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Platform Power - Sangeet Paul Choudary PDF
Platform Power - Sangeet Paul Choudary PDF
POWER
3) The idea that this value is created when users interact as Welcome to the platformed world! Here’s your guide and I hope
producers and consumers you enjoy the view!
2
Section 1
Platform
Business
Models
KEY QUESTIONS We typically think of companies competing over products — the proverbial “build
1. What is a Platform? a better mousetrap.” But in today’s networked age, competition is increasingly
over platforms. Build a better platform, and you will have a decided advantage
2. Why are we seeing the emergence of
platforms?
over the competition.
3. How do I go about building a platform? In construction, a platform is something that lifts you up and on which others can
stand. The same is true in business. By building a
digital platform, other businesses can easily
“By building a digital platform,
connect their business with yours, build products
other businesses can easily
and services on top of it, and co-create value. connect their business with
This ability to “plug-and-play” is a defining yours, build products and
characteristic of Platform Thinking. services on top of it, and co-
create value.” TWEET
Consider the market for smartphones. Nokia and
Blackberry today are a shadow of their former
glory. Their technology and products lag Apple and the Android ecosystem. But
the triumph of Apple and Android is not from features and functions. It is from the
app store on which external developers create value. Microsoft has gotten
excellent reviews for the technology in its new phones, but it is the ability to create
a successful platform that will determine its ultimate success.
The rise of platforms is being driven by three participants, both producers and consumers
heart of successful matchmaking, and distinguishes platforms enables anyone with a smart trap
from other business models. The Matchmaker captures rich data to connect and communicate.
about the participants and leverages that data to facilitate Every business today is faced with the fundamental question that
connections between producers and consumers. For example, underlies Platform Thinking: How do I enable others to create
Google matches the supply and demand of online content, while value? Building a better mousetrap still might not have the world
marketplaces like eBay match buyers to relevant products. beat a path to your door. But the right platform might just do the
Not all platforms place the same emphasis on all three building trick.
There are two broad business models: pipes and platforms. You could be running
KEY QUESTIONS
your startup the wrong way if you’re building a platform, but using pipe strategies.
1. What is a Platform business model?
2. How is it different from traditional business More on that soon, but first a few definitions.
models?
3. How are internet businesses different from
traditional businesses? PIPES
4. Why do most internet businesses fail?
Pipes have been around us for quite some time now. They’ve been the dominant
model of business. Firms create stuff, push them out and sell them to customers.
Value is produced upstream and consumed
downstream. There is a linear flow, much like water “The world is moving from
flowing through a pipe. Pipes to Platforms, from
linear to networked
We see pipes everywhere. Every consumer good business models.” TWEET
However, platforms often have no value when the first few users conversions.
come in. They suffer from a chicken and egg problem, which I talk
extensively about on this blog. Users (as producers) typically
produce value for other users (consumers). Producers upload PRODUCT DESIGN AND MANAGEMENT
photos on Flickr and product listings on eBay, which consumers
Creating a pipe is very different from creating a platform.
consume. Hence, without producers there is no value for
consumers and without consumers, there is no value for Creating a pipe requires us to build with the consumer in mind.
producers. An online travel agent like Kayak.com is a pipe that allows users
to consume airline tickets. All features are built with a view to
Platforms have two key challenges:
enable consumers to find and consume airline tickets.
1. Solving the chicken and egg problem to get both producers
In contrast, a platform requires us to build with both producers
and consumers on board
and consumers in mind. Building YouTube, Dribbble or AirBnB
2. Ensuring that producers produce, and create value requires us to build tools for producers (e.g. video hosting on
YouTube) as well as for consumers (e.g. video viewing, voting
Without solving for these two challenges, driving site traffic or
etc.). Keeping two separate lenses helps us build out the right
app downloads will not help
features.
with user acquisition.
“Platforms don’t just optimize The use cases for pipes are usually well established. The use
Startups often fail when they conversion funnels to grow. They cases for platforms, sometimes, emerge through usage. E.g.
are actually building build and deliver value through
Twitter developed many use cases over time. It started off as
platforms but use Pipe network effects.” TWEET
something which allowed you to express yourself within the
Thinking for user acquisition.
constraints of 140 characters (hardly useful?), moved to a
Source: Platform Thinking 9
platform for sharing and consuming news and content and AirBnB, SitterCity, Etsy), one or both sides pays the platform a
ultimately created an entirely new model for consuming trending transaction cut. When producers create content to engage
topics. Users often take platforms in surprisingly new directions. consumers (YouTube), the platform may monetize consumer
There’s only so much that customer development helps your with. attention (through advertising). In some cases, platforms may
license API usage.
