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June 5 - July 5, 2022
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.
By contrast with a platform, a pipeline is a business that employs a step-by-step arrangement for creating and transferring value, with producers at one end and consumers at the other.
Platforms beat pipelines because platforms scale more efficiently by eliminating gatekeepers.
Platforms beat pipelines because platforms unlock new sources of value creation and supply.
Platforms beat pipelines by using data-based tools to create community feedback loops.
Network effects refers to the impact that the number of users of a platform has on the value created for each user. Positive network effects refers to the ability of a large, well-managed platform community to produce significant value for each user of the platform. Negative network effects refers to the possibility that the growth in numbers of a poorly-managed platform community can reduce the value produced for each user.
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.
Typically, only 1–2 percent of customers convert from free to paying.
Freemium models also create freeloaders than can be hard to monetize
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.
Virality is about attracting people who are off the platform and enticing them to join it, while network effects are about increasing value among people on-platform.
As the story of Google suggests, networks that permit frictionless entry are able to grow organically almost without bound. 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.
Scaling a network requires that both sides of the market grow proportionally. For example, one Uber driver can serve an average of about three Uber riders an hour. It would make no sense for Uber to have one rider and 1,000 drivers—nor 1,000 riders and one driver.
One negative network effect occurs when the growth in numbers that enables more matches between producers and consumers also leads to increasing difficulty, or impossibility, in finding the best match. To avoid this dilemma, frictionless entry must be balanced through effective curation. This is the process by which a platform filters, controls, and limits the access of users to the platform, the activities they participate in, and the connections they form with other users.
the larger your network grows, the better your curation can become—a phenomenon we refer to as data-driven network effects.
The first category, positive same-side effects, includes the positive benefits received by users when the number of users of the same kind increases
A poorly designed platform produces little or no value for users and generates weak network effects, or none at all.
In every such exchange, the producer and the consumer exchange three things: information, goods or services, and some form of currency.
in every case, the exchange of information takes place through the platform itself.
As a result of the information exchange, the platform participants may decide to exchange valuable goods or services as well.
Each item exchanged among platform users can be referred to as a value unit.
When goods or services are exchanged between platform participants, they are typically paid for using some form of currency.
Video viewers on YouTube or followers on Twitter pay the producer with attention, which adds value to the producer in a variety of ways.
platform that can internalize the flow of money may be well placed to charge a transaction
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.
There are fundamentally two participants in any core interaction: the producer, who creates value, and the consumer, who consumes value.
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.
Participants + Value Unit + Filter → Core Interaction
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.
Platforms must perform three key functions in order to encourage a high volume of valuable core interactions, which we summarize as pull, facilitate, and match. 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.
As part of the design process, platform companies need to develop an explicit data acquisition strategy. Users vary greatly in their willingness to share data and their readiness to respond to data-driven activity recommendations. Some platforms use incentives to encourage participants to provide data about themselves; others leverage game elements to gather data from users.
But innovation can easily lead to excessive complexity, which makes the platform more difficult for users to navigate.
A platform that fails to evolve by adding desirable new features is likely to be abandoned by users who discover a competing platform with more to offer.
the end-to-end principle states that, in a general-purpose network, application-specific functions ought to reside in the end hosts of a network rather than in intermediary nodes.
C. Y. Baldwin and K. B. Clark of Harvard Business School describe a well-designed platform as consisting of a stable core layer that restricts variety, sitting underneath an evolving layer that enables variety.12
There are advantages to an integral approach where the system is developed as quickly as possible to serve a single purpose, especially in the early days of a platform. However, in the long run, a successful platform must have a more modular approach.
Modularity is a strategy for organizing complex products and processes efficiently.
Modularity is beneficial only if the partition is precise, unambiguous, and complete.
In the world of platforms, the Internet no longer acts merely as a distribution channel (a pipeline). It also acts as a creation infrastructure and a coordination mechanism. Platforms are leveraging this new capability to create entirely new business models. In addition, the physical and the digital are rapidly converging, enabling the Internet to connect and coordinate objects in the real world—
A platform’s ability to scale rapidly is further enhanced by network effects. When positive network effects kick in, higher production leads to higher consumption, and vice versa.
In other words, user commitment was more important than user acquisition.
Furthermore, for a platform business, user commitment and active usage, not sign-ups or acquisitions, are the true indicators of customer adoption. 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.
Most big companies have evolved metabolisms that reflect this relatively slow pace of change: their processes for strategic planning, goal-setting, self-evaluation, and course correction operate on leisurely schedules with annual or, at best, quarterly checkpoints. However, in the world of platforms, dominated by networks that interact rapidly and unpredictably, the market can change quickly and customer expectations can change even faster. Management systems need to change accordingly.
EIGHT STRATEGIES FOR BEATING THE CHICKEN-OR-EGG DILEMMA
1. The follow-the-rabbit strategy. Use a non-platform demonstration project to model success, thereby attracting both users and producers to a new platform erected on your project’s proven infrastructure.
2. 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.
3. The seeding strategy. Create value units that will be relevant to at least one set of potential users. When these users are attracted to the platform, other sets of users who want to engage in interactions with them will follow.
4. The marquee strategy. Provide incentives to attract members of a key user set onto your platform.
5. The single-side strategy. Create a business around products or services that benefit a single set of users; later, convert the business into a platform business by attracting a second set of users who want to engage in interactions with the first set.
