Platform Strategy: how to Identify & Create Platforms

Five of the ten most valuable companies in the world today—Apple, Alphabet, Amazon, Facebook (Meta), and Microsoft—derive much of their worth from their multisided platforms (MSPs). How should we think about platforms, and what strategies can we use to identify and launch platforms in our organizations?

What are (Multisided) platforms?

When we talk about platforms, we often think about so-called ‘digital platforms. But platforms have existed much longer than that. Think about newspapers connecting subscribers and advertisers or a big mall that connects consumers and merchants.

A multisided platform is a system/service that creates value by connecting and/or matching different types of customers while enabling interactions between them [8].?Key to platforms is the level of intermediation it provides as well as the depth and breadth of interactions it facilitates, a.k.a. consociality (1).

The key principles of platform businesses are according to [1]:

• Resource orchestration (instead of resource control)
• External interaction (instead of internal optimization)
• Focus on ecosystem value (instead of a focus on customer value)

Platforms can range from asset-heavy (2) to asset-light (e.g. Uber and the Uber App)

A platform model is different from the reseller/retailer model, where goods and services are bought from a collection of producers and which functions as a value-added distribution service. It is also different than a so-called pipeline business that buys input (for example, raw materials) and combines them into a product or service to be sold.

Companies do not have to be a platform, retail, or pipeline business exclusively. They can be a combination of them. Take, for example, Amazon. Amazon Marketplace and AWS follow a platform model, while Amazon Prime Video is more akin to a reseller model. Amazon Studios (content production) and consumer electronics like the Kindle follow the pipeline business model. If you look at Google or Apple, you will see that they, too, have a mix of platform, reseller, and pipeline models.

When you start looking around, you will see that platforms are everywhere. Examples are eBay (retail), YouTube (media), Google Search(advertising), Kickstarter (finance), IOS (mobile), HMOs (health)

Platform customer types can be categorized (in a simplified view) within three different buckets [1]:

• Producers create offerings (e.g., app creators or advertisers for/on Android)
• Consumers buy or consume the offerings of producers (e.g., Android video games, productivity apps, as well as ads)
• Providers provide the interfaces for the platform (e.g., mobile Android devices)

Besides producers, consumers, and providers, there are owners who control the platform IP and decide who can participate (e.g., Google for Android).

Certain platforms have a high level of intermediation and consociality (1),[2]. For example, Uber and VRBO (matchmakers). Other platforms have a lower level of intermediation and consociality such as Kickstarter (enablers). Yet other platforms have high intermediation but low consociality, such as Lending Tree (hubs) or the inverse, such as Craiglist (forums). Not all platforms are the same when it comes to enabling interactions between their customers. [3] identified four different platform business types:

• Exchange, e.g., shopping malls, dating websites, VRBO
• Transaction, e.g., credit cards, PayPal
• Ad-supported media, e.g., newspapers, social networks.
• Hardware/Software: VHS (Video Cassettes), Android

One of the reasons businesses are interested in platforms is because of the power of network effects and their potential to drive sustained growth. Network effects can be divided into two main categories: direct and indirect.

Direct (or same side) effect: when an increasing number of users of a product drives an increase in value. Example: the telephone and Facebook. In both cases, the more owners (of a phone) or users (on Facebook), the higher the probability that I can connect with my friends and, thus, the higher the value of the platform.

Indirect (or multi-sided/cross-sided) effect: an increase in the number or quality of a customer type drives increased value for other customer types. Example: OpenTable, the more restaurants are on OpenTable, the more attractive it is for a person to use OpenTable to book a restaurant. The inverse is also true: the more users are on OpenTable, the more attractive it is for a restaurant owner to list their restaurant on the platform. It is less likely that you would join OpenTable because many of your friends are using it. You would more likely join because of the large selection of restaurants.

Identification

As mentioned, you do not have to be a platform company exclusively; you can be a platform, pipeline, and retail company at the same time, as some of the examples demonstrated. There are several strategies you can employ to find the platform for your product [4]:

• Opening doors to third parties: product or service has a big customer base that other (third-party) sellers are interested in reaching (Amazon Retail).
• Connecting Customers: the company sells the same product or service to distinct customer segments that interact/transact outside the firm’s offering (Garmin could connect fitness trainers with Garmin device owners).
• Connecting products to connect customers: the company sells two products or services to distinct customer segments that interact/transact outside the firm’s offering. ?(Credit bureaus could create online MSPs where consumers could obtain their credit scores and receive targeted offers from financial institutions).
• Supplying to a multisided platform: become an MSP by creating an offering for your customers’ customers that enhances the value of the product or service they buy from your customers. Shopify is a leading provider of e-commerce tools for online and retail merchants. Currently, the company has no direct connection with its customers’ users. It could, however, start offering a common log-in or loyalty program to users of its customers’ sites.

