Sangeet Paul Choudary, Platform Power

PLATFORM
POWER
Secrets of billion-dollar internet startups
Sangeet Paul Choudary

Based on the blog Platform Thinking (http://platformed.info)
© 2013 Sangeet Paul Choudary
All Rights Reserved. No part of this publication may be

reproduced, distributed, or transmitted in any form or by any
means, including photocopying, recording, or other electronic or
mechanical methods, without the prior written permission of the
publisher, except in the case of brief quotations embodied in
critical reviews and certain other noncommercial uses permitted
by copyright law.
For all queries, please email, sanguit@gmail.com

Introduction
Credits: Fran Simo Creative Commons

As internet startups, we often believe that we are in the business Airbnb enables hosts and travelers to interact and engage in
of building technology. The essays in this book set out to debunk commerce.
that view.
Instagram enables photo creators to show off and discuss their
Several monikers and catch-phrases have been used to creations with photo viewers.
characterize trends in recent times. Web2.0, Crowdsourcing,
These are all examples of platform business models connecting
Collaborative Consumption, Sharing Economy, App Economy,
producer and consumer roles and allowing them to interact with
Gamification are some of the terms that come to mind. Observed
each other.
closely, there are three common threads that underlie all of these
trends: The essays in this book aim at explaining the importance of these
models, why these models are emerging at this point in time and
1) The focus on the user as someone who does work
why they will be the dominant model for business in a networked
2) The notion of value created in an external ecosystem of users world.
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!
These factors underlie the importance of platform business

models in business today. And internet startups are leading the
Sangeet Paul Choudary
way.
Very briefly, platform business models enable creation and

exchange of value between users, with the firm (startup) acting as
an infrastructure enabling users to interact.
Wikipedia enables creators to create a knowledge base and

consumers to consume that information.
2
Section 1
Platform
Business
Models
Credits: Petr Jan Juračka Creative Commons

Chapter 1
The Building Blocks of Platforms
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.
Source: Platform Thinking 4

The use of platform thinking extends beyond the tech sector. “pull.” Where traditional ecosystems push, these new platforms
Retailers are shifting from distribution channels selling products, pull. Platforms also rely on the power of network effects — as
to engagement platforms co-creating value. Online retailers like they attract more users, they become more valuable to those
eBay, Etsy, and Amazon led the way, and now traditional retailers users. And there’s a growing academic literature that explores the
are following. unique quality of value creation on what are called “multi-sided
platforms.”
Nike is shifting from products to platforms. Building on the
success of its Digital Sport products, Nike recently launched In our view, the success of a platform strategy is determined by
its Nike+ Accelerator to help companies build on the Nike+ three factors:
platform. Nike’s announcement reflects platform thinking. “We are
Connection: how easily others can plug into the
looking for people who want to create
platform to share and transact
companies that build upon the success of “The rise of platforms is being driven by
[Nike+] to make the world more active.” three transformative technologies: cloud,
social, and mobile.” TWEET
Gravity: how well the platform attracts
The rise of platforms is being driven by three participants, both producers and consumers
transformative technologies: cloud, social, and mobile. The cloud

Flow: how well the platform fosters the exchange and co-
enables a global infrastructure for production, allowing anyone to
creation of value
create content and applications for a global audience. Social
networks connect people globally and maintain their identity
online. Mobile allows connection to this global infrastructure
Successful platforms achieve these goals with three building
anytime, anywhere. The result is a globally accessible network of
blocks:
entrepreneurs, workers, and consumers who are available to
create businesses, contribute content, and purchase goods and The Magnet creates pull that attracts participants to the platform
services. with a kind of social gravity. For transaction platforms, both
producers and consumers must be present to achieve critical
Readers will recognize a number of intellectual foundations to
mass. Apple needed to attract both developers and users.
platform thinking. These range fromGeoffrey Moore’s
Similarly, eBay needed both buyers and sellers. Platform builders
ecosystems to John Hagel and John Seely Brown’s focus on

must pay attention to the design of incentives, reputation In the future, we will see more and more companies shifting from
systems, and pricing models. They must also leverage social products to platforms. Even those in the extermination business
media to harness the network effect for rapid growth. may worry less about building better mousetraps, and more on
building mousecatching platforms. For example, imagine a smart
The Toolbox creates connection by making it easy for others to
mousetrap with sensors that wirelessly communicate to a cloud-
plug into the platform. This infrastructure enables interactions
based MouseCatcher service. Homeowners and exterminators
between participants. For example, Apple provides developers
could monitor the status of the trap on their smartphones,
with the OS and underlying code libraries; YouTube provides
receiving a text message when it
hosting infrastructure to creators; Wikipedia provides writers with
is out of bait or needs checking. “Platforms bring participants
the tools to collaborate on an article; and JC Penney provides in, create the conditions for
Smart traps already exist. But the
stores to its boutique partners. value creation and match
shift from products to platforms
participants to each other.”
The Matchmaker fosters the flow of value by making would focus on building the TWEET
connections between producers and consumers. Data is at the service (the Trapp Store?) that
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.
blocks. Amazon Web Services has focused on building the

Toolbox. Meanwhile, eBay and AirBnB have focused more on the
Magnet and Matchmaker role. Facebook has focused on the Note: This article was co-authored with Mark Bonchek.
Toolbox and Magnet, and is actively building its Matchmaker
ability.

Chapter 2
Overview of Business Models: Pipes vs. Platforms
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
that we use essentially comes to us via a pipe. All

of manufacturing runs on a pipe model. Television and Radio are pipes spewing
out content at us. Our education system is a pipe where teachers push out their
‘knowledge’ to children. Prior to the internet, much of the services industry ran on
the pipe model as well.

This model was brought over to the internet as well. Blogs run on BUSINESS MODEL FAILURE
a pipe model. An ecommerce store like Zappos works as a pipe
So why is the distinction important?
as well. Single-user SAAS runs on
pipe model where the software is “Internet businesses are Platforms are a fundamentally different business model. If you go
created by the business and fundamentally different
about building a platform the way you would build a pipe, you are
because they are non-
delivered on a pay-as-you-use probably setting yourself up for failure.
linear. Users replace
model to the consumer. consumers. Ecosystems
create value.” TWEET We’ve been building pipes for the last few centuries and we often
tend to bring over that execution model to building platforms. The
media industry is struggling to come to terms with the fact that
PLATFORMS
the model has shifted. Traditional retail, a pipe, is being disrupted
Had the internet not come up, we would never have seen the by the rise of marketplaces and in-store technology, which work
importance of platform business models. Unlike pipes, platforms on the platform model.
do not just create and push stuff out. They allow users to create
and consume value. At the technology layer, external developers
can extend platform functionality using APIs. At the business PIPE THINKING VS. PLATFORM THINKING
layer, users (producers) can create value on the platform for other
users (consumers) to consume. This is a massive shift from any So how do you avoid this as an entrepreneur?
form of business we have ever known in our industrial hangover.
Here’s a quick summary of the ways that these two models of
TV Channels work on a Pipe model but YouTube works on a building businesses are different from each other.
Platform model. Encyclopaedia Britannica worked on a Pipe
model but Wikipedia has flipped it and built value on a Platform
model. Our classrooms still work on a Pipe model but Udemy and USER ACQUISITION
Skillshare are turning on the Platform model for education.
User acquisition is fairly straightforward for pipes. You get users
in and convert them to transact. Much like driving footfalls into a

retail store and converting them, online stores also focus on
getting users in and converting them.
Pipe Thinking: Optimize conversion funnels to grow.
Many platforms launch and follow pipe-tactics like the above.
Getting users in, and trying to convert them to certain actions. Platform Thinking: Build network effects before you optimize
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
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
Monetization for a pipe, again, is straightforward. You calculate all P i p e T h i n k i n g : We c h a rg e

the costs of running a unit through a pipe all the way to the end consumers for value we create.
“Internet monetization: Find
consumer and you ensure that Price = Cost + Desired Margin.
a way to make money
This is an over-simplification of the intricate art of pricing, but it Platform Thinking: We’ve got to
without killing the network
captures the fact that the customer is typically the one effect.” TWEET figure who creates value and who
consuming value created by the business. we charge for that.
On a platform business, monetization isn’t quite as

straightforward. When producers and consumers transact (e.g.

