Peter Domican runs The Knowledge, a Levitt Group podcast from the Chartered Institute of Marketing. Every other month, Peter talks to authors on strategic topics relevant to senior marketers such as blockchain, agile marketing and the Internet of Things.
In his last latest podcast for The Knowledge, Peter interviewed Laure Claire and Benoit Reillier about Platform Strategy: How to Unlock the Power of Communities and Networks to Grow Your Business, published by Routledge.
Q — To kick us of, can you tell us what we mean by a platform business?
Laure: That’s a key question because people may have different definitions. If you talk to CTOs, they see platforms more from a technology angle, so they’d say that the Intel platform benefited from the replacement of DOS by Windows. Chief Product Officers might also have a different definition because they often see platforms as modular products. For example, a car manufacturer might say that the Jaguar XK8 uses the same platform as the Ford Mondeo. If you ask CEOs, they may also have a different definition, which might be a little bit looser and perhaps more focused on the business side and in particular might reflect business models.
The problem is that if you don’t have clear definitions, it can really have an impact on the formulation of your platform strategy.
What we usually do is actually spend time with management teams to have a common definition that everyone adheres to. We looked at what successful platforms do and we came up with a definition: these companies acquire, match, and connect two or more customer groups to enable them to transact. You could take the example of eBay. eBay attracts buyers on one side and sellers on the other side. eBay matches them in a way that is relevant, timely and filtered. The buyers and the sellers are then connected and buyers can actually ask questions about particular products. Think about a buyer interested in buying a second-hand car. They might want to know about how many owners and accidents the car had. That stage is really important to reduce the asymmetry of information between buyers and sellers. Then, finally, the sellers and the buyers can transact, which is actually the ‘raison d’être’ of the platform.
Benoit: What I would add is that it’s interesting to compare and contrast what a platform does versus a traditional business. A traditional business, instead of attracting matching connecting people to enable them to transact, which is our definition of a platform as Laure mentioned earlier, buys raw material and then transforms it and sells finished products at a margin. It’s a bit different in the service industry, but it’s the same concept. Traditional businesses are very linear by nature and follow a traditional value chain model while platforms do not.
Q — These businesses have really taken off in the last few years haven’t they?
Benoit: Yes. They have. It’s been quite incredible. Only 20 years ago, we did some studies and you’ll find that platforms are a very, very small percentage in terms of the number of firms, and in market capitalization terms, it was just a few companies that were using this business models, roughly 10% in early 2000 if we look at some of the US stock indices. Now, it’s a lot more than 50%.
The five largest companies in the world in market capitalisation terms, Apple, Google, Facebook, Microsoft, and Amazon are all powered by these new business models. All have a platform at the heart of their business.
Even private companies like Uber and Airbnb are growing incredibly fast. It’s a very powerful business model.
Laure: The magic of platforms is they can really unlock the power of communities and networks. One of the key things that they use is network effects. We can define network effects as a phenomenon whereby a service becomes more valuable as more people use it.
Benoit: Again, this is very different from traditional firms where typically, if you buy materials, you deplete some assets, while platforms are exactly the opposite. The more people use a service like maybe Airbnb or even a dating site, the more properties or profiles you have, the more valuable the service is. You can easily imagine that a platform with just one person to date or one flat to rent is a lot less valuable than one that has already achieved a critical mass and has got lots of people or lots of flats available.
Q — You’ve got two effects in essence. You’re offering more products to customers and offering more customers to suppliers. The more you have in each, the better in theory that must be.
Laure: Exactly. You have traditional businesses which have network effects on one side. Think about telecom networks. The network becomes more valuable as more people have telephones and actually can call and receive calls. But with platforms you can do even more, because as you say, they often have network effects on both sides. The more buyers you have on eBay, the more it attracts sellers and vice versa.
In terms of marketing, this is actually wonderful because the platform can work with its participants to promote the service. Sellers, for example, can promote themselves to buyers and attract other sellers. Etsy did this very well. When they launched, they actually relied on the sellers to do the marketing themselves and attract their customers onto the platform. These positive feedback loops are behind the growth of many successful platforms.
