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Microsoft, Facebook, Apple, Google, Amazon and 60% of the world’s largest companies earn most of their revenues from platforms.
Uber connects riders to taxi drivers. And that’s the interesting thing about platform business models – they connect people and businesses.
Platforms are into matchmaking business.
The more riders willing to take Uber, the more drivers join the platform. And the more drivers join, the more it’s easier to get rides, and the more the riders willing to join.
And the cycle continues.
This is what we call network effects. And that’s where the difference lies between products and platforms.
Platforms facilitate interactions between users, and benefit from network effects, transaction costs and learning cycles.
Now, let’s face it. Platform businesses are very attractive. But are extremely hard to build. But when you succeed to build one, you become a “winner-take-all”. Just like Amazon, Facebook and others.
So what’s the secret to success here? I’m about to reveal five secrets you can copy from successful giants to build, launch and sustain a successful platform business model.
Here’s the first one.
1. Start with a single core interaction
In 2005, MySpace was the leading social networking site with over 70million unique users.
They enjoyed first-mover advantages like network effects. And the cost of switching to another network was high since users had established strong relationships with one another.
This was a significant entry barrier for Facebook.
So how did Facebook manage to beat MySpace, despite the challenges?
It turns out people could sell all kinds of products to their networks on MySpace. The platform incorporated anything that pushed traffic. In fact, the folks at MySpace were ready to punch any monkey.
Then Facebook launched and instead focused on connecting similar people, with priority on trusted connections. It’s only later on that they added other interactions, like simple inline ads.
The Facebook platform was initially open exclusively to Harvard students.
And this kind of serves as a lesson to anyone trying to build a successful platform.
The lesson learned here is quite clear, and MySpace’s executive said it himself.
Do one thing great, not do many things good. In our case, we were doing many things kinda crappySean Percival, VP Online Marketing, MySpace
Starting small, and focusing on one thing at a time turned out to be key to Facebook’s strategy.
And Geoffrey, Marshall and Sangeet (in Platform Revolution) nail this insight for us in a better way.
“Start with a Minimum Viable Platform. Focus on the essence of what the platform aims to achieve, and power one interaction at a time”Geoffrey,marshall, sangeet
In other words, whatever you hope to do with your platform, resist the temptation of starting with many functionalities. Or many types of participants.
For a two-sided platform, you should start by enabling that single core interaction that gives each side the reason to participate in value creation and exchange.
2. Don’t charge too much
Successful platform businesses often charge little to encourage participants.
In fact, most platforms take less than 20% for transaction fees.
Airbnb charges hosts a 3% fee to cover the cost of processing payments. Then they take less than 14.2% of the booking fees from guests.
Transaction fee are not the only revenue model for platforms.
Here are some popular revenue models applied in successful platforms.
- Get a transaction cut. Like Airbnb and Uber. The transaction fee must be reasonable. If you take too much, participants may start thinking of doing transactions off the platform, and definitely destroy value.
- Charge for Access. Like LinkedIn. Here you charge for lead generation. And often you charge the side that needs the other side more.
- Charge for Attention. Like Facebook charges advertisers. Here one side pays to get attention from a defined target. But make sure you don’t clutter the interactions with the ads.
- Charge for Tools. Like Vimeo. Here the platform owner charges fees for better/upgraded tools.
Remember. Don’t charge too much. It’s a game of volumes.
3. Choose a Launch Strategy
Imagine you’re the first subscriber to a telephone network. Of what value will it be if there’s no one to call?
In fact, you only find the network valuable when another person joins.
And the more the people you can interact with, the more value you get from the network.
So will you accept to join an empty network?
Well, experience shows that a lot of people will only join when they see some mass adoption.
A two-sided platform is only valuable to the producer side as long as the consumer side is there. But consumers will not be excited to join unless they see active producers on the platform.
So if you’re still launching the platform, who will accept to join first when no one else is there to interact with?
This phenomenon is called the chicken-or-egg dilemma.
And your number one challenge when launching a platform business model is to solve this chicken-or-egg dilemma.
Successful platforms solved this problem using one or more of the following strategies.
i. Follow-the-rabbit strategy
When Intel wanted to push fundamental industry-wide innovations, they needed component providers, keyboard providers and mouse providers to join the USB standard.
Since no one was using the USB standard by then, it was not attractive for these providers to join.
So Intel created architecture labs. Then invited each of the providers, and helped them do the engineering to adopt the USB.
And after each adoption, they made a lot of noise about the success, and publicized it to get others to join. And more providers followed the rabbits.
So this strategy works when you’ve already built something successful, even if it’s a product. Then you use that obvious or visible success to mobilize others to get onboard.
ii. The piggyback strategy
When YouTube launched, it was not attractive because it did not yet have many videos.
Content creators wanted to see many users before joining, and users want to see interesting content before they could join.
So what YouTube did was that they rode the MySpace social network by embedding YouTube videos on MySpace, where there were many potential users.
And it worked, because users shared the video contents with their networks, enabling YouTube to tap on MySpace and get first users.
So for your case, you can piggyback on an existing platform that has users you want to attract to your platform.
iii. The seeding strategy
When Google sponsored the Android operating system, not too many users were excited about getting their new mobile device and having nothing to run on it.
Yeah, there were very few Apps on Play Store by then.