BUT… PLATFORM THINKING APPLIES TO ALL INTERNET We are moving from linear to networked business models, from
BUSINESSES dumb pipes to intelligent platforms. All businesses will need to
move to this new model at some point, or risk being disrupted by
If the internet hadn’t happened, we would still be in a world platforms that do.
dominated by pipes. The internet, being a participatory network,
is a platform itself and allows any business, building on top of it,
to leverage these platform properties. “We are moving from linear to networked business
models, from dumb pipes to intelligent platforms. Build
Every business on the internet has some Platform properties. a platform today, or get disrupted.” TWEET
I did mention earlier that blogs, ecommerce stores and single-

user SAAS work on pipe models. However, by virtue of the fact
that they are internet-enabled, even they have elements that
make them platform-like. Blogs allow comments and
discussions. The main interaction involves the blogger pushing
content to the reader, but secondary interactions (like comments)
lend a blog some of the characteristics of platforms. Readers co-
create value.
Ecommerce sites have reviews created by users, again an

‘intelligent’ platform model.
THE END OF PIPES
In the future, every company will be a tech company. We already

see this change around us as companies move to restructure
their business models in a way that uses data to create value.

Chapter 3
Platform Thinking for business in a Networked World
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 ‘STUFF’ APPROACH
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

inefficiently because of a lack of information needed to make a creating more stuff. That sounds paradoxical but that is exactly
decision. We’ve been solving problems by creating more stuff what Twitter does to news. The media industry has a limited
largely because we didn’t optimize distribution and access to the number of journalists. Twitter enables anyone out there to
stuff that already existed. become a source of news without having to become a journalist.
YouTube increases the inventory of content without setting up
new media houses. eLance allows companies to get work done
THE ‘OPTIMIZATION’ APPROACH without having to hire people to do the job.
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

The ‘platform’ approach: How can we redefine ‘stuff’ and find new The ‘stuff’ approach (GM, Toyota): Create more cars. The greater
ways of solving the same problem? the number of people with this problem, the more cars you need
to create.
The ‘optimization’ approach (Avis, Cab Aggregators): There are

THE ACCOMMODATION PROBLEM
many taxi operators but consumers aren’t aware of all the
Problem: I’m traveling to city X and I need to end myself some choices. Let’s create a search engine and help them figure the
accommodation. best route to their destination and the modes of public transport
that will take them there.
The ‘stuff’ approach (Sheraton): Create more stuff. Build more
hotels, set up more BnBs. If there are fewer rooms than tourists, The ‘platform’ approach
(Lyft, ZipCar, ZipRide): Let’s “Airbnb, Zipcar and Apple
buy some land, put up a hotel and create more rooms.
proposed new solutions to existing
redefine the problem space.
problems by enabling an
The ‘optimization’ approach (Kayak): There are a lot of hotels out What if we drastically ecosystem of new producers and
there but travelers do not necessarily have all the information to expand the number of cars service providers.” TWEET
make the choice they want to. Let’s aggregate this inventory and available to choose from for
create a reliable search engine. Let’s build review sites to help commuting from point A to
make the right decision. point B?
The ‘platform’ approach (AirBnB): How can we redefine travelers’

accommodation? How about enabling anyone with a spare room
and mattress to run their own BnB? THE COMPUTING PROBLEM
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

consumers want, bucket them into groups and design new CHALLENGES
models for these groups.
The platform approach is new. Much of this problem
The ‘optimization’ approach (Comparison “New platforms need to solve solving has come up only in the last five years and
shopping): There are a lot of phones out there. chicken and egg problems, ensure few solutions have demonstrated the kind of success
quality and combat regulatory
Why don’t you enter your parameters and we that the ‘stuff’ approach and the ‘optimization’
challenges. It’s not pretty!” TWEET
will spew out the best phone models that approach have. Hence, one might be tempted to
satisfy your needs. dismiss this as a fad.
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.

Chapter 4
A Design Framework for Networked Businesses
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.
THE BUSINESS ENGINE AND REPEATABLE OPERATIONS
Every business goes through three stages:
Creating the engine: Early stage, figuring out the

“Running a business
set of repeatable operations it needs to do to
engine: Build the engine
create value. (design), oil it (optimize) and
step on the gas (scale).”
Oiling the engine: Rapid testing and iterating to
TWEET
refine and optimize the repeatable operations
Stepping on the gas: Scaling by repeating the

repeatable operations

THREE APPROACHES TO BUILDING A BUSINESS
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.
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.

good examples of bringing in these checks and balances and
scaling them along with the community.
THE THREE QUESTIONS FRAMEWORK
What are the repeated chunks of work in my business?
The first part involves identifying the activities that need to be

repeated to scale and expand the business.
Who is doing the work today?
Secondly, is the work being done manually or algorithmically? If

so, can we bring in greater efficiencies (speed) or effectiveness
(accuracy) by leveraging an ecosystem?
How can we get someone else to do that work?
Finally, users, like employees, need incentives. Fitting in the right

organic and inorganic incentives forms an important part of
relying on an external ecosystem to build value.
“Key to scale: If employees are doing something today, get

users and algorithms to do it in the future.” TWEET

Section 2
Network
Effects
Credits: Christian Bachellier on Flickr Creative Commons

Chapter 5
Demystifying Network Effects and Virality
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

SAME SAME BUT DIFFERENT
Both network effects and virality tend to magnify value and

growth respectively as more users use the product. This is
probably why the two concepts are often confused. However, as
elaborated above, the two actually mean very different things.
In fact there are many products that exhibit virality without

exhibiting network effects. A case in point being email and cross-
platform communication products. A key feature here is that they
are either interoperable across networks (Hotmail) or leverage an
underlying network for both the viral transmission as well as
delivery of the value proposition. In the case of SurveyMonkey,
EventBrite etc., that underlying network may be mail, a social
network or even a blog.
There are many others that exhibit network effects without

exhibiting virality. Products with indirect network effects such as
marketplaces may not grow virally. In such cases, network effects
are a result of aggregation of the two sides and while each side
can be brought on virally through some incentive, it’s very difficult
to leverage the indirect network effect to get users on one side to
come on through invitations or interactions from the other side.