What’s really interesting here is that from a marketing standpoint, the acquisition and the retention becomes a joint effort between the platform and its participants on both sides sometimes.
Q — Because the participants have a stake in making that network better.
Benoit: Absolutely. Again, this is a critical difference with traditional businesses, but the value, if you think about it, within a platform business is co-created between the platform and its participants, that’s really one of the magical things in some ways. Uber has no cars. Airbnb has no real estate. Facebook, now the largest media company in the world, has no journalists. eBay has got no stock, effectively. All these companies are successful and have been able to grow tremendously because they were able to harness and unlock the power of the communities and networks that co-created value with them.
Q — If we could go back a little bit, what are the key lifecycle stages of these businesses, and how do businesses grow from one stage to the next?
Laure: We see four different stages in the lifecycle of a platform: design, launch, scaling and defensive growth. During the design phase, you need to think about who the key participants are, what the value proposition is for each of the key participants, what the governance principles might be, and so on. At launch, it’s about attracting users on one side and producers on the other side. Think about which side you’re going to attract first. There’s a number of challenges like creating the right product market fit for each of the value propositions. You need to make sure that enough participants start engaging with the platform, so that there’s enough activity and interactions to create what we call liquidity. If you’re a startup, you’re going to start raising more funds for the scaling stage. Challenges and priorities during scaling are different. I think the key one is to make sure as you grow the platform, you’re going to do it in a balanced way so that you have enough users on one side and enough producers on the other side. If suddenly, you don’t have enough sellers offering a wide selection products, the buyers are going to leave and then if there’s fewer buyers, then sellers are going to leave, and so on.
Q — That’s very much like a traditional market in that you need lots of stall holders to attract the customers and when you get more customers and more stall holders, then it brings in more people.
Laure: Exactly, that’s a great analogy. In fact, a traditional market is a platform. It’s a physical platform where people meet in a particular location during a set period of time.
Benoit: We have clients in Istanbul and we found that the Grand Bazaar actually meets all the criteria of our definition of a platform. They’ve been operating for many centuries now. The big difference is now platforms are going global and digital and are able to scale, but the concept has been around for many, many years.
Laure: Exactly. During the scaling phase, building trust and loyalty is very important for the platform, because the service might become mass market at this stage, so you need to make sure that there’s going to be enough trust for, first of all, people to trust the concept. Sometimes, if it’s a new concept, think about Airbnb when they launched, it can take some effort for people to simply try the service. There need to be enough trust in the platform itself. Is the platform going to look after me if there’s a problem? Also, establishing trust between the users and the participants. That’s quite critical because very often, participants don’t know each other. They might be complete strangers. How do you establish that trust is absolutely critical.
Q — What are the management and organisational challenges in building these types of networks?
Benoit: You have quite a few. The first one would probably be a mindset one. Suddenly, because you’re co-creating value with the platform participants, you need to think about governance principles. Who is allowed on the platform? What are the laws, rules and norms and expected behaviours, and how do you incentivize participants? You no longer control the customer experience end-to-end, you can merely influence it. For guests to enjoy clean and pleasant flats on Airbnb, Airbnb needs to persuade hosts to list flats onto the platform and create the right environment for that to happen.
Then the second challenge is that you need to realise that you’re in effect launching two different businesses. You’re launching a business on one side (users) and a business on the other side (producers).
You need a value proposition that will attract people, say, on the host side if you are a platform renting flats and another one on the guest side. You need to think about this very carefully so that you can reach critical mass.
Laure: Exactly. In terms of resources, it could be quite difficult because it means that from a product, from a marketing standpoint, you’re going to have to serve these two very distinct groups of customers. I think the third challenge is to keep these two sides in balance as you grow.
You need to make sure that you have enough users on one side and enough producers on the other side to keep balanced liquidity and healthy activity on the platform.