Platform economics isn’t quite as straightforward either. At least
Pipe Thinking: Our users interact
one side is usually subsidized to participate on the platform.
with software we create. Our
“Software is no longer about Producers may even be incentivized to participate. For pipes, a
product is valuable of itself.
human-computer interaction. simple formula helps understand monetization:
It’s about human-human
Platform Thinking: Our users Customer Acquisition Cost (CAC) < Life TIme Value (LTV)
interaction using
interact with each other, using computers.” TWEET
software we create. Our product This formula works extremely well for ecommerce shops or
has no value unless users use it. subscription plays. On platforms, more of a systems view is
needed to balance out subsidies and prices, and determine the
traction needed on either side for the business model to work.
MONETIZATION
KEY QUESTIONS Business is about solving customer problems. It’s been claimed that business is
1. How are today’s internet businesses primarily about beating the competition or about maximizing shareholder returns
different from the ones that we had in the but if the successes (and failures) of the past decade are anything to go by, the
nineties? primary goal of business is solving customer problems. If you think about the
2. How are platform business models different approach that businesses take to solving these problems, three broad patterns
from other internet business models? emerge.
The approach of the industrial age to solving customer problems has been to
create more stuff. If there’s a customer problem out there, you set up factories and
build some stuff. And once consumers have got their needs satisfied but you’ve
still got all this excess production capacity, you put in some marketing and
convince consumers that they want more stuff. The default model for solving
business problems has been the ‘stuff’ approach. If you’re dealing with goods,
you’re churning out more goods while if you’re a services-based company, you’re
putting more people on the job. The approach to scaling a solution has been
creating more.
Most problems do not need to be solved by throwing stuff at them. Most problems
are, actually, information problems. In reality, most problems are currently solved
Enter algorithms. You have stuff out there which is sub-optimally The ‘stuff’ approach creates
s u p p l y, t h e ‘ p l a t f o r m ’ “Platform businesses create new
distributed. Here’s a two-step approach to solving the problem:
sources of value, instead of simply
a p p ro a c h u n c o v e r s n e w
redistributing existing value.”
1. Aggregate all the information on the stuff out there sources of supply. The goal in TWEET
this case is not only to
2. Leverage algorithms to optimally match the right stuff with a
optimize but also to redefine
consumer’s desire
the input (inventory) that you are optimizing.
Google built one of the fastest growing companies of all time
applying the optimization approach to the world’s information
problem. Most internet businesses create value through IN ESSENCE…
optimization. Computer science, as a field of study, is itself based
on solving optimization problems. Every consumer problem out there can be solved in one of three
ways:
The ‘stuff’ approach: How can we create more stuff whenever the
THE ‘PLATFORM’ APPROACH problem crops up?
Platform Thinking adds one more step to the optimization The ‘optimization’ approach: How can we better distribute the
approach. Instead of merely aggregating information on stuff out stuff already created to minimize waste?
there (Step 1 above), it enables creation of more inventory without
Problem: I need a mobile phone with all the bells and whistles but
every mobile phone has a different feature set and I can’t figure
THE TRANSPORTATION PROBLEM the best one for myself.
Problem: I need to figure out a reliable and safe way of getting The ‘stuff’ approach (Nokia): Create more phones and more
from point A to point B whenever I want to. models. Conduct your market research, figure out what
The ‘platform’ approach (Apple): Let’s rethink the phone. We can’t While execution challenges continue to exist, they are, by all
build everything. What if we just built out the tools that others means, solvable.
could use to build apps that consumers could then use to extend
the functionality of their phone? Inventory: When you redefine inventory as AirBnB or oDesk
does, you need to ensure you have a clear strategy for
encouraging users to create the inventory. This often leads to a
chicken and egg problem as producers won’t create inventory
THE NEWS PROBLEM
unless there’s a ready market of consumers and consumers won’t
Problem: I need to know about what’s happening around the participate without inventory to consume.
world.
Quality: When an entirely new set of producers gets created,
The ‘stuff’ approach (NY Times): Put more journalists on the job, quality control can be a problem. Platforms need to have robust
churn out more content and get the news out to more channels. quality control mechanisms to separate the good from the bad.
The ‘optimization’ approach (Google News): Rank news stories External forces: We need new regulations for these new models.
and serve readers with the matches closest to what they’re Über has already had problems with regulations. We need to
looking for. solve for trust in the virtual world. Airbnb has already come under
the scanner on this count.
The ‘platform’ approach (Twitter): Redefine the journalist.
Everyone can create and distribute news now.
KEY QUESTIONS Every business is an engine. It needs to do a certain set of things repeatedly to
1. How do you scale processes beyond your create value. If you haven’t figured out that set of repeated operations, you
company? probably haven’t created a scalable business yet.
2. How do you leverage your user/developer Ford needs to repeatedly assemble cars, Google needs to repeatedly run its
ecosystem to create value?
crawler, Facebook needs to repeatedly get users to interact with other users.
So this is the formula for building a business. You figure out how A brief recap of the three approaches to problem solving
you are creating value. You identify a set of operations that
The ‘stuff’ approach: How can we create more stuff whenever the
repeatedly create value. You figure out a way to efficiently
problem crops up?
conduct these operations repeatedly.