Chapter 6
Building Products with Network Effects
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,
4. How can you compete with Facebook in

Facebook and LinkedIn have grown big with this connection-first model.
todays world?
However, a new breed of networks is gaining ground with the content-first model.
They provide users with tools to create a corpus of content, and then enable
conversations around that content. Behance, Pinterest, Instagram, Dribble,
Scoop.It have all gained traction by building a corpus of content before building a
social network.
The two contrasting approaches are summarized in the table below:

Social networks like Bebo, Facebook and Twitter used this
playbook to create their respective networks leveraging address-
book integrations and other hacks to rapidly build a large number
of network connections.
The importance of building connections, in this model, cannot be

emphasized enough. In fact, the growth teams at Facebook,
Twitter and LinkedIn specifically aim for ‘X connections for a user
within Y days of sign-up’ to activate the user.
Since a critical mass of connections is required before users

experience value, the key to building a successful network is
The rules of building a social product are changing. It’s important
minimizing the friction in creating connections. Contact-list
to understand this shift to build social products that can
integration helped social networks like Facebook and LinkedIn
effectively gain traction on the internet today.The connection-first
gain initial traction through the removal of sign-up friction.
model is no longer as effective as it used to be. As the social web
grows, and a larger number of social products compete for our In spite of growth hacks like contact-list integration, there is
attention, we are seeing a dramatic shift towards the content-first always a lead time in getting users on board and reaching critical
model. If you’re still getting users to send out Facebook invites, mass. This is the ‘gap’ where it becomes very difficult to
you’re adding to the noise, instead of standing out and getting demonstrate value in using the product.
noticed.
THE CONNECTIONS-FIRST SOCIAL PRODUCT

Frictionless sign-up + Virality = Network Effects? Or not!
Traditionally, the playbook for building network effects has been Startups often believe that removing friction in sign-up and
the following: Get users on board, connect them to each other creating some form of viral acquisition are the two key elements
and have them create content and conversations. to reaching critical mass. In fact, with the rise of Facebook
Connect and the social graph, a large number of social products
have sprung up on the promise of frictionless sign-up and viral
growth. However, users on the internet have limited time and THE CONTENT-FIRST SOCIAL PRODUCT
attention. As more startups leverage the social graph and flood
Today’s social startups don’t start off as networks. They start off
users with invitations to join their networks, users have started to
as standalone apps. These products enable users to create a
develop invite fatigue.
corpus of content first. They then connect the users with each
Clearly, frictionless sign-up and virality are not the one-stop other as a consequence of sharing that content.
solutions we were hoping they would be.
Instagram started out as a photo-taking tool and built itself out
into a social network subsequently. The initial focus was entirely
on the creation of content and the connections were formed over
The secret to network value
time leveraging other social networks. It is unlikely that Facebook
Startups often fail to appreciate the gap between technology and
would have considered Instagram a direct competitor in its early
value proposition. For products like Evernote, technology serves
days, largely owing to its model of deferring network creation.
the entire value proposition. However, for social products, the
value proposition is a combination of technology and the content
that users create on top of it. YouTube’s value lies in its hosting
How to create a network in stealth mode
and streaming capability, but more importantly in its vast
Instagram started off as a standalone tool. In doing so, the
repository of videos.
product provides ‘single-user’ utility to the user even when other
The secret to creating a social “How to create a social users aren’t around on the network. There are two aspects to
product that demonstrates startup that works: Enable building single-user utility:
content creation before
immediate value is to enable
connecting users. Think 1. The single-user utility should allow creation of content that will
content before creating the
Instagram.” TWEET
ultimately form the core of the network. The core of Instagram is
network.
pictures. Discussions are centered around pictures. Hence, the
Content created on the network is the new source of competitive single-user tool needs to allow creation of pictures. This is an
advantage. The videos on YouTube, the pictures on Instagram, extension of the OpenTable model, where a restaurant first
the answers on Quora are the primary source of value for users manages its real-time seating inventory on a single-user tool,
and the key driver of competitive advantage for these platforms. before that very inventory is exposed to consumers on a network,
to allow them to reserve tables. Curation-as-creation products 5. Open out the network once a critical mass of linkages have
like ScoopIt and Storify also use this model to curate content been built.
which will serve as the core for network interactions.
2. The product should deliver greater value when users share their
The rise of the content portfolio
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. Have a vision for creating the network but do not start

executing on network creation
The new success factors
2. Enable a single-user tool that creates content that is core to Frictionless sign-up and virality are important but they are no
social interactions longer the key to building social products. The following are key
to building content-first social products:
3. Share this content on external networks (social networks,
email, blogosphere) Removal of barriers to the creation of content: Startups like
Instagram, which succeeded in simplifying the creation
4. Capture interactions around the content to build network
process and in enabling users to spread the word, succeeded in
linkages at the backend
eventually building the connections between users.

Growing the creator base, not just the user base: Since value for The new growth hacks
the overall networks is scaled by scaling content creation, the In the connections-first model, the one hack that minimized
platform needs to focus on incentivizing and increasing the friction in building connections was the contact list integration. In
percentage of users who create content. the content-first model, the hack that minimizes friction in
creating content is the creation widget. Creation widgets have
Strong curation models: Content-first social products scale well
grown in popularity in recent times, spreading across the internet
only when there is a strong curation model in place to separate
in the form of browser add-ons and one-click buttons. Several
the signal from the noise. Without strong curation, greater content
curation-as-creation startups like Pinterest and Scoop.it have
can actually lead to a poorer user experience leading to reverse
used widgets to enable users to create content easily.
network effects.
The future
Incentives: The platform needs to encourage users to build out
This new model of building networks allows a social product to
the connections. This works best when the platform encourages
gain traction while value is being created by users. Once enough
an innate motivation (self-expression or self-promotion) in the
content is created, the users are connected and the network
user to spread the word about her content. In doing so, the users
builds out. Social products that win will focus on enabling users
build the necessary connections that set up the network.
to create content first and generate conversations around it. The
creation of the actual social network will be a final step, as a
consequence.
“Building social platforms?
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

Chapter 7
The new rules of the Network Effect
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

the flow of information between parties became tremendously However, the cost of providing access to the network has fallen
powerful as central hubs of data transfer. precipitously. The days of customers buying expensive hardware
to use a network are gone as is the correlating lock-in effect.
In fact, the first network effects platform was Bell Telephone,
which established a government-sanctioned monopoly nearly 100
years ago. Since then, successful network effects businesses
have sung from essentially the same hymnal. CONVERTS
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
once they were in, they were in for good,

thus erecting barriers to entry for would-be competitors.

TENDING THE FLOCK popularity lately. Trust is an important component of this new
breed of network effects business. As a result, reputation built on
Without the upfront investment in physical hardware and users’
the platform directly contributes to greater value for all users.
newfound ability to port personal information and contacts, how
Building reputation on a platform requires consistent delivery of
is a company to retain its users? Is the network effect’s ability to
highly rated services and may also involve qualifying for some
lock-in users dead? Hardly.
minimum criteria set forth by the platform. Hence, once a service
The power to leverage the network effect now resides in “stored provider builds reputation on a platform, it prevents her from
value.” Unlike network access costs, stored value is investment migrating to a competing platform.
that comes in small increments with repeated use, increasing the
Usage Data: Users store value in the form of data, either by
importance of the service the more a user engages with it.
actively collecting information, such as in the case of Dropbox or
Reddit, or passively as their usage improves the service by
offering more relevant information, such as is the case with
STORED VALUE Quora, which delivers a personalized news feed based on usage.
The more a user consumes information through the platform, the
Stored value comes in four forms, and companies leverage these
more intelligent the algorithm becomes in recommending
tiny investments to build lock-in to their service and retain users.
pertinent content to the user. In both cases, the data set built by
Creative content (e.g. Pinterest, Facebook, Instagram): Users or for the user delivers greater value with increased usage,
invest in creating a portfolio of creative content, which forms the something that won’t directly be available on a competing
basis of their interactions on the platform. The quality and platform.
quantity of the content results in more interactions with other
Influence (e.g. Twitter, YouTube channel subscriptions): Networks
users, which, in turn, provides greater value to the content
that utilize a one-sided follow model create an influence dynamic.
creator.
Unlike importing contacts or “friending” people, collecting
Reputation (e.g. TaskRabbit, AirBnB, StackOverflow): Although followers is largely outside the direct control of the user. With the
marketplaces for physical goods, such as eBay, have been exception of sketchy tactics banned by the Twitter terms of
around for some time, services marketplaces have grown in service, accruing more Twitter followers can only be done by

tweeting content others find interesting enough to share. As the
user’s follower count grows, so does the stored value in the
network and the incentive to stay actively engaged.
“Four types of stored value on social networks:

creative content, reputation, usage data and influence.”
TWEET
KEYS TO THE KINGDOM
Creating a network effect is not what it used to be. Today, stored

value created by the users reinforces the power of the network
effect to retain users and grow market share. This dynamic makes
creating user habits all the more important as investments of
stored value only occur through successive passes through the
user experience.
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

Section 3
Reverse
Network
Effects
Credits: NASA Goddard Photo and Video on Flickr Creative Commons

Chapter 8
The biggest threat facing today’s social networks
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
2. What are the key sources of value on social

from this dynamic.
networks? How do they break down with
scale? But as online networks grow to a size never seen before, many question their
sustainability and believe that they are becoming too large to be useful.
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.
NETWORK EFFECTS AND VALUE
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.