Q — Let me just ask about pricing and the pricing mechanisms that are built into these types of networks. What are the nuances of these types of systems?
Benoit: Pricing for platforms is very different from pricing for traditional firms. It can take time to get your mind around the kind of pricing strategies you can deploy within the platform business. In a traditional business, you need to make sure that you price above your cost –although you can have short term promotions. However, if you want to make money, you need to have a margin, therefore prices need to be kept above cost.
With platforms, because you have at least two sides, you can subsidise the service on one side and offer it for free, while you charge the other side.
One of the examples that is often used is the bar/disco one. A bar owner might offer free drinks for ladies. This attracts another side of the market, which would be men looking for ladies, and paying for the overall cost of drinks. It’s the same for the entrance of a disco. The same happens with platforms. Usually one side ends up paying for the service, while the other side gets the service for free. It’s not a rule though. In some cases, the two sides pay. In other cases, the two sides that transact on the platform don’t pay, but there’s third side that ends up paying for the service of the platform, like advertisers for example, in the case of Facebook. You get lots of different options and you get much more pricing flexibility.
Laure: What’s interesting is that the price changes that you may make on one side might impact the other side. For example, if eBay tomorrow decided to increase listing fees for sellers, a few of them might say, “Well, this is too much for me, so I’m going to stop selling on eBay.” This would have an impact on the inventory available to buyers. Therefore, buyers might shop elsewhere because there isn’t a wide enough selection for them anymore.
You can see that how changes in pricing on one side can actually impact the demand on the other side and vice versa. You have what we call first order effects, in terms of pricing on the selling side, but you might also have second order effects on the other side, here in that case the buyer’s side.
Benoit: This is of course related to the network effects we talked about. It’s important to keep in mind that network effects work both ways, so they’re great in terms of growth, but network effects can also be the reason why a platform can very quickly unravel. The wrong pricing decisions could definitely lead to that.
Q — It sounds like you need to get the pricing model right very early on, though.
Benoit: Even though we find that the models often evolve over time, that’s because in the early days, your first priority is to make sure that you attract people because you’re really looking for liquidity. You want to prove that you can create transactions. You can enable people who have joined your platform to transact on it. The priority is growth and limiting friction, and one way to do that is to have pricing that is either very low or in some cases just non-existent in the early days. As the platform grows thanks to the network effects, the value it brings to participants increases, because you can find counter-parties when you join the platform. That’s when we often see platforms starting to introduce pricing, new pricing structures, and new pricing models, and in some ways increasing their price as the value they bring to the market increases.
Q — Which is what Facebook have done in establishing a robust platform and then adding users to it.
Benoit: Exactly. Facebook was probably even more astute than that because it managed to attract so many people so quickly that it never really needed to charge users. What it did was open a third side, which was the side of the advertisers who had a vested interest in getting access to these users. It managed to grow and remain pretty much frictionless for content creators and content consumers, but still monetizing the value that it was creating through advertising.
Q — We’re obviously very familiar with the success stories; the Ubers, the eBays. What about the failures? What can we learn from those?
Benoit: I mean, we see literally dozens of companies every week, lots of startups. It looks like around 50% of all start ups securing funding use a platform business model these days. So we see quite a few people not succeeding! It’s important to remind people that a successful platform is more the exception than the rule, and that’s because you need to launch two businesses. You need to keep this balanced growth. You need to reach that critical mass that will allow people to transact. All these stages are quite difficult. We see many people trying and never really finding platform fit, which is the equivalent of product market fit in the platform world.
Typically, entrepreneurs try something new, hoping there’s a market there, but they never quite manage to attract enough people to make the market liquid enough.
Laure: In terms of the key lessons what we see is that, first of all, if you want to launch a platform, you need to think really carefully about the design. You may not have all the answers, but there are some key questions, like who are going to be the participants? What is going to be the value proposition for each side? What is the core transaction? How the two sides are going to connect? What are going to be the governance principles? As I said, you’re not going to have 100% of the answers, but at least you have a starting point from where you’ll be able to iterate.