The ‘optimization’ approach: How can we better distribute the
There are three broad ways that businesses conduct these
stuff already created to minimize waste?
operations repeatedly and get things done:
The ‘platform’ approach: How can we redefine ‘stuff’ and find
Get employees to do the work
“Three sources of value new ways of solving the same problem?
creation in a business:
Get algorithms to do the work
Employees, Algorithms
and Users. Which ones do
Get users to do the work
you rely on?” TWEET Essentially, the three approaches to building a business now are:
The ‘stuff’ approach: Get employees to do the work
Let’s think through the problem of navigating the web for the
The ‘optimization’ approach: Get algorithms to do the work
most relevant information for the day. Three companies try to
solve this in three very different ways: The ‘platform’ approach: Get users to do the work
Yahoo: A bunch of editors decide the best content for the day
Google News: Algorithms decide the top news of the day Depending on which approach you take, the way you build your
company could vary significantly.
Twitter: Users’ tweets and retweets decide the top news of the
day. A platform thinking approach to building a business involves
figuring out ways by which an external ecosystem of developers
These three approaches correspond exactly with the three
and users can be leveraged to create value. The iPhone app store
models for problem solving, mentioned in the previous chapter.
does this, YouTube does this, and so does Wikipedia.
Source: Platform Thinking 17
UNDERSTANDING REPEATABLE OPERATIONS The algorithms are easily replicable but the ecosystems aren’t.
Hence, building a business where the ecosystem scales the value
It’s important to note that we are talking about repeatable
creating operations is quite different from building a technology-
operations. Writing code is not a repeatable operation. It is a one-
only company.
time infrastructural activity, similar to building out the assembly
line or setting up the factory. The operations that the code PLATFORM THINKING AND SCALE CONSIDERATIONS
automates (e.g. login management) are the repeatable operations.
Scale is achieved by making repeatable processes more efficient
(faster/cheaper) and effective (accurate).
WHY ECOSYSTEMS, NOT ALGORITHMS, ARE YOUR One of the ways to infuse platform thinking into your business is
COMPETITIVE ADVANTAGE to look at a problem that is being solved manually, and
repeatedly, and see if it can be solved by external users instead.
Most problems that could be fully automated are already
automated today. The next level of scale will come not by Facebook realized that it would have to translate its interface for
automating alone (and letting algorithms alone do the work) but every new foreign language. The norm was to do it with an in-
by leveraging an ecosystem ( and letting algorithms synchronize house or outsourced translation team. Facebook chose to
disparate actions). crowdsource it, building not just a more scalable model, but in
many cases, better translations as well.
There are very few companies that compete purely on the
strength of algorithms. Google is a This is also demonstrated in the evolution of an online
rare example of a company whose community. Quora started off with employees asking questions
“You don’t build
competitive advantage lies in a set and answering them. Over time, it transitioned both these
technology, you enable
of very complex algorithms that it interactions. Algorithms
activities from the employees to the users.
fiercely protects. Facebook, Twitter, are easily replicable,
The problem that comes with this, of course, is that you let out
YouTube etc. compete not on the Ecosystems aren’t. ”
TWEET control and with that you need to build in checks and balances to
strength of their algorithms but on
ensure that no one is gaming the system. Quora and Reddit offer
the strength of their ecosystems.
“Key to scale: If employees are doing something today, get
users and algorithms to do it in the future.” TWEET
Network
Effects
KEY QUESTIONS Network Effects and Virality are often confused in the online world, possibly
1. What is the difference between network because the two often occur together and, in such cases, end up reinforcing each
effects and virality? other.
2. How can products have one without the Network effects and Virality are, however, completely different. There are many
other?
products which have network effects but are not viral. Conversely, many viral
products do not have network effects.
QUICK DEFINITIONS
A product with network effects gets more valuable as more users use it. Network
effects are achieved only after a certain critical mass is reached but can prove to
be a very strong source of value and competitive advantage beyond that point.
A viral product is one whose rate of adoption increases with adoption. Within a
certain limit, the product grows faster as more users adopt it.
“Network effects and virality are very different phenomena.
Learn how to control them separately to build great products.”
TWEET
KEY QUESTIONS The proverbial chicken and egg problem of building a new social product is well
1. How do you build social products? understood among tech startups, and it’s been commonplace to follow two
contrasting mechanisms for getting traction.
2. How have the rules of building social
products changed over time? Traditionally, startups have solved this problem by racing to connect users with
3. Why was Instagram a threat to Facebook? each other, essentially providing them the pipes to interact with each other. Twitter,
2. The product should deliver greater value when users share their
T h e r i s e o f t h e c o n t e n t p o r t f o l i o
content with their friends. The product builds out the network at
Instagram demonstrates how a network is created around a
the backend as more content is shared. Hence, the social
portfolio of user-generated content. Behance and Dribbble have
network gets created, effectively solving the chicken and egg
followed similar strategies by providing a portfolio for hosting
problem. A new breed of curation-as-creation startups (Scoop.It,
designs, before adding value through the creation of a peer-
Paper.Li etc.) is gaining traction on
“Building network effects? review community. Initially, Pinterest appealed to the designer
a similar model.