Connection: Networks allow users to discover and/or connect On most networks, value for users is created through more than
with other users. As more users join the network, there is greater one of these three sources. Facebook, for example, started with a
value for every individual user. Skype and WhatsApp become value proposition centered
more useful as a user’s connections increase. Match.com and a ro u n d c o n n e c t i o n , b u t t h e
LinkedIn become more useful as more users come on board. introduction of the news feed has “Three sources of value in
made content a central driver of online network products:
Content: Users discover and consume content created by other value. In recent times, the addition
Connection, Content and
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

Clout: The network may get inadvertently biased towards early have tried to solve this problem by curating the men that enter the
users and promote them over users who join later. system, in a manner similar to restricted access at a singles bar.
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

addition to being networks of connections, are also networks of many worry that less sophisticated users, entering the system,
content. may increase noise leading to a rapid depletion of value for
existing users. It remains to be seen whether its curation can
Most networks of content have low friction in content creation to
scale as the network opens up to a broader user base.
encourage activity from users and reach critical mass faster. To
ensure that the content is relevant and valuable, the network Personalization
needs strong content curation and personalization of the user
Content networks need a personalized consumption experience
experience.
for users, that serves them relevant content.
Reverse network effects set in if the content curation systems
An example is the news feed on Facebook or Quora or the
don’t scale well. As more producers create more content, the
recommendation system on YouTube.
relevance of the content served to consumers on the
network shouldn’t decrease. “Strength of curation and Inability to maintain relevance of the consumption
personalization algorithms
experience, with scale, may create reverse network
Curation determine a network’s
effects.
ability to scale relevance. ”
Content networks create a curation mechanism TWEET
The user experience on Facebook is centered
through a combination of moderation, algorithms
around the News Feed. However, Facebook’s
and community-driven tools (voting, rating, reporting
frictionless sharing and cluttered news feed may lead to lower
etc. ). Voting on YouTube, flagging a post on Facebook and rating
relevance for users as the network scales. Several factors
on Yelp are examples of curation tools.
contribute to this:
Curation mechanisms often break down as the volume of content
1) When a user adds friends indiscriminately, her news feed
increases. When curation algorithms and moderation processes
becomes cluttered with irrelevant posts.
do not scale, noise on the system increases. This leads to reverse
network effects and users abandoning the system. 2) Noise is further increased when marketers and app developers
get access to the news feed.
Quora has a very strong curation mechanism in place and
benefits from a tech-savvy early user base. As Quora scales,

3) When networks like Facebook and Twitter implement Users who join later find it more difficult to develop a following
monetization models like Promoted Posts/Tweets, the signal to and may stop using the network. These networks need a
noise ratio suffers further as promoted content is less relevant mechanism to ensure new users have equal access and exposure
than organic content. to the community to develop network clout. 500px, for example,
differentiates Top creations from Upcoming creations to expose
Networks of content are constantly faced
“Monetization that recent activity (often from undiscovered users) to the community.
with the risk of reverse network effects alienates users can
as they scale. The poor signal-to-noise potentially kill Reverse network effects often cause a large and thriving network
ratio in the news feed, not the size of the network effects.” to implode. As a network scales, it’s ability to maintain a high
TWEET
overall network, is Facebook’s weakest signal-to-noise ratio is the leading indicator of its usefulness.
link as the network scales. Networks can, in fact, scale very well and prevent reverse
network effects from setting in if they have:
1. Appropriate level of friction in network access and usage, that

REVERSE NETWORK EFFECTS: CLOUT prevents abuse
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.

Chapter 9
How online networks lose value with scale
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
2. Why is bog not always beautiful for online

lose value as they grow.
platforms?
Under what conditions do online platforms lose value as they scale?
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.

#1 – LESS SOPHISTICATED PARTICIPANTS ENTERING THE with The Naked Hairy Men Problem. As the network grew, un-
SYSTEM DILUTE VALUE policed, an increasing number of naked hairy men joined in
leading to an exodus of other users. As legitimate users fled, the
Every online platform is as valuable as the participants it relative noise on the platform increased further leading to a
connects. Quora, a popular Q&A site found rapid adoption in feedback loop that saw the site lose traction at nearly the
Silicon Valley as it connected highly successful early tech skyrocketing pace that it had gained it.
adopters, who were experts in their field. Quora’s strong curation
mechanism also ensures that the best answers get showcased Solution: There are two solutions: Either choose who gets access
invariably. to the platform (Curation of access) or scale the ability of the
system to curate content as the system grows larger (Curation of
The Quora community has created a
“Less sophisticated contributions). The former is easier to implement. Quibb, in fact,
deep repository of knowledge, thanks to
participants on an has built a very high signal community through manual curation.
these experts. However, as Quora scales, online community Dating sites like CupidCurated do this too, by curating the men
many worry that less sophisticated users, dilute value. Remedy:
who get access to the site. Platforms like Quora, which do not
entering the system, may increase noise Curate access.”
curate access need extremely sophisticated curation of
TWEET
leading to a rapid depletion of value for
contributions to scale well and not set the reverse feedback loop
existing users.
in motion.
This starts a reverse feedback loop because current experts start
abandoning the system owing to the poor quality, which leads to
further loss of quality, which in turn leads to other experts leaving. #2 – INCREASE IN ABUSE WITH SCALE
If a loop like that is set into motion, the quality of interactions and
Wikipedia demonstrates that any online platform is open to
of the content created can witness an exponential drop.
abuse. Incorrect Wikipedia articles demonstrate the vulnerability
We’ve seen this reverse feedback loop work out in the case of of a user-created platform as much as the voume of the correct
ChatRoulette, a network of video chatters that connects you with ones demonstrate the strength.
anyone across the world at random. Since ChatRoulette had
The problem of incorrect articles (noise) increases as networks
absolutely no checks and balances to screen users, it ended up
scale as policing these platforms becomes more complicated
with scale. In a world of community-created knowledge, who gets As a system scales, this over-personalization can lead to a
access to the community ultimately impacts the knowledge that constant firehose of information that is catered to what we
is created. already believe in, not what we need. This can prevent those
seeking a solution, from being served a solution that is radically
Solution: Few systems have succeeded
different (and effective) and may over-serve obvious solutions.
in scaling quality. Wikipedia is a rare “Reverse Network
example. Monitoring and user privileges Effects: Monitoring Solution: The solution is technological and requires constant
activity on networks
were scaled slowly at Wikipedia. This tweaking of the algorithms that match information to participants,
increasingly difficult
ensures that moderators have a track with scale.” TWEET to prevent the formation of an echo chamber.
record of desirable behavior. However,
few have replicated Wikipedia’s success
which shows how difficult it is to scale such systems. #4 – A CLOSED COMMUNITY CAN DEVELOP A HIVE MIND
Another problem that stems from