And there were few users too, App developers were not excited to join.
So Google ended up having to run a number of app design contests. And this created apps that attracted users, and in turn attracted more developers and so on.
In other words, you may need to provide some seed content yourself to attract the first audience that will make it worthwhile for other content providers to join.
iv. The marquee strategy
SAP was initially a provider of enterprise resource planning solutions.
When they were moving their solutions to the cloud, they wanted companies using those solutions to do same. But companies weren’t willing to be among the first to join.
It was a risky change, and companies wanted to be sure it was the right move.
So SAP signed a deal with ADP (Automatic Data Processing), which was the dominant payroll processing firm in the world.
And so immediately, because those systems inter-operated, it became safe and reasonable for businesses to adopt the system.
In fact, to apply this strategy, you need to sign up a well-known user to gain some credibility. Before others will join.
v. The single-side strategy
OpenTable provides diners with the ability to search for reservations.
Initially it was a cloud-based reservation management system that catered only to restaurants.
Then over time, they opened up to consumers once they had a critical mass of restaurants onboard.
This is often called the Product-to-Platform strategy. You start by providing a product or service that benefits only one set of users, and later convert it into a platform by attracting a second set to engage with the first.
vi. The producer evangelism strategy.
Kickstarter is an open crowdfunding system.
During launch, they first targeted founders and creators and then provided them the necessary infrastructure to launch campaigns for funding rounds.
And the founders joined and invited their communities to join their fundraising.
So this one works when you design a platform to attract producers who can then persuade their customers to become users of the platform.
vii. The big bang strategy
Here’s a big one indeed.
Tinder is a dating platform, where people make friends and meet new people
They launched at a frat party at the University of Southern California, and allowed men and women to find one another when they were in close proximity.
So this launch strategy mobilizes the supply side and the demand side at the same time.
viii. The micro-market strategy
Facebook used this strategy to beat MySpace.
At the initial launch, they restricted access to users who had a Harvard.edu email address. And they focused on the core interaction between those users which was to communicate status updates and to share short stories and then ultimately, to share images.
So here you start by focusing on small markets initially to generate value traction, before you expand.
Final word on the strategies…
We’ve seen how big players used the launch strategies above to take their platforms off the ground.
The take home message is that you need a critical mass to solve the chicken-or-egg dilemma. And you may find opportunities where you need to combine more than one of these strategies too.
Now, let’s move to the fourth secret for succeeding with a platform business model.
4. Consider open innovation
This is what Chris DeWolfe, Myspace Cofounder, said when Facebook overtook MySpace.
“While Facebook focused on creating a robust platform that allowed outside developers to build new applications, MySpace did everything itself. We tried to create every feature in the world and said, O.K, we can do it, why should we let a third party do it? We should have picked 5 to 10 key features that we totally focused on and let other people innovate on everything else.”Chris DeWolfe, Myspace Cofounder
And you, do you believe all the smart people already work for your company?
Well, despite the talent pool in MySpace, they found out the hard way that it’s not healthy to think this way.
Open innovation is about opening content to allow others to build it further. The open innovation principle believes that not all smart people work for your organization, so you need to find and tap into outside knowledge.
But to what extend should you open? Platform builders often struggle with the decision to balance openness and control.
Facebook did it progressively. They started only with .edu, later opened to .com, opened a gift shop to share gifts across the network, and later opened the developer system.
And with developers onboard, more applications were created on the platform that added the value users had from the network – from fun games, to photo processing apps, and many interactive apps.
But while openness accelerates innovation, it can also become a threat to the platform owner when it comes to capturing value. For instance, the Atari Crash of 1983. Their openness led to a flood of low quality games on their platform. And this led to the exit of some customers.
So you may start by closing the platform and defining quality standards before opening.
And stay alert when you open up. Small players can grow big and exert significant influence on the network. For instance, Facebook had to acquire Instagram.
Being able to balance the need for open innovation and the need for control is often a key difference between successful and failed platforms.
Govern the Platform
Want to know why Apple excludes low quality apps, pornography, hate speeches, and viruses from iTunes?
In reality, users of different characters will join your platform. And the behavior of some may drive others out of the platform.
Governance is all about promoting good behavior and discouraging bad behavior.
You should have a governance framework that determines:
- Who may participate in your platform?
- How do you create/divide value? and
- How do you resolve conflict among users?
If you don’t govern, some users may take unfair advantage over others.
For instance, Facebook blocked API access to Viddy, because they spammed friend links about their video service. Facebook also deletes fake profiles. In all they try to balance the needs of users, advertisers, and developers.
Airbnb also embraced risk and insured travelers and hosts against losses.
All these are examples of actions businesses took to ensure fairness among participants on their platforms.
Here is an simple guide from a Elinor Ostrom, a Nobel Price Winner of 2009 on how governance issues can be addressed.
- Define clear group boundaries
- Match governance rules for use of common goods with local needs and conditions
- Ensure those affected by the rules can participate in modifying those rules
- Ensure that the rule-making rights of community members are respected by outside authorities
- Develop a system to monitor members’ behavior
- Use graduated sanctions for rule violators
- Provide low-cost dispute resolution
- Build responsibility for governing the common resources in nested tiers
The platform business model is one of the most attractive in the world today.
And to succeed with one, you must make important decisions about scope, launch strategies, openness, and governance.
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