1. Start with standalone community as a tool to ‘bookmark’ their favorite designs, before it
The new playbook for creating single-user value. 2. Make built out the network. Early adopters found enough value in the
it better with friends.”
social products is essentially the ability to store designs and pictures, to use the product before the
TWEET
following: network became active.
1. Focus on creators.
“Internet startups are moving from a Connection-first
2. Make creation easier.
to a Content-first model. Are you?” TWEET
3. Design incentives.
4. Invest in curation.”
TWEET
KEY QUESTIONS If there is one altar at which Silicon Valley worships, it is the shrine of the holy
1. How easy is it to achieve critical mass and network effect. Its mystical powers pluck lone startups from obscurity and elevate
build network effects in the post-Facebook them to fame and fortune. The list of anointed ones includes nearly every
era? technology success story of the past 15 years. Apple, Facebook, Microsoft, eBay,
2. What are the new rules of competitive and PayPal, have each soared to multi-billion-dollar valuations on the supreme
advantage on todays networks? power of the network effect.
But today, the power of the network effect is fading, at least in its current
incarnation. Traditionally defined as a system where each new user on the network
increases the value of the service for all others, a network effect often creates a
winner-takes-all dynamic, ordaining one dominant company above the rest.
Moreover, these companies often wield monopoly-like powers over their
industries.
IN THE BEGINNING
Once, all a company needed to do to leverage the network effect was facilitate
communication between a critical number of customers. If enough people used a
particular system to exchange information, a leader would emerge and become
the de facto platform. Companies who could either form a marketplace or facilitate
First, establish a medium of communication by building the In addition to access costs falling to zero, another key component
required infrastructure or inventing a new technology. For of what once kept users locked into a network has vanished.
example, lay down telephone wires from coast to coast. Then, Once, porting contacts onto a new network, like switching instant
provide access to the network to improve the ease of information messaging services from Yahoo! to AIM, was a non-trivial task.
transfer — say, by selling fax machines. Finally, race to grow the Today however, customers use their Facebook, Twitter or Google
user base before competing services do. If you get bigger faster profiles to join a new service in seconds. A burgeoning network,
than your competitors, voilà! You’re inside the pearly gates. take Instagram or Pinterest, can leverage the single sign-on
enabled by the social graph to reach
critical mass faster than ever before.
RAPTURE Users not only port their personal “The source of
information but bring their competitive advantage
That’s the plan at least. But today, things on networks is moving
connections as well. In the age of the
are not quite so simple. For one, in the from user connections
“The network effect social web, the convenience of the to stored value.”
old days, consumers paid to access the
isn’t enough. You social graph has largely toppled the TWEET
network through their upfront need additional lock-in that once kept users bound to
investment in hardware. These upfront switching costs. ”
one network over another.
costs locked users into the network and TWEET
With the portability of the social graph and the fall of upfront
costs to join a network, companies must leverage new ways of
acquiring and retaining users. Business models that leverage a
network effect plus stored value, hold the keys to the kingdom.
Note: This article was co-authored with Nir Eyal, who blogs at
www.nirandfar.com
Reverse
Network
Effects
KEY QUESTIONS Network effects are the holy grail for Internet startups looking for venture-scale
1. How do social networks become less returns. On a platform with network effects, the value to a user increases as more
useful with scale? users use it. Facebook, Twitter, LinkedIn, YouTube, Skype and many others benefit
To explore the future of online networks, it’s important to note how network effects
correlate with value and the factors that make these network effects work in
reverse.
There is a strong correlation between scale and value in businesses with network
effects. Greater scale leads to greater value for users, which in turn attracts other
users and further increases scale. This rich-becomes-richer dynamic allows
networks to scale rapidly once network effects set in.
There are three sources of value created on networks: Connection, Content and
Clout.
users on the network. As more users come on board, the corpus Clout.” TWEET
of the subscribers feature has
of content scales, leading to greater value for the user base. added clout for some Facebook
Content platforms like YouTube, Flickr and Quora, as well as users as well.
marketplaces like AirBnB and Etsy becomes more useful as the
number of creators and the volume of content increase.
Clout: Some networks have power users, who enjoy influence WHY NETWORK EFFECTS WORK IN REVERSE
and clout on the network. Follower counts (Twitter), leaderboards
One would expect that the bigger the network, the more value
(Foursquare) and reputation platforms (Yahoo Answers) are used
users derive from it.
to separate power users from the rest. On networks like Twitter,
the larger the network, the larger is the following that a power However, as networks scale, the value for users may drop for
user can develop. several reasons:
Across these three drivers, a network with greater scale provides Connection: New users joining the online community may lower
greater value in the form of: the quality of interactions and increase noise/spam through
unsolicited connection requests.