reinforcement is the Hive mind. If “Communities risk
#3 - ONLINE COMMUNITIES TEND TO BECOME ECHO
certain forms of behavior are becoming echo
CHAMBERS OVER TIME chambers or developing
encouraged on a platform during the
hive minds. Solution lies
When exposed to a lot of information, we are likely to read what early days and certain others are in technology but also in
we agree with. Online systems use filters to personalize the discouraged, it runs the risk of leading editorial. ” TWEET
information served to each participant. These filters are often to a Hive mind as the network scales
created based on the participant’s past behavior. Over time, this where certain behaviors get reinforced
personalization can lead to inadvertent reinforcement of what we and established as the desirable behaviors. Reddit is an online
already believe in. network, whose community is often criticized for having a Hive
mind.
YouTube, for example, serves us videos based on what we’ve
viewed in the past. Facebook’s news feed works on similar This can lead to an online community getting too inward and
parameters. insular (and, hence, of lower overall value) and failing to
incorporate the value that diverse participants bring.
Solution: Curation of online behavior is very important during the greater authority and curation power on power users. Hence,
early days of the community. Under-curation can lead to noise curation at the point of access may be required for some
and over-curation can lead to selection bias, leading to a hive systems.
mind. Curation needs to be appropriately balanced.
#5 – LOWER QUALITY THROUGH INADVERTENT

#6 – CHALLENGE OF CONFERRING AUTHORITY
ACCEPTANCE
Consider an online platform that enables sharing of knowledge
On the internet, value is often conferred by community. E.g. The
globally and helps those looking for an answer to connect with
best answer to a question on Quora is decided by the community
those who have the answer. The best contributions don’t always
through upvotes and downvotes. Value is dynamic and constantly
come from existing experts, neither do the existing experts
evolving, best exemplified by a Wikipedia article which is in
understand the context of needs in remote areas. Hence, micro-
constant flux.
experts are needed to deal with the long tail of problems.
For all its advantages, this dynamic and community-shaped
The creation of new niche experts,
creation of value is also open to inadvertent acceptance. If
requires a curation model that effectively “Building reputation
enough number of participants accept something as true, it
separates the best from the rest. Creation systems is key to
becomes the new truth, even if it isn’t. The answer that bubbles scaling online
of experts, traditionally, has been done on
to the top and the latest version of an article are all decided by communities and
the basis of achievements or affiliations
the community, and are a function of the quality of the platforms.” TWEET
with certain trusted bodies. Creating that
community.
trust on an online platform is extremely
Solution: This problem is avoided by curating the community important if one is to create new experts.
through policing who joins the network. Some dating sites curate
This curation of micro-experts is non-trivial. Not only are they
the men joining the network to mitigate the common problem of
more in number than any team of traditional experts, they need to
women being stalked. Also, platforms like Wikipedia confer
be curated by the community for the model to be scalable.

Quora, for example, creates new experts, largely relying on However, as a network scales, trust and authority systems
community voting. become more difficult to scale as well. It becomes much more
difficult to identify the corner cases.
As the network scales, it often finds it increasingly difficult to
identify new experts as community sentiment tends to be biased The systems that survive are the ones that scale. For every Reddit
towards early participants. Early users on Quora and Twitter tend and Quora out there, there are a thousand attempts that gained
to have orders of magnitude higher followers than those who traction but failed to scale because they failed at curation.
joined in late, not only because they had more time, but also
because:
#8 – THE LONG TAIL ABUSE
Follower count follows a rich-becomes- richer dynamic and those
with higher counts attract even more followers For all its efforts at scaling, Wikipedia successfully controls the
quality of only the top 20% articles that lead to 80% views. As
The community’s power to curate depends on two aspects:
any platform scales, curation methods tend to work very
1. Quality of community members effectively for the ‘Head’ but not for the long tail of user
contributions. This runs the risk of long tail abuse. While it can be
2. Strength of curation tools
argued that the majority doesn’t get affected by such abuse, the
minority that does get affected increases as the network scales
and as the curation problem itself gets exacerbated.
#7 – SCALING TRUST AND AUTHORITY MANAGEMENT
SYSTEMS MORE CHALLENGING WITH 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.

Section 4
Building User
Ecosystems
Credits: Petr Jan Juračka Creative Commons

Chapter 10
Users vs. Customers
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:
Most internet businesses can be viewed as a platform on which value is created

and consumed. E.g. YouTube.com is a platform on which video uploaders create
value and viewers consume value. With that in mind, let’s move on…
WHO’S THE USER?
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.
A user may perform one of two roles:

Producer: Someone who creates supply or responds to demand. consumers of interactions and status updates, thought leaders
If you think of YouTube, whenever a user adds a video, he’s acting are curated producers and recruiters are producers of job listings
in a Producer role, creating supply. A person answering a and consumers of relevant user profiles.
question on Quora is a producer, responding to demand.
This brings us to the third party in the debate…
Consumer: Someone who creates demand or consumes supply.
A video viewer is a consumer on Youtube. A question asker on
Quora (as well as others viewing the question and answers) is WHO’S THE CUSTOMER?
playing a consumer role.
As in the offline world, the customer is someone who pays. The
Note that these are roles, not user segments. If you think of eBay, customer may not be part of the central demand-supply equation.
the sellers are the producers and the buyers are the consumers The sole defining criterion for a customer is that the customer
so we have two fairly distinct segments. pays money to the business.
But on Twitter, every time you tweet, you “Don’t just call them
are in a producer role, and if you start users. Isolate The customer may be:
producer and
reading your tweet stream the next 1) The producer: e.g. Vimeo. Video up loaders can pay for
consumer roles and
second, you’ve moved to consumer build for each.” premium features.
mode. TWEET
2) The consumer: e.g. New York Times. Readers pay to access
Splitting the term ‘user’ into these two news
roles helps us understand the exact motivations and actions for
the user while using the product.Understanding the motivations 3) Someone else: e.g. Facebook. The advertiser is the customer
and actions helps us design tools that enable the users to
Again, multiple parties may be customers. On LinkedIn, we have
perform these actions instead of loading the product with
users (who play both consumer and producer roles) as customers
features.
as well as advertisers and recruiters.
Most products have more than one producer or consumer role.
To summarize:
E.g. On LinkedIn, professionals using LinkedIn are producers and

1. Every internet business has three distinct types of roles: Customer: Technically, both hosts and travelers are customers
Producer, Consumer and Customer since they forgo a cut of the transaction
2. There may be multiple roles of each type on every business
3. Producers create supply or respond to demand Yelp
4. Consumers create demand or consume supply Producer: Yelp (creates listings), Review Writers
5. Customers pay Consumer: Consumers in the city, Review Readers
Customer: Merchants that advertise
A few quick examples:
The New York Times
Zappos.com Producer: The New York Times
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.
Customer: The segment of consumers actually buying shoes.
AirBnB
Producer: Hosts, Review Writers
Consumer: Travelers, Review Readers

Chapter 11
Building User Contribution Systems
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
2. Create enabling technology that caters to those motivations
3. Have a clear strategy to maximize the number of creators on the platforms.
The following 6 questions can help a platform think through these issues and
enable it to successfully create a platform that finds traction.
ARE YOU PROVIDING TOOLS OR CHANNELS? OR BOTH?
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.

