Uber. Airbnb. Amazon. Apple. PayPal. All of these companies disrupted their markets when they launched. Today they are industry leaders. What’s the secret to their success? These cutting-edge businesses are built on platforms: two-sided markets that are revolutionizing the way we do business.
Platforms Eat Pipelines
The internet has largely replaced newspapers as the main source of news for many people. News organizations don’t have to pay for paper, printing, distribution, and countless other expenses when they publish online. An efficient method of dispersing the news “ate” a less efficient pipeline.
The Three Components
The core interaction has three components: participants, value unit and filter. After figuring out what the core interaction is to be, design the components in the above order.
Three of the most important functions of a platform are pull, facilitate and match.
- Pull attracts users to the platform.
- To facilitate transactions the platform provides tools and rules; this is the scaffolding of interactions.
- And platforms must match users to each other. The right consumers should find the right producers.
The End To End Principle
The more peripheral a feature is to the core mission, the more peripheral it should be on a platform. If only some users need it, then it shouldn’t be junking things up in a central location. This will make the system run more efficiently.
Always leave room for organic and spontaneous change. Examine how users are behaving and whether they are putting the system to unexpected uses. This can suggest new directions for the platform.
Governance: Policies to Increase Value and Enhance Growth
Governance is all about creating good rules. A platform is composed of a community of users. Like all healthy communities, there need to be rules protecting the members of the community. The wrong kind of rules, however, can alienate users.
Three Fundamental Laws Of Good Governance
First, rules should always create value for the customer.
Second, those writing the rules shouldn’t use their power to change the rules in their favor.
And finally, platforms should never take more than a fair share of the wealth.
Openness: Defying What Platform Users and Partners Can and Cannot Do
To be open means to have no restrictions on development, commercialization or use. In another definition, it can mean that any restrictions — like rules and fees — are reasonable and nondiscriminatory.
Getting the right amount of openness is difficult, but important. Openness encourages innovation, but the more openness there is the harder it is to monetize and control a platform.
The Network Effect
Platforms are businesses that match users to each other in order to make financial or social transactions that create value. Value arises from the community the platform serves.
Platforms multiply profits because they benefit from network effects, which can help the value of a network grow exponentially. As individuals join, the potential number of connections between individuals skyrockets algorithmically, making the network more valuable.
Better And Faster Scalability
Platforms can grow much faster than pipeline businesses because they do not own the resources that create value. Platforms are also more scalable. Growth isn’t constrained by resources, so it can happen faster. Platforms bring new supplies to market because users are constantly innovating.
There are still plenty of pipeline companies still around today, but whenever they have to compete against a platform business, they lose.
Network Effects: The Good And The Bad
Frictionless entry makes it possible for users to quickly and easily join a platform.
Side-switching platforms allow users to switch roles.
- There are positive same-side effects, which are good effects that increase on one side.
- Negative same-side effects. For example, an increase in users can increase competition.
- Positive cross-side effects. When there are more vendors, consumers have greater choices.
- Negative cross-side effects. Too much choice, too many ads, too much competition, etc.
Online Platforms: A Primer
A platform is a business that connects people using technology to create an ecosystem in which value can be created and exchanged.
Platforms can host multiple types of users, such as Amazon, which has both sellers and buyers, or they can have a single primary type of user, such as Facebook’s community of users who interact socially with one another.
The Tools For Governance
Tools for governance include laws, or platform rules, and norms, the desirable behavior within a community.
Architecture, or programming code, can be used to reinforce desired behavior and make unwanted behavior difficult to perform.
And finally, markets, including not just financial monies but also social currency.
Quality and Trust
Matching quality is a metric that measures how well search algorithms match users with transactions. People want to be able to find what they are looking for. Search results shouldn’t bring up a bunch of noise that users must sift through. A good metric to measure this is the sales conversion rate—the percentage of searches leading to interactions.
Trust is essential. No one will risk money to buy something if they can’t trust the site to provide them with high-quality information about the product and the transaction. Trust is built through careful curation.
Reducing Costs
The internet provides infrastructure and coordinates communication. Platforms make use of these features for transactions all over the planet.
The internet can reduce costs, as it did in the news industry.
Platforms find new sources of supply. They make it easier for producers to participate, and it’s easier to get their products into the value chain.
Taking The Uber Ride
Platforms enable new forms of consumer behavior. People will gladly jump into a stranger’s car when they use Uber. It wasn’t too long ago that such behavior would have been considered dangerous. Platforms enable this because they have built-in mechanisms to engender trust between users.
Platforms change quality control into user-driven curation. Users gravitate towards higher quality goods, edging out less desirable products.
Architecture: Principles for Designing a Successful Platform
It’s difficult to know where to start with platform design. Copying other companies does not always work because platform businesses differ from one another. Instead of attempting to mimic another platform, the emphasis should be on interaction. Always begin with the core interaction when designing a platform.
The Power of the Platform
Platforms typically enjoy two-sided network effects. The two sides required for interaction attract each other; for example, on a site with buyers and sellers, the presence of buyers attracts sellers, and the presence of sellers attracts buyers.
Network effects can come from and affect both sides of a network.
Viral Growth
Viral growth is a pull process. Create an environment where users tell new people about the platform. Viral growth depends on the user to be the sender. The sender shares a value unit. Allow the value unit to spread to existing networks. Then there has to be an actual recipient to receive the value unit. Viral growth can accelerate the platform’s expansion at an extremely rapid rate.
Monetization: Capturing the Value Created by Network Effects
- Charge a transaction fee. This way, people aren’t discouraged from joining the site to begin with.
- Charge for access. For example, on employment websites, recruiters usually pay to list jobs.
- Charge for enhanced access. LinkedIn is free to users, but they can pay a fee to see complete listings of the people who have looked them up.
- Charge for enhanced curation. Offer high quality.
Metrics: How Platform Managers Can Measure What Really Matters
By measuring the right things, needs, performance and other aspects of the system can be assessed.
- Platforms are a new business model that require new ways to keep track of what’s going on.
- Platforms must track and manage a different set of metrics than the old pipelines did.
- Platforms create value through network effects. Good metrics focus on positive network effects and the activities that can affect them.
- Rate of interaction success is important. A high rate of successful interactions draws users.
