reason WhatsApp sold for $19 billion wasn’t its fifty employees. The reasons were the same: the network effects both organizations had created.

Growth comes not from horizontal integration and vertical integration but from functional integration and network orchestration.

In the world of network effects, ecosystems of users are the new source of competitive advantage and market dominance.

The natural tendency of those charged with creating a new platform business is to study similar implementations and imitate them. But because no two markets are identical, this strategy often fails. A poorly designed platform produces little or no value for users and generates weak network effects, or none at all.

platform connects producers with consumers and allows them to exchange value.

interactions on a platform resemble any economic or social exchange, whether it occurs in the real world or in the virtual world of the Internet. In every such exchange, the producer and the consumer exchange three things: information, goods or services, and some form of currency.

Platforms are designed one interaction at a time. Thus, the design of every platform should start with the design of the core interaction that it enables between producers and consumers. The core interaction is the single most important form of activity that takes place on a platform—the exchange of value that attracts most users to the platform in the first place. The core interaction involves three key components: the participants, the value unit, and the filter. All three must be clearly identified and carefully designed to make the core interaction as easy, attractive, and valuable to users as possible. The fundamental purpose of the platform is to facilitate that core interaction.

in virtually every case, the core interaction starts with the creation of a value unit by the producer.

Participants + Value Unit + Filter → Core Interaction

When designing a platform, your first and most important job is to decide what your core interaction will be, and then to define the participants, the value units, and the filters to make such core interactions possible.

successful platforms begin with a single core interaction that consistently generates high value for users.

The core interaction is the why of platform design. The whole purpose of a platform is to make core interactions possible—indeed, to the extent possible, to make them inevitable by making them highly valuable to all participants.

The platform must pull the producers and consumers to the platform, which enables interactions among them. It must facilitate their interactions by providing them with tools and rules that make it easy for them to connect and that encourage valuable exchanges (while discouraging others). And it must match producers and consumers effectively by using information about each to connect them in ways they will find mutually rewarding.

One kind of feedback loop is the single-user feedback loop. This involves an algorithm built into the platform infrastructure that analyzes user activity, draws conclusions about the user’s interests, preferences, and needs, and recommends new value units and connections that the user is likely to find valuable.

Unlike traditional pipeline businesses, platforms don’t control value creation. Instead, they create an infrastructure in which value can be created and exchanged, and lay out principles that govern these interactions. That’s what the process of facilitating is all about.

As part of the design process, platform companies need to develop an explicit data acquisition strategy.

activities that are not central to the workings of the network but valuable only to particular users should be located at the edges of the network rather than at its heart. In this way, secondary functions don’t interfere with or draw resources away from the core activities of the network, nor do they complicate the task of maintaining or updating the network as a whole.

This is the problem with abundance. When platforms start unlocking new sources of supply, quality often nosedives

user commitment was more important than user acquisition.

Within three months, PayPal’s user base grew from 100,000 to one million.

For starters, in the world of platform marketing, pull strategies rather than push strategies are most effective and important.

But in the world of platforms, rapid, scalable, and sustainable user growth is most often achieved through pull processes.

if you’re launching a platform, knowing the value propositions offered by your competitors can help you structure your own, allowing you to claim a relatively untouched market niche—even if your basic value unit may appear similar on the surface.

So designing spreadable value units is a crucial step toward virality.

When the user of a platform sends a value unit to a friend or acquaintance, the recipient will respond if he or she finds the value unit relevant, interesting, useful, entertaining, or otherwise valuable.

Most well-designed platforms create far more value than they directly capture—which is why they attract large numbers of users, who are happy to enjoy the benefits of all the “free” value provided by the platform.

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. When that’s not the case, monetization may not be possible.

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.

Charging a transaction fee is a powerful way of monetizing the value created by the platform without hampering the growth of network effects. 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.

it’s possible to monetize a platform by charging producers for access to a community of users who have joined the platform not in order to interact with producers but for other, unrelated reasons.

Platforms that charge producers fees for better targeted messages, more attractive presentations, or interactions with particularly valuable users are using enhanced access as a monetization technique.

Another way of monetizing enhanced access is by charging users for lowering barriers that otherwise exist between users.

Platform managers must also be careful not to allow monetization of enhanced access to create the impression that user access is being restricted.

When the quantity of content on a platform becomes overwhelmingly great, consumers may find it increasingly difficult to find the high-quality content they want, thereby reducing the platform’s value for them. When this happens, consumers may be willing to pay for access to guaranteed quality—in other words, for enhanced curation.

Creating value for users while asking nothing in return is often a great way to attract members and encourage participation.

If possible, avoid charging for value that users previously received for free.

avoid reducing access to value that users have become accustomed to receiving.

when transitioning from free to fee, strive to create new, additional value that justifies the charge.