Tools: Platforms may provide creative and/or infrastructural HOW ARE YOU MAKING THE CREATIVE PROCESS EASIER
tools. Vimeo gives anyone the ability to host an HD video online THAN EXISTING OPTIONS?
and deliver a video quality superior to all
There is no dearth of choice on the internet. Competing platforms
competitors. Instagram enables users to create beautiful photos
are a click away. In such a scenario, platforms that allow easy
without being a PhotoShop expert.
creation and allow users with lower skills to create high quality
Channels: In some cases, creativity platforms may provide pipes creations often achieve higher traction. The number of people
to a specific desired audience. Dribbble allows users to upload who tweet is orders of magnitude higher than the number of
their creations and provides them access to the right professional people who blog.
community.
One of the contributing factors is the fact that Twitter provides
Tools+Channels: One way to build a lasting platform is to supply pipes in addition to tools. However, the more important factor is
both. That is what enabled Instagram, a late follower, to the lower skill and investment required to tweet, as compared to
disrupt Hipstamatic, a far superior product. writing a blog post. In a similar way, Instagram lowered the skills
Hipstamatic allowed users to apply filters require to create beautiful pictures, a factor that led to its
to pictures (initially) but Instagram “Provide producers widespread adoption.
with production tools
created a thriving community around
and market access as
such photos. Facebook Photos, in a incentive. Think
similar way, disrupted Flickr to become Instagram.” TWEET IS THERE A ROBUST CURATION MODEL TO SEPARATE THE
the largest storehouse of photos on the BEST FROM THE REST?
internet. Facebook provided access to an
audience and their news feed while Flickr only provided hosting. Curation is critical when you’re providing a democratic platform.
The platform should have a robust model to separate the
At the end of the day, if a tree falls in a forest and no one is bathroom singers from the Grammy winners. There are typically
around to hear it, does it make a sound? three broad models of curation and a scalable platform usually
has a combination of all three:

1. Algorithmic Curation: The internet is fundamentally about IS THERE A CLEAR, DEMOCRATIC, EQUAL-ACCESS PATH
automation. The key ingredient of a scalable model of curation is TO THE TOP?
algorithmic detection of good versus bad, based on certain rules.
Before launching a platform, you should understand the
There is, however, a potential for false positives with algorithmic
motivations that drive creators to contribute. A common theme
curation which might lead to good creations being rejected.
across all platforms is visibility, self-expression and/or
Algorithmic curation should, hence, be scaled carefully and
recognition. Since platforms have a model of curation to separate
should ‘learn’ and optimize with social and editorial inputs.
the signal from the noise and since the creations that make it to
2. Social Curation: You may call it the Digg model but it’s the the top of the heap get consumed much more than those that
model of choice on all platforms today. The community is don’t, creators should be given a clear equal-access path to the
provided with tools (voting, rating, flagging etc.) to provide an top of the heap.
input regarding the quality of the creation and the aggregation of
Just as every website publisher invests in SEO to score high on
these inputs is used to sort and rank creations and determine
Google’s ‘curation’, creators need an understanding of what it
their relevance.
takes to rank high on a platform. If the mechanism of ranking high
3. Editorial Curation: While tech entrepreneurs would want and gaining visibility is unclear, creators may not be interested in
everything to be automated, manual curation has a place on participating on the platform. “We feature the most voted
every platform, especially in the early days. Editorial curation creations on the front page” is a clear proposition as it specifies
helps to understand patterns that can how the ‘best’ are separated from the ‘rest’.
then be automated and scaled. In some
cases, editorial curation can even be “Three models for
used to kick start the platform when curation: Social, IS THERE AN INCENTIVE BEYOND SELF-EXPRESSION?
there aren’t enough creators on the Algorithmic and
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.

incentives can provide a competitive advantage for the platform example, did this through a series of
vs. competition. competitions for creators.
“Building an online
Let’s look at designers and photographers. Different platforms But once a critical mass of creators is on community? Have a
clear path to convert
have provided different incentives for these people: board, a second cycle needs to be
consumers to
started. Creators attract consumers and creators.” TWEET
Threadless: Provides community recognition and curation + The
it is much more efficient for the platform
ability to possibly monetize creations if voted to the top.
to convert these consumers into new
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.
DO YOU HAVE A PLAN TO CONVERT CONSUMERS TO

CREATORS?
User generated content has come a long way on the internet. At

one point, the 90-9-1 rule was often quoted to explain the low
levels of contribution in online communities but, of late, platforms
have greater percentages of contributors, especially owing to the
rise of the smartphones which allow a greater number of users to
create anytime and anywhere.
However, the success of a platform still hinges on its ability to

maximize the percentage of creators. Hence, in its initial days, a
platform needs to focus on attracting creators. YouTube, for
Chapter 12
Organic incentives for User-Producers
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
2. How do you design your product for

great way to ensure users keep spreading the word around without even explicitly
organic virality? having to talk about your product is by having your platform enable them to
market THEMSELVES.
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.
HELP USERS CREATE AND MARKET SOMETHING REALLY COOL
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

pictures using a (thus far) crappy camera WHEN USERS MARKET THEMSELVES, YOUR PRODUCT
and distribute them. In all these cases, “Best viral trick GETS FREE MARKETING
virality was baked into the value proposition ever: Enable users
to express and According to Ben Rattray, founder of Change.org, Change.Org’s
of the service. There was no need to
promote
artificial incentives to be layered on top of adoption took off, largely thank to a woman sitting in an internet
themselves.”
this to promote virality. cafe in Cape Town, South Africa who wanted the attention of the
TWEET
world on something she was passionate about. She started a
petition against “corrective rape” seeking government action. The
campaign amassed 170K signatures from users in 160 countries,
HELP USERS CREATE WHILE CURATING
widespread media coverage, and an offline protest in
A service may not allow a user to be creative in new ways but Johannesburg which eventually led to the National Task Force
may still enable her to project a certain persona. Twitter’s investigating the issue. Not only did it garner much needed
continued usage, by a lot of follower-intensive tweeters, is largely support against an unwholesome practice, a single campaign
driven by the tweeters’ desire to act as a multicaster for news that from a non-celebrity catapulted the platform to global adoption.
they would want to associate themselves with. Many curation-as-
creation tools like Paper.li and Scoop.it grow on a similar model.
To some extent, even Groupon’s virality was partly attributable to THE FLIP SIDE… A SOCIAL NETWORKING STORY
this model (apart from the incentives and deal tipping of course)
So here’s the problem with acting as a virtual showcase for users.
as some users like to be aware of the best deal and like to pass it
To allow users to create and market something, the creation
on to their friends.
process should be incredibly simple. The simpler the creation and
As sharing increases, creation in the form of curation and re- marketing, the better potential for user-driven virality. BUT on the
sharing is vastly shifting the balance and transforming consumers flip side, the easier it is for users to contribute, the more noise
into contributors on a UGC network. there is in the system. And noise, can eventually undo the
platform.

