The essential guide to successful platform building
The chicken or egg problem
First and foremost for those who are still not familiar with what a platform really is let´s pass in review some principals to understand better what defines this model and how it is different from the traditional one.
1.1-What is a platform?
Geoffrey G. Parker author of Platform Revolution defines it as:
”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.”
1.2-What differentiates a platform from the traditional business (Pipeline)?
From this picture, we can see the fundamental difference between the two models. As the pipeline model is a direct transaction between two sets of users a producer and a consumer of defined product/service, the platform offers more of a ´fair´ alternative where value is generated by the interaction between the different sets of users.
A one really known success story is nonother than Netflix: which provides value not only to movie producers but also to consumers by providing them with original, ad-free and worldwide content.
1.3- What made these changes possible?
Mainly these 3 technologies reduced the friction in global interactions:
- The cloud: Content storage and distribution
- The mobile technology
- Social Media
2- The chicken or Egg problem:
When we talk about the “chicken or egg problem”, or “chicken or egg dilemma”, we refer to a paradox in which one’s trying to determine which of two items comes first, since it is impossible to have one without the other.
This is exactly this kind of problem that platforms need to face at the early stages of development: if you need to attract two different sets of users which gain value from one another, how do you attract the first set? and which set do you start with?
So how to attract your first customer? How to attract enough users? But if a platform doesn´t have users how will it attract sellers?
And that is how we end up with the paradoxical cycle of the chicken or egg problem.
But even if we attract enough users or sellers, how can we reach the perfect equilibrium in order to grow the platform steadily.
3- What to look for when building a platform:
3.1- Network effects:
Network effects are the incremental benefit gained by an existing user for each new user that joins the network.
There are two types of network effects: Direct and indirect
Direct network effects are also known as the same-side effects. The value of service simply goes up as the number of users goes up. Let´s take in here the example of Paypal. If there are not enough people accepting the service as a payment method or trading money on the platform the value of the service will drop down drastically.
With indirect network effects, the value of the service increases for one user group when a new user of a different user group joins the network. You must have two or more user groups to achieve indirect network effects.
Taking Uber as an example, as more riders (i.e. consumers) join the platform, the more useful and valuable it is to drivers (i.e. producers) because they have more business opportunities. The reverse is also true. As more drivers join the network, riders have shorter wait times and more locations available for their rides, thus the network is more valuable.
3.2- Platform architecture:
The platform architecture is an enduring — often irreversible — choice with profound evolutionary and strategic consequences. Good platform architecture has four desirable properties. These architectural properties always invoke tradeoffs such that dramatically increasing one property will reduce another. It is therefore impossible for any architecture to simultaneously have high levels of all of these properties. On the other hand, some of these properties are correlated; increasing one can help nudge another property upward. A platform architect should aspire for “satisficing” (a mix of satisfactory and sufficient) levels of a mix of these properties.
3.3- Critical mass:
The point where the value of the network exceeds the cost of joining for most users. Once a network reaches sufficient size, its network effects start to pull in new users and growth takes off.
3.4- Platform Governance:
The first dimension of platform governance is decision-making authority or decision rights. A decision right broadly refers to who — the platform owner or app developer — has the primary authority and responsibility for making a specific type of decision — simply put, who makes what decisions (Athey and Roberts, 2001; Vazquez, 2004). A decision right can reside primarily with the platform owner, which represents the centralization of a decision right. Or it can reside primarily with an app developer, which represents a decentralization of a decision right. Perfect centralization and decentralization exist mostly only in theory and are rarely ever observed in practice. In practice, a decision right can reside anywhere along the continuum of complete centralization and complete decentralization. This means that both the platform owner and app developers have some authority and responsibility for most decisions but it might lean more toward one party.
3.5- Pricing strategy:
Even though platforms, just like traditional businesses decide the prices by balancing volume and margins, cross-side network effects make the demand of each set of users dependent by each other.
If for example in a platform the price for one side ( side A or subsidy side) is reduced, not only more users will be attracted from that side, but it will make possible to increase either the prices or the attraction power on the other side (side B or money side). This increased value on side B augments exponentially the importance of having users on side A so that the price for side A is reduced further, as this loop continues.