1. More prospective connections for the user
Content: The network may fail to manage the abundance of
2. A larger corpus of potentially relevant content
content created on it and may fail to scale the curation of content
3. Access to a larger base of potential followers (greater clout), for created and the personalization of the content served to users.
power users
Just as network effects create a rich-becomes-richer cycle LinkedIn creates friction by preventing users from communicating
leading to rapid growth of the network, with distant connections. This ensures that users do not receive
reverse network effects can work in the unsolicited messages. This also allows LinkedIn to offer
opposite direction, leading to users “Reverse Network frictionless access (OpenMail) as a premium value proposition.
quitting the network in droves. Effects: Networks get
noisy as they scale.” ChatRoulette, in contrast, anonymously connects users over a
Friendster, MySpace and Orkut bear
TWEET video chat without needing to login. This lack of friction led to
testimony to the destructive power that
ChatRoulette’s stellar growth but also led to reverse network
reverse network effects wield.
effects as anonymous naked hairy men took to the network, thus
increasing noise and driving genuine users away from it.
REVERSE NETWORK EFFECTS: CONNECTION Dating sites, as well as social networks like Orkut, have imploded
in a similar manner after reaching scale, owing to noise created
Connection-first networks (dating websites like Match.com and
by fake profiles.
networking communities like LinkedIn) build value by connecting
people. In general, networks of connection scale well when they create
appropriate barriers to access on the network.
These networks may suffer from reverse network effects as they
scale if new users joining the network lower the value for existing
users. To prevent this, an appropriate level of friction needs to be
REVERSE NETWORK EFFECTS: CONTENT
created, either at the point of access or when users try to connect
with other users. On content networks like YouTube or Flickr, a larger network is
likely to have more content creators, leading to more content for
On dating sites, women often complain of online stalking, as the
the user to consume. Networks like Facebook and Twitter, in
community grows, and abandon the site. Sites like CupidCurated
Networks of clout have a system of differentiating power users 2. A strong curation system that scales well with the size of the
from the rest. Twitter, Quora and Quibb have baked in clout network
through the one-sided follower model. Active users vie for greater
glory while using the network. 3. A highly relevant and personalized user experience
Networks of clout tend to be biased against users joining in late. 4. A democratic model for users to build influence
Clout is a consequence of content that the user creates and early
In a world where networks are reaching unprecedented scale, a
users get more time to create content and develop a following.
keen focus on maintaining a high signal-to-noise ratio will enable
This is, ironically, aggravated by focusing on a high signal-to- them to remain valuable as they grow.
noise ratio. Twitter recommends super users to prospective
followers as these users are likely to create better content. Hence, “To prevent Reverse Network Effects: curate access and production,
encourage democracy and ensure relevance of personalization.” TWEET
the platform itself helps separate the power users from the rest.
KEY QUESTIONS Reverse Network Effects may sometimes set in with scale i.e. online networks may
1. Under what conditions do online platforms become less useful as they scale. I do not imply that all online platforms lose value
lose value with scale? as they grow. However, in the absence of robust curation, online platforms may
Since the participants on an online platform create value, an online platform loses
value with scale when the participants it allows in OR the information/value that
they create are not curated appropriately. Poor curation leads to greater noise
which makes the platform less useful.
Let’s look at a few factors that increase noise and drive down the value of online
platforms as they scale.
Every platform has its own way of building authority and/or trust. In summary, appropriate quality controls are required to control
Ebay and AirBnB do it through ratings, Wikipedia through edit production and appropriate filters are required to control
wars, Quora through votes. A network needs a fool-proof model consumption. And both these components need to scale as the
for building participant authority to ensure that the right opinions network scales.
are served for consumption.
Building User
Ecosystems
KEY QUESTIONS If you’ve been around the internet startup world for long enough, you’ve probably
1. How is the role of the consumer changing? engaged in the user-customer debate at least once. Who’s the user? Who’s the
customer? Who should we be focusing on?
2. What is the difference between users,
customers and consumers? In this essay, I’d like to talk about the User-Customer debate since that lies at the
3. How do you build your product for enabling very heart of how we think about the design of internet businesses.
interactions between producers and
consumers? If we put on the Platform Thinking lens, we essentially do away with the user-
customer debate and replace it with a more fundamental view of how your
business functions. Here’s how:
Quite simply, the user is anyone who uses the product. Now that doesn’t help us
too much, so let’s break that down a little.
4. Consumers create demand or consume supply Producer: Yelp (creates listings), Review Writers
Producer: Zappos.com itself is the producer; sourcing shoes and Consumer: Readers
creating supply.
Customer: Readers, Advertisers
Consumer: Users browsing and buying on the storefront.