One of the reasons MySpace found rapid adoption was a DESIGNING FOR SELF-EXPRESSION
technical glitch that allowed users to insert HTML code into their
So how does one design for self expression? A few pointers to
profile page and change its look and feel. Users loved it because
keep in mind.
of the ability to express themselves. Teeny Boppers who knew
nothing about coding started exchanging HTML code snippets to 1. Enable creative actions, target one-click: What are the
make their profile look cool. MySpace, thrilled by the fact that modes of “showcase-able” self-expression on your platform.
users’ need for self-expression, was being met, decided not to fix Voting is self-expression but isn’t “showcase-able”. For every
the glitch. Over time, there was too much noise as every profile creative action, minimize the number of steps. Have at least
page looked different, ad-strewn and unaesthetic. Navigation was one action which is only one-click creation. Typically, sharing is
a nightmare. Moreover, since most users didn’t understand one-click. Promote such actions.
HTML, there were a lot of errors and broken pages across the
site.This eventually led to falling engagement on MySpace. 2. Does it alter the underlying look and feel and consistency
of the platform? You don’t want another MySpace. For that
Bebo noted what was going on and
matter, you don’t even want all the complications of Android
allowed users to customize using “Empower users
(developers working on different versions, handsets supporting
photoshop instead of HTML, which, within limits. Too
much flexibility different versions). Specify what can be modified and what
being a lot easier, led to fewer broken
leads to MySpace- can’t be touched.
pages. Customization of profile pages style debacle.”
gradually became a trend. While it TWEET 3. Provide easy multi-channel distribution: Provide easy
helped in self expression, it altered the distribution not just on your own platform but also on others.
essential experience of the underlying Make it one-click.
platform itself and made navigation quite difficult. Eventually,
unsurprisingly, the social network that emerged victorious was 4. Design one-click (swipe?) sharing for the mobile: Sharing
one that allowed few customizations to the basic look and feel accounts for a lot of creation on the mobile.
while providing new tools for self-expression.

5. Convert consumers to creators: Quora and StackOverflow
use a very simple product hack to convert consumers into
creators at the point of consumption.
If you want your users to spread the word, ask yourself “What’s in
it for them?” Monetary incentives are not scalable. But playing on
the innate human desire to show-off, that’s just where your
service may get really, really viral.
Self-expression is at the very core of why you and I spend so

much time creating stuff (tweets, status updates, photos, blog
posts etc.) on the internet. Why would your users be any
different?

Chapter 13
Removing barriers to usage
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.
A pain point can often be stated in the following terms:

“Forget features,
I am a <USER DESCRIPTION> think value
proposition.”
Trying to <DO XYZ> TWEET
But I’m unable to do so because of <A 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.

THE SKILL BARRIER low investment of time and effort. Since everyone has the 140
character limit and given how democratic the real time feed is,
Lack of skills is one of the biggest barriers to getting something
there is no humungous effort required to stand out anymore.
done. We hire the carpenter, plumber etc. to get stuff sorted
owing to the skill barrier. Products that help ‘unskilled’ users do Another common theme that disrupts the time/effort barrier is
something they couldn’t have done before break the skill barrier aggregation. Platforms that aggregate multiple providers often
and open up a new segment of users. provide a compelling value proposition as a one-stop entry point.
In the early days of the web, Yahoo provided value as the home
WYSIWYG website creators and editors enable creation of
page of the web. As the web grew and portal-based navigation
landing pages and websites without the need to know HTML.
grew clumsier, Google emerged as the one-stop solution to
WYSIWYG editors help non-coders launch landing pages with
accessing anything on the web. Meta search engines (e.g.
little effort and create a new market in the process.
Adioso) act as the one-stop entry point and allow a user to search
Instagram lowers the skill barrier required to create arty pictures across multiple providers, thus drastically reducing the time to get
that earlier required photoshop prowess. her job done.
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

Unbundling is another way the internet brings down the money Most media businesses (publishing, performing arts etc.) are
barrier. Music was traditionally sold as albums. Users would have industries with gatekeepers determining which producers get
to buy an entire album even though they liked only 1-2 songs in it. market access. Platforms like Amazon Kindle Publishing,
iTunes disrupted this market by allowing per-song billing. In doing YouTube, CDBaby disrupted these industries to varying degrees
so, it made the market a lot more efficient and consumers who by allowing producers direct access to a market of consumers
would ordinarily not have purchased an entire album to get a tho whom they could market themselves.
particular song also ended up buying the song.
This applies equally well to marketplaces. The long tail of sellers
on online marketplaces wouldn’t have existed in the real world as
they wouldn’t have had access to the niche market that would be
THE RESOURCE BARRIER interested in their product. eBay created a large segment of
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.
These examples repeatedly demonstrate the fact that lowering

barriers to get something done creates new markets for the
THE ACCESS BARRIER product. Competition on the internet is no longer about fighting
tooth and nail over price or features as was the case with
Platforms often disrupt gatekeepers by allowing producers direct
traditional businesses. In today’s age, competition is about
access to potential consumers.

offering a value proposition that is offered by no one else and
creating an entirely new market of consumers who had a latent
need but no readily available solution to solve that need.
Companies that do this effectively win.
“To achieve hyper-adoption and high usage, bring down friction in

usage. Lower barriers of skill, time, resources, money and access.”
TWEET

Section 5
Metrics
Credits: Luca Zappa Creative Commons

Chapter 14
A framework for metrics: Pipes vs. Platforms
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.
PIPE SCALE: THE TRADITIONAL DEFINITION OF SCALE
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

B) Cost-effectiveness they directly contribute to scale much like MBAs did in traditional
businesses.
A lot of business education is focused on
strategies for optimization of these Not every internet startup is all about Platform Scale. E.g. an
processes. An IT outsourcing shop, for “Two key aspects of commerce company like Zappos has Pipe Scale on the supply
scaling:
example, optimizes processes surrounding side and Platform Scale on the demand side. The same applies to
Repeatability and
the labor variable to create scale. A Cost-effectiveness.”
any online media company which still has reporters sitting in a
manufacturing business has to optimize TWEET room and churning out stories. On the other hand, marketplaces
processes involving all three variables (e.g. and platforms like ebay, Facebook and AirBnB have Platform
procurement, production, distribution). Scale on both sides.
Google was probably the first business that achieved Platform

Scale on both the demand AND the supply side. The users are on
PLATFORM SCALE: THE NEW DEFINITION OF SCALE
self-serve and so are the advertisers. This is why it is, even today,
Let’s look at Platforms now. This is where the internet comes in. one of the most successful internet businesses ever.
The internet, by definition, brings with itself unlimited scale.
On the contrary, Groupon has Platform Scale on the demand side
Moreover, since networked businesses tend to deal more with
but Pipe Scale on the supply side. It maintains an ever growing
bits than atoms, the inputs to business are no longer the 3
sales force to manage the merchant side of the business.
variables above. The new inputs to business are data and talent
(intellectual capital, both internal and external). Amazon is one of those rare internet companies that did a
fabulous job of mastering both Pipe Scale (on the supply side) as
Scale in a networked business is no longer dependent on
well as Platform Scale (on the demand side).
processes within the business, it’s driven by network processes.
By network processes, I mean interactions that users on the
network have with the product. The business scales by scaling
SO WHAT METRICS SHOULD YOUR BUSINESS USE?
these interactions. Hence, the new counterpart of process
optimization is actually interaction design and this is partly why Here’s the one line answer:
designers are so important in networked businesses, because
A business should focus on those 3. Utilization efficiency (Inventory turnover)
metrics which help it create “Focus on metrics which
help create repetitive
repetitive processes (Pipe Scale)
processes or repetitive
or repetitive interactions (Platform interactions.” TWEET Platform Scale: The metrics that determine scale are typically
Scale) that will ultimately build determinants of engagement and repeat usage. These could be
scale. one or more of the following:
1. Per interaction engagement (Length of visit etc.)
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.