Besides following one of the above strategies for creating a platform, you want to answer some key questions for your future platform [3]:

• Who are the key customer types?
• What is the role or value contribution of each customer type?
• Why would these customers join the platform?
• How do these customers extract value from the platform?
• How does the platform monetize when launched and when it grows?
• Whom do you need to bring on board when you start your platform?
• Who are the most important customers?
• Is there a balance between the value each customer type receives?

For existing pipeline companies, the move to a platform involves three key shifts [1]:

• From resource control to resource orchestration (the network of producers and consumers is the chief asset)
• From internal optimization to external interaction (persuading participants to join and govern the ecosystem)
• From a focus on customer value to a focus on ecosystem value (maximize ecosystem value)

Creation

Once you understand what kind of platform you want to create, you need to understand what it will take to develop, launch, and sustain the platform.

How do you launch? The Network Effect Bootstrap

Launching a platform can be challenging. Why should I use Uber if there are not many drivers on Uber? Why should a driver register with Uber if not many people are looking for a ride on Uber? The following eight strategies can help when launching a platform [5].

“Follow the rabbit”. Leverage a non-platform project/setting to demonstrate success. Amazon Marketplace first grew its customer (consumer) base as Amazon Retail. Because of a sizable consumer base, it was easier (lower risk) for producers (third-party sellers) to join the Market Place.

“Piggyback”: Connect with an existing user base of a different platform to create value and recruit those users. In the early days, payment processing on eBay was easier for PayPal users. This made it more likely that PayPal users would join eBay and vice versa. Both platforms benefited from each other.

“Seeding”: Create value units for one set of customers, and once these customers are attracted, other customer types will follow. When Google launched its Android smartphone OS to compete with Apple’s iOS, it seeded the market by offering million-dollar prizes to developers who created the best apps across different categories. Winners became market leaders, attracting large numbers of customers.

The “marquee strategy” provides incentives to attract members of a specific type onto your platform. The Swiss postal service created a digital message-delivery platform using scanning and archiving technology from the company Earth Class Mail. To attract holdout customers who stuck with traditional mail delivery, Swiss Post gave away thousands of iPads to households, encouraging rural communities to switch from physical to electronic messaging, thereby greatly reducing its resources in hand-delivered mail.

Single side: Provide services/products that benefit a single customer segment. This is different from the two previous strategies in that it is not about offering incentives but providing an actual product or service to a particular customer segment and converting that later into a platform by attracting other customer segments., A business like OpenTable can first be a pipeline business by offering reservation management software to restaurants and evolve into a platform by connecting restaurants with potential guests.

Producer Evangelism: attract producers who can convince their customers to become users of the platform. The “producer evangelism strategy” involves designing a platform to attract producers who can then persuade their customers to become users of the platform. Crowdfunding platforms such as Indiegogo and Kickstarter thrive in this regard by targeting creators who need funding with the infrastructure to host content about their idea and manage the fundraising campaign.

The “big bang adoption strategy” involves using traditional opportunistic push marketing to attract attention. Tinder, a location-based dating app, achieved its breakout by launching during a frat party at the University of Southern California. Tinder made it easier to connect and achieve critical mass during the party in a small, contained location.

The “micro market strategy” targets a tiny market where members are already engaging in interactions, enabling the platform to prove its effectiveness at matching. Facebook launched in a closed and concentrated community ( Harvard University), ensuring the creation of an active community at launch.

What are the points of differentiation?

Like any product, you want to position the platform in such a way that it offers a unique and attractive value to customers. [3] lists several areas of value that can help in establishing these differentiations:

Network added value:

• Number of participants (there is, or it is easy to build up a large customer base)
• Quality goods & services (you provide a best-in-class product)
• Data shared by participants (the more data is shared, the better the product: direct network effect)

Platform added value:

• Unique features & benefits (you have unique features that make it harder for other platforms to compete)
• Free content

Open Standards

• SDKs, other web/app interfaces, APIs

Interaction tools

• Targeting and matchmaking tools (how good are your algorithms)
• Transaction enablers (is it easy to connect and exchange)

Trust enablers (do customers trust the platform and others participating? What policies, features, … does the company provide to establish trust?)

• Identification systems
• Reputation systems
• Financial safeguards
• Non-competitive assurances?

Is your network defensible??

Some networks (the interaction between customers that the platform intermediates) are fragmented, while others are global. For example, VRBO regularly connects rental hosts and visitors from around the world. On the other hand, most users of Uber will use the service primarily where they live and sometimes use the service when they travel.?From a network perspective, VRBO can be seen as a globally connected network (most, if not all, transactions are global). The network for Uber is more fragmented, with local clusters in cities and limited connection between these clusters as most of its transactions are people using the service in the town, village, or region where they live. When networks are globally connected, the barrier to entering by a competitor becomes harder. The reverse is also true: Uber competitors can start small in areas where Uber does not have a presence and grow from there. It is possible to strengthen a network by creating a global overlay on top of a fragmented network [6].