AirBnB
KEY QUESTIONS A platform without creators is a ghost town and there is little incentive for
1. How do you create a crowdsourcing consumers to use it. Replicating the technology of YouTube is a considerably
strategy? smaller challenge compared to replicating its community of video creators.
2. What are the principles for building and The creators are active partners in creating (and delivering) the value proposition of
nurturing an online community?
the platform. Hence, any startup building a creativity platform should:
3. How do you create the incentives for users
to contribute? 1. Understand the motivations of the creators
The following 6 questions can help a platform think through these issues and
enable it to successfully create a platform that finds traction.
Creativity platforms may provide content creators the tools to enable them to be
creative, or they could supply the channels to market their creations to an
audience. Or both.
platform. This is important because Editorial.” TWEET Art for art’s sake isn’t always good enough. While self-expression
creators power the value proposition for and the ability to gain an online following and build a personal
such platforms. The platform has little or brand are great incentives for creators, having additional
no value without the creations.
500px: Provides community recognition and curation + The ability creators. A platform, hence, needs to have
to host an online portfolio. a clear plan for converting consumers to creators to have a
sustainable value proposition.
Dribbble: Provides community recognition and curation + Access
to highly relevant job offers.
KEY QUESTIONS Why would a user talk about your product? Often, it’s because your product is
1. How do you create organic incentives for really cool and helped them do something that they would never have imagined
participation and virality? possible. But users don’t want to be talking about your product all the time. A
It goes without saying that people would much rather talk about themselves than
about, well, an online product. Just ensure that they’re using your service to talk
about themselves. Self-expression is an innate human desire and the internet
provides a global audience to the expressive. Any service that allows users to A)
express their creativity and B) spread the news about it in the easiest possible
manner is likely to find quick adoption among users.
This psychology may seem obvious in the case of, say, Youtube, which really got
big when users started creating and putting up their video and getting the word
around. DrawSomething is another service that grew virally by making it easy for
its users to get creative. Instagram allowed users to instantly produce cool
one that allowed few customizations to the basic look and feel accounts for a lot of creation on the mobile.
KEY QUESTIONS Product creators often tend to think of products in terms of features. I’m not
1. How do you build intuitive products? talking about the traditional myth of “more features is better” that got debunked a
long time back. Product creators still think of features because they try to deliver a
2. How do you create conditions for high user
adoption and usage?
certain functionality. Instead, a product should actually be visualized as an answer
to a pain point. Users don’t use products because they need certain features.
Users use products because they have been trying to do something but were
facing a barrier while doing it so far and the product helps lower the barrier.
Products that lower (or completely remove) the barrier to getting something done
tend to create entirely new market segments that had never existed earlier.
In all such cases, the lower barriers lead to greater adoption than
would have come through direct competition. A me-too
THE MONEY BARRIER
Photoshop competitor, even if it was free, would never have
gained the adoption that Instagram did. Online services are increasingly trying Freemium offering a basic
level for free to the more amateur producers with limited needs.
These tools were only available for a fee earlier. Having them
THE TIME/EFFORT BARRIER available for free creates an entirely new market. Users from the
existing market also deflect towards a free alternative. Over time,
People are strapped for time. A value proposition based around some of them migrate to a paid tier. While lower price has never
time savings or lower effort is an attractive one. Bloggers needed been a sustainable competitive advantage, completely free has
to invest time and effort to write posts that would stand out. the potential to disrupt an existing market.
Twitter brings down that barrier and allows publishing with very
Let’s take an example closer home. Entrepreneurship has sellers which never existed previously by lowering he access
become mainstream like never before. There are several reasons barrier.
that contribute to this phenomenon but one of the most important The investment community (angel investors, VCs etc.) is not
is the drastic reduction in the resources required to get a necessarily an equal-access community and the right
company up and running. One of the many contributors to this connections and introductions can open many doors that would
change is the rise of Amazon Web Services which lowered the otherwise not have existed. Kickstarter seeks to democratize
resources and upfront investment required to get your service up access to investment by allowing anyone to set up a project,
and running. While a startup would have had to get a minimum state funding requirements and raise money online.
level of infrastructure upfront earlier, it can now dip into Amazon’s
vast resources on-demand.
Metrics
KEY QUESTIONS Successful businesses are often not distracted by a hundred different metrics but
1. How are concepts of business efficiency laser focused on one metric that is the best predictor of scale. How does a
and scaling changing in a world of business identify such a metric?
platforms?
Most businesses are on a relentless pursuit of scale. Most of business education is
2. What metrics should one plan for in a world
of platforms? built around creating and understanding patterns in business scale. There is,
however, a shift in the concept of scale in business today and not all companies
seem to embrace it appropriately.
