Platform businesses
Understand the physical process you're replacing
Develop a single user action
Find a viral driver of adoption
Curate the network and its effects
Build in secondary services
1) Understand the physical process you're replicating
The strength of a platform business is that each new customer adds value to the platform as a whole. Therefore they're most useful when there's an interdependency between customers. For example, nightclubs provide a platform for people to meet. More people, more value. To manage this value the owners act as a filter, in this case through drinks prices and bouncer policies. Recent technologies have provided new opportunities for platform businesses. However, in every instance, the technology will be replacing a physical process. Usually eliminating, replacing or replicating a gatekeeper. For example, Google has replaced librarians, Uber taxi companies etc. Good opportunities for platform businesses exist where there are information asymmetries, non-scaleable gatekeepers, and high fragmentation. However, they are less effective where there is high regulatory control, high failure costs, and a resource-intensive industry.
2) Develop a single user action
A single, simple core interaction between participants will make it easier for users to engage with each other. They can then easily create and consume a single value unit. For example, Wikipedia's units of value are articles. Contributors can create, contribute, edit and accept information. Then readers can filter the results. Software’s ability to orchestrate the process and make it simpler is what provides its value. Ideally, this creates a simple ‘plug and play’ infrastructure. The more repeatable and meaningful this core interaction the more effective the product. Where there is a lack of repeatability or a lack of friction is where a platform businesses can struggle. For example, ApplePay is a payment platform eliminating card payments and putting customers directly in touch with vendors. However, it has been slow to gain usage as it does not eliminate a particularly large friction. In comparison, in Africa, where monetary transactions are a problem in themselves, mobile payment systems like Empessa can solve a bigger problem and therefore grow more rapidly.
3) Find a viral driver of adoption
The interdependency between customers on platforms is ideal for non-linear growth. Supply can be used to stimulate demand, or vice versa, or both. Ebay is a natural example of this, where sellers are demonstrated the advantages of buying and buyers are demonstrated the advantages of selling. Other strategies can be more one-sided. OpenTable focussed on the supply side. It provides management software for restaurants. The restaurants then send their existing customers to Opentable to make bookings. Indeed Opentable even paid some restaurants to use their software. Often platforms seem to be giving a deal to one side which seems too good to be true. This side then drives growth while leveraging the side which can be exploited as much as is possible without inhibiting that growth. Other tactics include starting without fees, such as Ali Baba and seeding platforms with fake users and inventory. A refined niche can help amplify viral effects. Such as a city by city or business to business focus. To encourage adoption, platforms should remove barriers and optimise the flow of value wherever possible.
4) Curate the network and its effects
Virality attracts people, network effects keep them. Network effects increase as more people join the platform. They increase benefits such as the number of matches, the value of data, economies of scale and many more. This exponentially increases value and therefore the rate of growth. As the number of users grows, filtering becomes increasingly important. Myspace didn't curate their network effectively and lost it. Mark Zuckerberg understood that people preferred some governance of the system. Also that businesses wouldn't advertise in a lawless society. Zuckerberg and others see platforms as having influence over populations similar to the governments of nations. Just governance is important and helps value creation. Key rules for good governance are to create value, not change the rules in your favour and take no more than a fair share. Trust is vital, much more so than price and value. Once a stable community is established it can very useful. For example, Wikipedia has created a repository of human knowledge through nothing more than good governance. Initially, it was marketed as Newpedia and assumed that academics would be the best sources of knowledge. But due to slow content creation, the founders opened up the platform to a larger network and were rewarded by much faster growth.
5) Build in secondary services
The network can also be effective at driving the development of services on the platform. Some platforms, such as Google's Android and the Ethereum Blockchain enable developers to build almost anything they want on the existing infrastructure. Airbnb is a more closed and curated platform but still adds user-driven trust and efficiency functionality as it develops. Indeed platforms often move through a spectrum of being open and closed. Amazon went from a closed platform, using simple if effective feedback loops such as reviews, to an open platform with its marketplace offering. This demonstrated bravery in cannibalising its own offering to keep pace with the long-term market trend. The iPhone was originally a closed system before Steve Jobs famously changed his mind and allowed external app developers in. The debate is always between fragmentation/openness vs integration/closedness. Either way, the key principle is to listen to your customers.
