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

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.

A well-designed filter ensures that platform users receive only value units that are relevant and valuable to them; a poorly-designed filter (or no filter at all) means users may be flooded with units they find irrelevant and valueless, which may drive them to abandon the platform.

To begin with, platforms need to solve a chicken-or-egg problem that pipeline businesses don’t suffer from: users won’t come to a platform unless it has value, and a platform won’t have value unless users use it. Most platforms fail simply because they never overcome this problem. It’s such an important challenge that we’ll devote all of chapter 5 to analyzing it and helping you solve it.

One powerful tool that encourages users to keep returning to the platform is the feedback loop. A feedback loop in a platform may take various forms, all of which serve to create a constant stream of self-reinforcing activity. In the typical feedback loop, a flow of value units is that generates a response from the user. If the units are relevant and interesting, the user will be drawn to the platform repeatedly, generating a further flow of value units and facilitating more interactions. Effective feedback loops help to swell the network, increase value creation, and enhance network effects.

the single-user feedback loop can be a powerful

A successful platform creates efficiencies by matching the right users with one another and ensuring that the most relevant goods and services are exchanged.

We are hopping into strangers’ cars (Lyft, Sidecar, Uber), welcoming them into our spare rooms (Airbnb), dropping our dogs off at their houses (DogVacay, Rover), and eating food in their dining rooms (Feastly). We are letting them rent our cars (RelayRides, Getaround), our boats (Boatbound), our houses (HomeAway), and our power tools (Zilok). We are entrusting complete strangers with our most valuable possessions, our personal experiences—and our very lives. In the process, we are entering a new era of Internet-enabled intimacy.9

The rise of platform businesses is transforming the structure of the business landscape in three specific ways that have largely gone unnoticed. We describe these three forms of platform-driven disruptions as de-linking assets from value, re-intermediation, and market aggregation.

Nike is not the only company taking the first steps in transforming its traditional pipeline business into a platform business. Under Armour, a rival of Nike in the sports and casual wear market, has been moving quickly to build its own fitness ecosystem. In November 2013, it purchased MapMyFitness, a leading workout and exercise tracking platform. Then, in February 2015, it followed up by buying two more fitness platforms—MyFitnessPal, which focuses on nutrition, and Endomondo, a “trainer in your pocket” that mainly serves consumers in Europe. The total purchase price for the three companies: a hefty $710 million. “What’s really astounding,” one analyst commented, “is that none of the companies acquired make actual devices. Instead, everything is about platform and data. And—more importantly—users.”

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. We’ll explore this topic in greater detail in the final chapter of this book, where we’ll share our vision of the future of the world of platforms.

Traditionally, the marketing function was divorced from the product. In network businesses, marketing needs to be baked into the platform.

It’s tempting to assume that the launch strategy that works for Platform A will work for Platform B. But history shows it isn’t so. In fact, even platforms that are direct competitors may need to adopt different launch strategies in order to carve out powerful and unique positions in the marketplace.

One way to address this conundrum is to avoid the chicken-or-egg problem altogether by building a platform business on the foundation of an existing pipeline or product business. This approach is known as:

The piggyback strategy. Connect with an existing user base from a different platform and stage the creation of value units in order to recruit those users to participate in your platform. This is a classic strategy used in many successful platform launches. As we’ve seen, PayPal used this strategy when it piggybacked on eBay’s online auction platform.

Dating services often simulate initial traction by creating fake profiles and conversations. Many skew their profiles to showcase attractive women, in a bid to attract men to the platform.

8. The micromarket strategy. Start by targeting a tiny market that comprises members who are already engaging in interactions. This enables the platform to provide the effective matchmaking characteristic of a large market even in the earliest stages of growth.

Viral growth is a pull-based process based on encouraging users to spread the word about the platform to other potential users. When users themselves encourage others to join the network, the network becomes the driver of its own growth.