Let’s think about Pipes. The key inputs for business, traditionally, have been land,
capital stock and labor. The business scales whenever one or more of these
parameters scale. You hire more people, you get more resources and better
machinery and the business scales. However, there is a cost associated with
scaling each of these 3 variables. As a result, the primary focus while scaling is
optimization. Optimization involves creating repeatable processes which can be
cost-effectively repeated over and over again to grow the business. The two key
aspects of scaling are:
A) Repeatability
First, It’s important that a business knows which forms of scale it 2. Time between interactions (Time between contributions, time
has on which sides. Second, most metrics fall under three between visits)
categories:
3. % Interacting (% active users, % of users who produce etc.)
1. Per-unit economics of repeatable process OR interaction
2. Time between repeatable process OR interaction
A business that has Pipe Scale on one side (e.g. supply) and
3. % of inputs successfully being leveraged for repeatable Platform Scale on the other side (demand) has to look at both
process OR interaction types of metrics. This is typically the case with an e-commerce
company which looks at improving time to source on the supply
side and time between purchases on the demand side. A social
Pipe Scale: The metrics that determine scale are typically network like Facebook needs users to interact with each other as
determinants of per-unit efficiency. These could be one or more of often as possible and hence focuses on %interacting, more
the following: specifically DAU/MAU.
1. Per-unit efficiency (Cost per input, per-unit production The governing principle is to understand the processes and
cost, Cost of moving a unit through a channel) interactions which drive scale and focus on the metric that
decides how those processes and interactions can be made
2. Turnaround efficiency (time to source)
repeatable.
KEY QUESTIONS Marketplaces are difficult businesses to run. Like all multi-sided platform
1. How do you measure success of an online businesses, they suffer from the classic chicken and egg problem: the technology
marketplace? has no value unless buyers and sellers are present and you can’t get the buyers on
There are three factors that determine success for a marketplace business:
The lifeline of a marketplace (and any platform business for that matter) is liquidity.
Liquidity is a state where there are a minimum number of producers and
consumers on the marketplace and there is a high expectation of transactions
taking place. This is similar to the critical mass of users that is needed on a social
network for users to find value in the network. Critical mass is a state where there
is enough volume of supply and demand, for transactions to start sparking.
The first and most important metric to watch out for is the percentage of listings
that lead to transactions within a certain time period. This serves as a proxy for the
efficiency of the marketplace. Merely increasing the number of buyer and seller
Disruption
LOREM IPSUM Technology startups are disruptive because they are driven by a desire to solve an
1. How do platforms disrupt traditional unsolved problem in a unique way and create new value. Most large and
industries? established companies, in contrast, are driven by a desire to defeat competition
3. How did Youtube disrupt TV viewing? Consider the problem of traveller accommodation. A regular hotel chain would go
around studying its competition. It would create a set of features that differentiate
it from competition. Finally, it would try to find ways of drawing customers away
from competition leveraging these features.
AirBnB did none of those things. In fact, AirBnB applied Platform Thinking to solve
the problem of traveller accommodation. It didn’t compete on features. Instead, it
created a platform that allowed anyone with a spare room, apartment or island to
start running a B&B with access to a global market of travelers.
PLATFORM COMPETITION
Creation of new user behaviors on the demand side: Travelers There are two aspects that differentiate these platforms from the
would rarely stay at strangers‘ apartments in a new city. AirBnB industries they seek to disrupt:
brought in a new behavior.
They create new sources of supply that had never existed before:
No one would have imagined an inventory of travel
CONCLUSION
KEY QUESTIONS “What got you here won’t get you there.” Career advice that works equally well in
1. What are the factors that lead to traction of the world of online platforms.
a new platform among early adopters?
The single factor that separates a successful platform from a failed one is the
2. What key factor leads to traction of a new development of network effects. Most platform businesses fail because they never
platform with the mainstream audience?
develop network effects. Social networks without users, content platforms without
3. How do disruptive technologies spread? content, marketplaces without buyers and/or sellers. Platforms are very rewarding
once network effects are built but equally unforgiving without.
Hence, reaching that minimum critical mass, after which users find increasing
value in the platform as it grows, is critical.
A platform business focuses entirely on building this critical mass, not only in its
initial days, but also going forward. The critical mass is an indication of the fact
that the platform has reasonable activity to deliver value to users. A marketplace
where new products are listed often and get bought often, a discussion board
where there is high daily activity and retention.
WHY TRUST RULES MARKETPLACES
APPEALING TO THE MAINSTREAM
A marketplace connecting buyers and sellers needs a reliable
Geoffrey Moore, in his seminal work ‘Crossing The Chasm’,
mechanism for managing trust. This is especially true for
explains how appealing to an early adopter crowd is different
marketplaces with high risk. AirBnB allows travelers to stay at the
from appealing to a mainstream audience. The early adopters
houses of complete strangers. Early adopters and the
tend to be more comfortable embracing risk while the mainstream
backpacking kind would take to such a platform if it offered
audience tends to be more pragmatic.
significant variety and price advantages. A more mainstream
Critical mass and activity/liquidity is by far the most important audience would want to have concerns regarding safety (Is the
factor for platform success. However, activity is a necessary but host reliable?) and service quality (Are the pictures representative
not a sufficient condition for mainstream adoption. of the actual apartment?) addressed first.
