by Geoffrey G. Parker, Marshall W. Van Alstyne, Sangeet Paul Choudary
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A platform is a business that connects people through technology, making an ecosystem that allows value to be created and exchanged.
Platforms can host several different kinds of users, like how Amazon has both sellers and buyers, or they can have one primary type of user, like Facebook’s community of users who interact with each other socially.
The significant thing in common is that they bring people and organizations together in one place where they can interact with one another. Platforms match users for financial or social transactions, which creates value.
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 profit because they benefit from network effects, which can help the value of a network to grow exponentially. As individuals join, the potential number of connections between individuals skyrockets algorithmically, making the network more valuable.
Network effects are the result of increasing value for those who are already on the platform, and they increase with the scale of the platform.
Because platforms don’t own the resources that create value, they can grow much faster than pipeline businesses. Platforms also scale better. Growth isn’t tied to resources, so it can occur faster. Platforms bring new supplies to market because users are always coming up with new things.
There are still plenty of pipeline companies still around today, but whenever they have to compete against a platform business, they lose.
Platforms invert the firm, which is to say that many of the processes that take place inside pipeline companies are external in platform companies.
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.
Platform businesses are the most efficient value creators, compared to other types of businesses, because they harness the power of network effects.
Frictionless entry makes it possible for users to quickly and easily join a platform.
Side-switching platforms allow users to switch roles.
Beware of negative network effects. If there are lots of users, it can overwhelm the system.
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 choice.
Negative cross-side effects. Too much choice, too many ads, too much competition, etc.
Deciding where to begin in platform design is difficult. Copying other companies doesn’t always work because platform businesses tend to be different from each other. Instead of trying to imitate another platform, the focus should be on the interaction. Platform design should always start with the core interaction. 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 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. Look at how users are behaving; see if they’re putting the system to unexpected uses. This can suggest new directions for the platform to take.
Platforms are places where buyers and sellers can come together and transact business. It isn’t a business model. Platforms have been around for ages. Platforms include traditional marketplaces where goods, like produce, are sold.
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 internet provides infrastructure and coordinates communication. Platforms make use of these features for transactions all over the planet.
There are several reasons for this.
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 crazy 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 the less desirable products.
Separating assets from value. Ownership of assets like equipment should be separated from value. For example, pooling the use of a MRI machine means everyone can use it without having to buy their own.
Re-intermediation. There are new kinds of middlemen. For example, executives in the music industry used to rely primarily on agents in order to find new talent. Now they’re just as likely to trawl YouTube in search of good acts.
Market aggregation. Markets combine and become centralized. For example, Alibaba has created a single platform for wholesalers all over the world.
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. Facebook is an example of a platform where users draw in more users through viral growth.
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. People are more than happy to pay a premium to purchase the things they want if they can easily get exactly the thing they want.
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.
In manager and sponsor participation, the sponsors control the platform architecture, the manager controls interactions. Often these two roles are played by the same entity.
Developer participation has two different kinds of users. Core developers are usually employees. Extension developers add value to the platform, usually from outside the business.
With user participation, any user might have the ability to freely add content. The problems with this kind of participation includes the possibility of lower value content. It’s useful to find some way to curate the content.
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.
To avoid this, platforms should observe three fundamental laws of good 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.
Orderly markets reduce risk for the participants.
The way to understand what’s going on with a system is through metrics. 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.
Liquidity means that there are some producers and consumers, and there is a high percentage of interactions. You can track liquidity by measuring the percentage of listings that lead to interactions. It’s also important to look at illiquidity, which happens when transactions aren’t possible.
For example, when Uber users want a ride but there are no cars available. People get frustrated by these kinds of things and can become so discouraged that they leave the platform.
Matching quality measures how well the search algorithms match users to make transactions. People want to find what they’re 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.
When users go to a number of different sites to do similar kinds of transactions, it’s known as multi-homing. It’s better for the platform if it can keep all those tasty transactions at home on the platform. One way to accomplish this is to limit platform access. Platforms should try to get exclusive access to essential assets so users won’t want to go to other platforms.
It’s always a good strategy to foster innovation and capture its value. Keep a close watch on the apps that are developed for the platform. Absorb those apps that look like they might take off.
Regulations should be reevaluated everywhere because the whole game has been changed by platform businesses. Often enough, new economy businesses have just ignored existing regulations. This has brought a host of ethical problems.
Dominant platforms might resist change and innovation- after all it’s the status quo that gives them the edge. This does not serve the public good. People won’t have access to the improved technology.
There are many industries that will probably convert to platform industries in the coming years, these include information intensive industries, industries with non-scalable gatekeepers, highly fragmented industries and industries characterized by extreme information asymmetries.
Industries that are resistant to platform transformation include industries with high regulatory control, industries with high failure costs and resource intensive industries.
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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.
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