Similarly, four key elements are necessary to begin the process of viral growth for a platform business—the sender, the value unit, the external network, and the recipient. Let’s consider the viral growth of Instagram: • The sender. A user on Instagram shares a picture that he has just created. This launches the cycle that will eventually bring in a new user. • The value unit. On Instagram, the value unit is the picture that the user shares with friends. • The external network. For Instagram, Facebook serves as a very effective external network, allowing value units (photos) to spread and be exposed to potential users. • The recipient. Finally, a user from Facebook gets intrigued by the picture and visits Instagram. This user may create her own photo and start the cycle all over again. Now the recipient is acting as the sender.

The same cycle of viral growth—a form of growth impossible in the industrial economy of pipelines and products—helps to explain the success of many other platform startups. Airbnb encouraged users with rooms to rent (hosts) to list their offerings (value units) on Craigslist (external network). Those who saw the room listings (recipients) and were motivated to rent those rooms became Airbnb users—and many subsequently began renting out rooms of their own, fueling the growth of the platform. OpenTable similarly encourages diners (hosts) to share their dinner reservations (value units) over email or Facebook (external networks) with their friends and colleagues (recipients) who are joining them for dinner.

If you’re a platform manager hoping to achieve the same kind of viral growth as Instagram, Airbnb, and OpenTable, you need to design rules and tools that will jumpstart the cycle.

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. Successful platforms use one of eight proven strategies for solving the chicken-or-egg problem: the follow-the-rabbit strategy; the piggyback strategy; the seeding strategy; the marquee strategy; the single-side strategy; the producer evangelism strategy; the big bang adoption strategy; and the micromarket strategy. The speed of a platform’s expansion can be accelerated through viral growth. This depends on four key elements: the sender, the value unit, the external network, and the recipient.

Yet, ironically, this powerfully positive growth dynamic makes monetization very tricky. Any charge levied on users is likely to discourage them from participating on the platform. Charging for access may lead people to avoid the platform altogether; charging for usage may inhibit frequent participation; charging for production reduces value creation, making the platform less attractive to consumers; and charging for consumption reduces consumption, making the platform less attractive to producers.

For consumers: Access to value created on the platform. Video viewers find the videos on YouTube valuable; Android users find value in the various activities made possible by the apps; students on Skillshare find value in the courses made available through the site. • For producers or third-party providers: Access to a community or market. Airbnb is valuable for hosts because it provides access to a global market of travelers. Company recruiters find LinkedIn valuable because it enables them to connect to potential job-seekers. Merchants find Alibaba valuable because it enables them to sell their products to customers around the world. • For both consumers and producers: Access to tools and services that facilitate interaction. Platforms create value by reducing the friction and barriers that prevent producers and consumers from interacting. Kickstarter helps creative entrepreneurs raise money for new projects. eBay, combined with PayPal, allows anyone to start an online store that serves customers anywhere in the world. YouTube allows musicians to provide their fans with performance videos, without having to produce physical products (CDs or DVDs) and without having to sell through intermediary retailers. • For both consumers and producers: Access to curation mechanisms that enhance the quality of interactions. Consumers value access to high-quality goods and services that address their specific needs and interests, while producers value access to consumers who w...

Sometimes, a less-than-optimal monetization strategy can be made workable through ingenuity. During its early years, Alibaba, the e-commerce platform company that has been called China’s eBay and Amazon rolled into one, was unable to charge transaction fees simply because its primitive software had trouble tracking the flow of online deals. CEO Jack Ma was forced to charge membership fees instead—an option he would have preferred to avoid because of the entry friction it creates. Alibaba managed to overcome this problem by offering sizeable commissions to salespeople who convinced others to sign on to the platform. When word got around that some Alibaba sales agents were earning commissions in excess of a million Chinese yuan, equivalent to well over $100,000, the drive to enlist members shifted into high gear despite the friction caused by the entry fees. To this day, Alibaba charges no transaction fees, having managed to monetize the platform through advertising—as if a company that facilitated transactions, like Amazon and eBay, were to generate its profits by selling ads like Google.

As many of the cases mentioned in this chapter suggest—and as plenty of familiar real-world examples illustrate—the imperative to create and grow network effects often leads platform founders to begin by offering their services for free. Creating value for users while asking nothing in return is often a great way to attract members and encourage participation. “Users first, monetization later,” as the slogan goes. Or, in a variant that we heard from the executive in charge of platform strategy for Haier Group, a Chinese manufacturing company, “You never take first money.” 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

a platform is fundamentally an infrastructure designed to facilitate interactions among producers and consumers of value.