This is why it is not unusual to find in the platform business offers that go below the marginal cost or even at a negative price (where users get rewarded for using the platform at a cost for the platform itself).
3.6- Push vs Pull Strategy:
Simply put, a push strategy is to push a product at a customer, while a pull strategy pulls a customer towards a product. Push strategy is a quick way to move a customer from awareness to purchase, while pull strategy is about creating an ongoing relationship with the brand. Both serve a purpose in moving the customer along the journey from awareness to purchase, however, pull strategies tend to be more successful at building brand ambassadors.
While some companies decide to adopt one or the other it is important to find a complementary balance between the two. Choosing your marketing strategy and tactics should be done carefully and with a thorough understanding of your business, current brand awareness, and target audience. For example, launching a new unknown product would require more push than an established brand.
Push and pull tactics within the larger strategy should work together seamlessly to move the customer through their journey. For example, the impact of a flyer in the mail is lost without a website for the customer to visit to learn more. Modern consumers are savvy and require several interactions with a company and product before engaging.
4- Solution strategies + examples:
Although the chicken or egg problem is s complex problem, it is not an unsolvable one. Many successful platforms found creative solutions to this conundrum, and even if every case is different, some patterns where identified, and some strategies developed:
- 4.1- The seeding strategy:
The platform takes the task of value creation upon itself by acting as the first producer. When Google launched its Android smartphone operating system to compete with Apple’s iOS, it seeded the market by offering US$5 million in prizes to developers who created the best apps across ten categories. Winners became market leaders, attracting large numbers of customers.
- 4.2- The standalone strategy:
used to attract a set of users to the platform by providing them with one or more products/services that can give value to the users by themselves, like useful tools or the like. When a sufficient number of users of one set is reached, the platform open to the secondary set of users, which is willing to interact with the first set hence triggering positive network effects.
Square is a classic example of this strategy. Payments is a space which is especially difficult to get into, partly because it is very difficult to have a critical mass of buyers and sellers start using your payment mechanism simultaneously. In the case of Square, the standalone credit card swiping value proposition was enough for merchants to start adopting the product. The consumer side of the equation, which is still kicking in, has the potential to disrupt retail payments altogether, but that was not the dream that was sold to the merchants originally.
- 4.3- The Marquee strategy:
performed by the platform by attracting one or more influential users, usually by some incentive, via special treatment or directly through cash payment. Most of the time this happens because these users are the key to a large number of other users that will almost surely follow once the influential users are on board
Facebook Gaming just signed Disguised Toast and Mixer signed Ninja, for example, to compete with Twitch.
- 4.4- Piggyback:
This strategy is about connecting with users from other platforms to participate in your platform. You need a compelling value to get them to switch.
Youtube has used the piggyback strategy on Myspace by offering better technology to the users, allowing them to embed videos on their own website or elsewhere. They incentivize people to upload videos using contests and promoted top content creators to partner status to share ad revenue with them. The creators were stimulated to bring in their communities who in turn became producers and enabled a rapid spread.
- 4.5. Follow the rabbit
Here, the trick is not about using an existing platform but instead leverage on a non-platform asset already owned and open it to others to use it.
This is what Amazon did when they launched their marketplace, offering others merchants the same solution they have been using themselves to run their book business, Amazon marketplace was born.
- 4.6- The big bang strategy
The “big bang adoption strategy” involves using traditional opportunistic push marketing to attract attention. Tinder, a location-based dating app, achieved its breakout in 2012 by launching during a frat party at the University of Southern California. Already a hotbed of young men and women looking to connect, Tinder made it easier and in the process achieved critical mass during the party in a small, contained location.
- 4.7 The micro-market:
Start with a small closed market where members are already engaging in interactions and leverage those interactions. Starting small enables you to match effectively and test quickly. A small scale but dense and highly interactive community works better than a widely dispersed user base which is too large to reach quickly.
Facebook started with the Harvard University network students first and extended to other universities and finally opened it to the outside world to reach a critical mass.
This article was originally published by Wessim allegue on medium.