What is the risk of disintermediation?

While intermediation is a key feature of platforms, it can also become a weakness. Initially, a platform can serve as an intermediary, but users could bypass the platform altogether after a while if intermediation does not add value. Imagine hiring a house cleaner from a platform and being satisfied with the service. Would you really go back to the platform to hire the same person again? Some mechanisms to reduce the risk of disintermediation can be [6]:

• Terms of Service. Prohibit off-platform transactions for customers/providers.
• Enhance the value of the transaction. Transaction add-ons can prevent or reduce off-platform transactions; consider insurance or loyalty points.
• Withhold contact information until the transaction is made.

Is the platform vulnerable to multi-homing??

Multi-homing means that customers of your platform could also join other platforms with similar services. A good example are ridesharing companies. Drivers and riders can use different ride-hailing platforms. To lock in drivers, Uber and Lyft gave bonuses to people who completed several trips without rejecting or canceling any or going offline during peak hours [6]. Gaming platforms use exclusive deals with publishers to ensure particular games are only available on their platforms. High prices of consoles and subscriptions reduce the risk of multi-homing by gamers [6].?

What are the possibilities of partnerships (Network Bridging)?

While network defensibility, disintermediation, and multi-homing pose growth risks when creating a platform, a growth strategy can be connecting your network/platforms with other networks/platforms and exploiting synergies. [6] describes the example of Alibaba bridging its payment platform Alipay with its e-commerce platforms Taobao and Tmall.

The nature of platforms, in part driven by the network effects, can lead to winner-take-all battles. It is important to consider how a company positions itself: compete or partner. [7] describes three conditions that, if satisfied, suggest a market is likely to be served by a single platform:

• Multi-homing costs are high for at least one side.
• Strong network effects for at least the users subject to high multi-homing costs.
• Users on different platforms do not have a strong preference for special features.

As an example, for a market likely to be served by a single platform, one can look at the DVD industry [7]

• Multi-homing costs are high for consumers (expensive to buy multiple players) and studios (providing the same content in multiple, incompatible formats increases inventory and distribution costs)
• Cross-side network effects are strong for both sides of the network. Most consumers value access to a wide variety of titles, and studios can realize scale economies when they can sell to more consumers.
• Opportunities for technical differentiation are modest, as DVD players connect to TV sets, which are standardized and limit DVD content differentiation.

Potential DVD platform providers anticipated this outcome and faced a choice: they could compete or partner by pooling their technologies. Industry participants chose the latter and created the DVD format in 1995, avoiding a replay of the VHS-Betamax standards battle.

Finally, there is the risk of envelopment [7]. Platforms can have overlapping user bases, and these shared relationships can make it easy and attractive for one platform to swallow the network of another. The envelopment risk can be especially high if one platform's offering is part of a larger bundled offering by the other platform. Within technology markets, envelopment is sometimes referred to as ‘convergence’. For example, mobile phones now include music, video players, and much more. Some of these (now common) mobile phone features were stand-alone platforms.

Conclusion

Companies do not have to become an ‘only platform’ business. Platform, pipeline, and reseller models can co-exist. While identifying the right model, customer types, and differentiations are key to building a successful platform, how you launch and address the risks of disintermediation, multi-homing, and network defensibility can determine the success of your platform. These risks can sometimes be mitigated through network bridging and partnerships.

References & Further Reading

[1] Van Alstyne M.W, Parker G.G., Choudary S.P. Pipelines, “Pipelines, Platforms and the New Rules of Strategy”, 2016 Harvard Business Review

[2] Perren R, Kozinets R.V., “The Lateral Exchange Markets: how Social Platforms Operate in a Networked Economy”, 2018 journal of Marketing.

[3] Rogers D.L., “The Digital Transformation Playbook”, 2016 (book)

[4] Hagui A., Altman E.J., “Finding the platform in your product: Four strategies that can reveal hidden value”, 2017, Harvard Business Review

[5] Parker, G.G., Van Alstyne, M.W. , Choudary, S.P. “Platform revolution - How networked markets are transforming the economy and how to make them work for you too”, 2016, Norton, New York

[6] Zhu F., Iansiti M., “Why some platforms thrive and others don’t”, 2019, Harvard Business Review

[7] Eisenmann T., Parker G., Van Alstyne M.W., “Strategies for Two-Sides Markets“, 2006 Harvard Business Review?

[8] Hagiu A. ,Wright J. ,"Multi-sided platforms", International Journal of Industrial Organization Volume 43, November 2015

Footnotes

(1) consociality represents the number and nature of social interactions between buyers and sellers

(2) asset heavy means it relies on physical parts. E.g., shops, manufacturing, etc… needed to create parts of a platform. For example, Johnson Controls Panopix might be software (asset light) but relies heavily on physical sensors and devices (in part produced by Johnson Controls) to provide input to the software.