These two basic types of participants use the platform to connect with each other and to engage in exchanges—first, an exchange of information; then, if desired, an exchange of goods or services in return for some form of currency. These participants come together on the platform to engage in a core interaction that is at the heart of the platform’s value-creating mission. In time, other kinds of interactions may be layered onto the platform, increasing its usefulness and attracting other participants.

application programming interface

For example, if a Facebook user has been posting information about plans for a vacation in France, a data aggregator might sell that data to an advertising agency that, in turn, would generate messages about Paris hotels, tour guides, discount airfares, and other topics likely to be of interest.

So what kinds of metrics are most valuable during the startup phase of a platform business? Platform managers should focus on the core interaction and the benefits it creates for both producers and consumers on the platform. To define success or failure for a platform, and to identify how to improve it, there are three main metrics: liquidity, matching quality, and trust.

On an information and entertainment platform, an interaction might be the click-through that takes a consumer from a headline to a complete story; on a marketplace platform, it might be the purchase of a product; on a professional networking platform, it might be the offer of a recommendation, the swapping of contact information, or a posted response to a question on a discussion page. Any of these interactions would signify a greater degree of engagement by the user and represent the moment when the user has recognized, used, and enjoyed a value unit available on the platform.

when an Uber user opens the app and discovers that no car is available. Illiquid situations discourage users from participating in the platform and so must be kept to a minimum.

A good example of an inherently comparative measure is a ratio or rate, which is calculated by dividing one number by another—for example, the ratio of active users, which is calculated by dividing the number of active users by the number of total users, or the rate of growth in active users, which is calculated by dividing the number of new active users by the number of total active users.6

A second crucial category of metric for the startup platform is matching quality. This refers to the accuracy of the search algorithm and the intuitiveness of the navigation tools offered to users as they seek other users with whom they can engage in value-creating interactions. Matching quality is critical to delivering value and stimulating the long-term growth and success of the platform. It is achieved through excellence in product or service curation.

Users generally participate in a platform with highly interactional intent; they want to find what they’re looking for as quickly as possible. Precision in matching leads to lower search costs for users

Thus, if the platform does a great job of linking users to one another quickly and accurately, those users are likely to become active participants and long-term members of the platform; if matching quality is poor, slow, and disappointing, users will soon dwindle in number, interactions will slow to a trickle, and the platform may be doomed to an early demise.

users—say, over a period of one to three months. Calculations like these may enable you to determine, for example, that an interaction percentage of 40 percent appears to represent a significant cutoff point for users of your platform: the majority of users who experience interaction percentage higher than 40 percent during their first week on the platform remain active members for at least three months, while a majority of those with an interaction percentage lower than 40 percent stop participating in activities on the site.

Platforms that focus on content creation require different metrics. For example, some measure co-creation (the percentage of listings that are consumed by users) or consumer relevance (the percentage of listings that receive some minimum level of positive response from potential consumers). These metrics focus on interaction quality and reflect the skill with which production is being curated.

The three key factors of liquidity, matching quality, and trust remain crucial to measuring the health of virtually any kind of newly launched platform.

The variety and range of metrics that may be suitable during a platform’s startup phase is limited only by your ingenuity and the nature of the activities occurring in your burgeoning ecosystem.

Lean Analytics,

lifetime value (LTV)

Haier’s CEO, Ruimin Zhang,

WeChat,

they should drive innovation, have a high signal-to-noise ratio, and facilitate resource allocation.14

Instead, Ries suggests, “you should make sure your metrics meet the ‘3 A’s test’ where your metrics are actionable, accessible, and auditable.”

Developers and users responded with dismay, and some observers called the policy an anti-competitive gambit that might be subject to governmental sanction under antitrust regulations.

But Alibaba’s leaders were playing a long-term strategic game. They had their eye not just on the shopping interactions that would take place on their platform but on the potential to monetize the platform by selling advertising.

A platform business need not own all the inimitable resources in its ecosystem, but it should seek to own the resources whose value is greatest.