To gain mainstream adoption, a platform has to be ‘reliable’. It As a result, AirBnB has focused on developing a strong peer-
should move beyond being an intriguing innovation to becoming based review system, not just for hosts but also for travelers. It
KEY QUESTIONS Craigslist, that ugly set of electric-blue links that still stands around like an exhibit
1. Why is it so difficult to disrupt Craigslist? from the museum of early web design. Poor design and a general lack of features
haven’t come in the way of the site’s popularity. Not only is the site an eyesore, it’s
2. What is Craigslist’s weakness?
a regular destination for scammers and spammers, alike.
3. How can a startup go about competing
with a mature and dominant platform? How does an ugly, stuck-in-the-nineties product continue to enjoy success in an
industry where design and user experience are so important?
Craigslist is a platform that connects buyers and service seekers with sellers and
service providers. Platforms that connect two or more diverse groups have no
value for users without a critical mass of users using it. Beyond the critical mass,
the platform gains strength on account of network effects becoming more useful
as more users use it.
The network effect: The single most important factor for a platform is its ability
to build the network effect. Without a minimum number of buyers and sellers,
platforms simply aren’t valuable enough. With network effects, a winner-takes-all
Curation of participants: Platforms may need to have a A poor user experience can often spell failure. In contrast,
mechanism for determining reputation of participants. This is Craigslist is a platform that is focused on helping buyers find
especially true for transactions that may involve the risk of fraud. sellers. And as long as there are more buyers and sellers on
board than on competitors, users continue to find value, despite
Being largely free (no transaction cut, no subscription cost for
the ugly interface.
most categories) and on account of having started in the early
years of the web, Craigslist has built tremendous network effects. Essentially, Craigslist is unlikely to be disrupted purely on the
strength of a cleaner UI, better features and superior technology.
While many believe that technology makes or breaks an internet
business, Craigslist clearly demonstrates that platforms win
through the value that the community creates.
SO WHY IS CRAIGSLIST SO PARANOID ABOUT PROTECTING
ITS DATA?
“Three factors governing platform adoption: network effect,
curation of content and curation of participants.” TWEET Craigslist has played villain with the startup community in recent
times, mercilessly doling out cease-and-desist letters to any
startup attempting to build a better transaction experience
leveraging its data.
Craigslist, the king of liquidity, ironically, doesn’t have a reliable Trust and reliability are key factors in online platforms gaining
method of determining a user’s reputation. While this may be widespread mainstream adoption for high risk verticals.
Source: Platform Thinking 76
TOO MANY AIRBNBS SPOIL THE PARTY A BRIEF GUIDE TO THE END OF CRAIGSLIST
Craigslist understands the importance of online reputation in Craigslist’s paranoia and crackdown are understandable. Airbnb
transactions. Its paranoia stems from a constant threat from other has effectively created a playbook of sorts to build a
networks, which may provide better trust and curation marketplace with network effects. Here’s how that reads:
mechanisms. These competitors can leverage its community and
Use Craigslist’s network to build liquidity and
content to build network effects of their own, while adding the
security and trust layer to gain larger adoption. Build a reputation system contextual to your vertical
Airbnb famously allowed hosts to post their listings to Craigslist The combination of liquidity and vertical-specific reputation offers
and directed travelers back to Airbnb for greater value than a horizontal platform.
the transaction. Additionally, Airbnb also “Airbnb
lured sellers on Craigslist to list on Airbnb, piggybacked on Zaarly, Swappel, Krrb and many others have used these
offering a better transaction experience. Craigslist’s network strategies to get traction on their own network.
like YouTube did on
Emerging networks often piggyback on the MySpace and If an emerging platform can own a category with the effectiveness
activity on established networks to gain Paypal on Ebay.” that Airbnb has, it is potentially creating a dent in Craigslist’s user
TWEET base, and a very small dent in its network effect. Craigslist
traction. PayPal grew on top of eBay,
YouTube grew on top of Myspace and understands that ten startups repeating this feat in ten different
Flickr gained initial traction on the blogosphere. Airbnb effectively categories could potentially create a dent sizable enough to
piggybacked Craigslist’s network to build its own. weaken Craigslist’s network effects entirely.
More importantly, Airbnb has built a strong reputation system to As we’ve seen with Friendster, Myspace and Digg, when users
build a worldwide community of travelers and hosts. It allows start leaving a network, a feedback loop sets in that creates
both parties to rate each other and has focused on building a increasing loss of users. Getting enough users away from the
huge corpus of reviews. Additionally, it offers verification services platform may potentially dethrone the currently invincible
to verify hosts where a photographer visits the actual listing and Craigslist.
takes representative photographs.
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