Also, we see a lot of people jumping headstart on the technology side and starting to build excellent technology solutions. We say that’s great, but you first need to prove the concept and the business idea. You don’t necessarily need to spend a lot of money on the technology side in order to actually prove the idea. You can start with an MVP, or a minimum valuable product. You can do prototyping and iterate on that. You can use also off-the-shelf Saas solutions to prove the concept. Then if you find that there is actually market demand on both sides, if you find out that you can actually create that platform fit, then you can start investing in technology that meet customer needs.
Benoit: In fact, you see many people who start with a very manual and non-automated way in order to learn about their market. That’s probably the right approach. We see founders who initially created a simple webpage and when customers join, the matching and the connecting is done behind the scene, and often, it’s not an automated process at the beginning. At this stage, it’s more important to learn about market needs, and valuable features to get to platform fit.
Q — Can I ask about competitors and the problems and challenges of launching a me-too product?
Benoit: Yes. Lots to say about competition, because competition is really being redefined by platforms. We see lots of established companies in particular struggling with platforms entering and competition in their markets. It’s very difficult to compete even with an existing product when a platform enters your space. That could be because the platform has got several sides. As we’ve seen, the platform has got much more price flexibility, for example, and may get its money from somewhere else. If you’re selling newspapers and there’s a Facebook entering your market and Facebook doesn’t charge anything for people to get content, then you find yourself with a formidable online competitor. It changes the basis of competition.
Laure: Yes, exactly. It could be also that the platform has simply a better customer experience.
A platform business almost has an unfair advantage, because platforms typically don’t produce anything. What they do is they actually connect different groups of customers. Therefore, they can really focus on the customer experience and providing those superior products or customer experiences.
Benoit: One of the competitive responses we see, which is very interesting, is the combination of business models. We see lots of people thinking about combining their existing business with a platform business model and become what we call a platform-powered ecosystem. When you think about even Amazon, that’s exactly what they’ve managed to do. Their core business was initially online retail. They had an inventory of books for sale, they were just a bookseller that happened to be online, but it was a traditional business model. Very much like a value chain. When they saw the success of eBay, they tried to replicate that, and that’s when they opened their Marketplace. It’s a little-known fact, but Amazon’s Marketplace sellers offer for more than 95% of the total inventory. Amazon has combined these two business models in a way that is almost transparent for buyers.
We see traditional businesses trying to replicate that approach as well, either by creating something internally or acquiring something, but that’s clearly something that is happening more and more often.
Laure: Amazon actually has continued to strengthen their platform-powered strategy with Prime for deliveries to customers and Fulfilment by Amazon on the seller’s side. They also have app stores such as the Skills Store for Echo/Alexa. They’ve created that ecosystem where once you become a customer, it’s almost very hard to leave because the value proposition is very sticky.
What’s interesting is that when you look at Amazon as a business, the whole is actually worth a lot more than the sum of the parts.
The same applies to other businesses like Apple and Microsoft.
Q — Yes, we don’t tend to think of Apple as a platform business.
Benoit: Yes, and again, it meets our definition of platform-powered ecosystem. If you think about the iPhone business, it’s run as a traditional one. Apple runs a linear value chain, where they buy raw materials, assemble and manufacture the hardware, develop the software, and distribute the phones. This is a traditional business model. They do it exceptionally well, but it’s still a traditional approach. The value of the iPhone is less the hardware itself, but it’s more the ecosystem that Apple has been able to build around it. It’s the App Store, which is a platform. The App Store is really about matching customers who are looking for functionalities or in some cases games and people who are actually developing these apps. Apple is uniquely able to harness the power of a developer community so that people develop millions of apps and all these apps add a little bit to the value of the iPhone itself. Apple, therefore, has got this positive network effect. The more apps there is, the more people want to get an Apple phone and everybody benefits.
Q — As these businesses grow, they’re starting to attract the attention of regulators. I wonder if you could say something about that?
Benoit: Absolutely. We’ve got a number of problems there. First of all, it’s important to recognize that regulation, labour laws, everything in our society has been in a way designed for a model dating from the industrial revolution, for traditional firms. You’re either employed or you’re not employed, but there’s no option in between for freelancers. Platforms, as you say, are really changing the rules. There is a lot of confusion around that.
What we see is that many of the attacks against platforms are using the wrong kind of arguments. Many people attack platforms because they are big, for example. As we’ve seen, by the very nature of the business model, they’re big because the larger they are, the more useful they are for their participants because of network effects. You have to accept that these types of businesses have got a minimum efficient scale and that’s why many platforms tend to be big. They’re also under attack because in some cases they’re accused of pricing too low, but as we’ve seen, that’s also one of the features. You can price in an incredibly flexible way, because you’ve got several sides. These may not be the right arguments. That doesn’t mean that platforms shouldn’t be regulated in any way, shape, or form though!
There are three ways of creating value. The first one is to be the most efficient company, and it’s difficult to achieve, but you can make money if you’re the most efficient. The second way is to be the most innovative company. If you out-innovate everybody, you’re very successful. The third way is to abuse your market power. Effectively, you’re too powerful for a market and you can behave independently of competition, which is actually not allowed.
Now, many people are asking: are large platforms so successful and profitable because they’re innovative or, in some cases, do they abuse their market power?
We see lots of discussions around that at the moment. I’m sure you’ve seen Google is often in the news due to the recent fine that has been imposed upon them by the European Commission.
Q — We’re coming up to the end of the podcast. I wanted to ask you what do you think the future holds for platform businesses, and in particular, what effect might blockchain have upon them?
Benoit: I’m sure Blockchain will have an impact going forward, with the potential to enable more decentralisation but it’s still an immature technology at this stage. If we look at the future of platforms, platforms are here to stay. Only a couple of years ago, some people seemed to think that it could be a phase and may not be something that would be that important in the long-term. What we’re seeing is that platforms are increasingly colonizing markets in B2C and B2B, and they are growing faster than traditional firms. Platforms really are not yesterday’s business model but probably tomorrow’s business model. Increasingly, they’re being combined with traditional business models. I already mentioned that, but platform-powered ecosystems seem to be a very powerful and resilient form. You see hifi speakers like Alexa/Echo and others combining the physical hardware (traditional model) with services such as apps and skills for Amazon’s voice platform and everything that goes around that.
The combination of traditional business models with platform ones is going to be very powerful in the future.
Laure: Yes, and we’ve seen platforms becoming quite successful in media, in retail, but now we’re seeing lots of other verticals; healthcare, education. I think in the future we might also see platforms inviting themselves in the realm of government. Estonia for example, is positioning itself as a platform, connecting individuals with companies. I think that it will apply to any kind of industry going forward.
Q — Estonia’s pretty much given itself a blank canvas. It’s been able to develop these digital services very effectively.
Benoit: Yes, and we see that in many markets, including in developing markets where platforms become the default solution, because there was nothing in some sectors beforehand.
Laure: M-Pesa, the payment platform, is very successful in Africa. They kind of managed to leapfrog in a way, because for people can now make payments from their mobile phones, rather than to walk for hours to visit a bank.
Benoit: To come back to your blockchain question. While blockchain is still very much an emerging technology, it reminds me of the early ’90s when the web had just been launched and you only had a handful of websites and it was clear that it was something quite magical, but people were still grappling with the real implications and what it would mean for the future. It’s a little bit the same with blockchain, but the concept of a global distributed ledger that is very cheap will no doubt enable new organizational forms. Things like distributed platforms where you no longer need a central core and governance and maybe it’s owned by all the participants, for example. Maybe it’s controlled and there is a governance framework that allows everybody to contribute to the management of the platform itself. These are the kind of things that may become possible thanks to underlying technologies like blockchain.
Laure: Blockchain might even give more power to communities in terms of how they organize themselves and how they run platforms.
To find out more about Platform Strategy, click here.