Chapter 15
Metrics for Marketplaces
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
2. How do these measures change over the

board unless you have sellers and you can’t bring in sellers without having buyers.
course of the lifecycle of the marketplace? Hence, building a marketplace is a lot like building two separate companies
simultaneously, each dependent on the other.
There are three factors that determine success for a marketplace business:
LIQUIDITY OR CRITICAL MASS
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

sign-ups doesn’t serve a purpose unless this metric starts rising. listing profile visits within the first
The time period would depend on the category. AirBnB listings page of results is one such metric.
“Building marketplaces?
would find transactions sooner than listings on a buy-and- When listings are served instead, as a
Get critical mass, fine-
sell real estate marketplace. This could also depend on ticket feed, the click-through per session tune matching algorithms
sizes within the same category. Fiverr and oDesk are both can serve as a proxy as well. The best and create trust
services marketplaces but the turnover on Fiverr is most likely metric to track matching efficiency mechanisms.” TWEET
higher, owing to the much smaller ticket sizes. varies with the business model of the
marketplace as well as the category.
To get to liquidity, the marketplace also needs to solve the
chicken and egg problem and get both buyers and sellers on
board. Marketplaces leverage a variety of tactics for
TRUST: CURATION OF PARTICIPANTS
circumventing this problem including building single user
utility, stealing traction and piggybacking other platforms. Building trust is central to marketplaces where transactions carry
risk. AirBnB is an example of a player in a high-risk category, that
succeeded because of its ability to curate its participants. AirBnB
MATCHING: CURATION OF PRODUCTS/SERVICES allows hosts and travelers to review each other and has one of
the highest review rates among marketplaces. It also takes
Users visit a marketplace with a highly transactional intent and
additional measures to build trust, including having professional
want to find what they’re looking for at the earliest. In this aspect,
photographers certify a host’s listing.
transaction businesses are remarkably different from engagement
businesses. A user visiting AirBnB or Yelp has a specific intent in This was one of the factors that helped AirBnB challenge
mind. Hence, the quality of the search algorithm and the CraigsList because CraigsList never built a strong curation
intuitiveness of the navigation are critical to delivering value. In system for participants.
contrast, a user visiting Pinterest often wants to spend some time
Focus on the trust metric is very important to move from
and consume content on the platform. Hence, the infinite scroll!
appealing to an early adopter audience to appealing to a
The efficiency of discovery and matching is critical to a mainstream audience. While early adopters use new
marketplace’s success. Percentage of searches that lead to marketplaces because of the novelty, opening up to a larger
market requires the trust and reputation management systems to
be alive and kicking.
WHAT’S NOT AS IMPORTANT:
User interface and design are less important with transactional

businesses as compared to engagement businesses.
On a marketplace, the ability to search and transact/interact

should be as intuitive as possible. Beyond that, the look-and-feel
and design are purely hygiene factors. Unlike social networks,
marketplaces are transactional and users typically don’t have
long visit lengths engaging with the product. Hence, UI is not as
important a criterion as the other three mentioned above.
In summary, if you’re building a marketplace:
1. Focus on liquidity, not just user

growth
“Three metrics for
2. At critical mass and beyond, closely
marketplaces: Liquidity,
track matching efficiency Matching and Trust.”
TWEET
3. When moving from an early adopter
to a mainstream audience, ensure that
the trust systems are in place and
functioning well.

Section 6
Disruption
Credits: Pierre J. on Flickr Creative Commons

Chapter 16
Patterns in Platform Disruption: AirBnB and YouTube
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
2. How did Airbnb disrupt the travel industry?

and protect their market turf.
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
AirBnB serves as an example of how today’s tech startups compete with

traditional industry behemoths without appearing to do so, in the first place. When
a platform like AirBnB or YouTube comes in, the established companies tend to

dismiss it on the basis of inferior quality. Someone with a Architecting a strong curation system: To create an environment
mattress in a living room clearly isn’t competing with a motel with of trust between travelers and hosts, AirBnB invested in a strong
room service. curation mechanism. Other platforms may use curation to confer
authority or a quality rating.
This is precisely the reason these startups succeed in operating
without competition. They solve a problem that larger companies This isn’t specific to AirBnB.
“Three levers of platform
are trying to solve. However, their solution is often not considered P l a t f o r m s l i k e Yo u T u b e , competition: New sources of
credible by these larger companies. Wikipedia, KickStarter, oDesk all supply, new user behaviors on
exhibit these characteristics to demand side, strong curation
Startups are often constrained on finances and resources. Using system.” TWEET
varying extent. We discuss this in
a platform approach to disrupt an industry that has traditionally
further detail below.
been dominated by service or product quality allows a startup to
gain traction without attracting the attention of its traditional
competitors.
THE SUPPLY EXPLOSION
AirBnB isn’t the only startup using Platform Thinking. Wikipedia

THREE LEVERS OF COMPETITION created the world’s largest repository of knowledge without
relying on experts. YouTube gets orders of magnitude more
AirBnB’s operational success can be traced to a three-pronged
eyeballs than any traditional TV channel, largely for a long tail of
strategy, which forms the basis of competition on most platforms:
videos that would never find their way onto television. oDesk
Creation of new sources of supply: For the first time, anyone with allows companies to get work done in an open, global
a spare mattress or room could run their own BnB. marketplace.
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

accommodation composed of the houses of people living in the CLOSING THE LOOP – CREATION OF NEW USER BEHAVIOR
cities. The idea that a global audience could find amateur home
The first step to disruption involves a supply explosion as we
video (as is often the case on YouTube) appealing would have
noted above. The second step involves creation of new user
been scoffed at. Platform Thinking unlocks new sources of
behavior.
supply.
A suggestion to shack up at a stranger’s apartment in a new city
The new sources of supply tend to be inferior and less
would have been considered crazy a few years back. AirBnB
sophisticated compared to the
created an entirely new user behavior when it aggregated new
existing ones: As the case study
“Platforms unlock new inventory. YouTube redefined what we watch, as a result of the
of AirBnB suggests, the average
sources of supply. Airbnb’s supply explosion. Carpooling.com made car pooling with
listing, initially, doesn’t compare hosts compete with traditional
strangers acceptable.
with established hotels in service hotels. YouTube stars
quality and targets a price- compete with network TV
conscious traveller. The same channels.” TWEET
dynamic applies when comparing CURATION AS A NEW SOURCE OF VALUE

YouTube to traditional broadcast.
Changing user behavior is never easy. Getting users to behave in
Over time, the supply on these platforms evolves to compete new ways is difficult, especially when the associated costs and
directly with mainstream competitors: As the platform finds risks are high. Staying at a stranger’s apartments in a new town
greater adoption among consumers, it attracts mainstream can be risky (and has been in a few cases). Finding interesting
producers as well. As a result, the producer quality improves as videos amidst a plethora of content on YouTube can be quite
the platform gains consumer traction, something that we’ve seen daunting.
both with AirBnB and YouTube as well as with many other
Platforms solve this problem through curation, a process by
platforms.
which they separate the best from the rest. YouTube, Reddit and
Quora have a community voting system that bubbles up the best
content. Wikipedia has collaboration tools that allow super-users
to correct entries and resolve disputes while editing an article.

AirBnB has invested heavily in its curation mechanisms because This is a pattern of disruption that is repeated often across
of the high risks involved. In some platforms. Any service industry that requires significant
cases, photographers certify investment to create supply has the potential to be disrupted by a
hosts’ listings. Moreover, the “A strong curation and trust platform offering lower-level services as long as the platform has
platform has a robust review mechanism is the key source a strong curation model.
of value on a platform.”
mechanism that lets each party
TWEET Startups don’t win because of better technology or features. They
rate the other. In fact, a large
win because they use this principle to unlock entirely new
contributor to AirBnB’s success
markets and create new user behaviors to compete effectively.
has been the success of the review
mechanism itself.
A strong curation and trust mechanism is the key source of value

provided by the platform owner. It is also the most important
determiner in the use of many such platforms.
CONCLUSION
The most important aspect of platform competition is that

startups do not remain under the hood forever. They eventually do
get around to competing with larger companies. However, they
defer this competition to a point in time where they have the
scale, traction and momentum needed to compete successfully.
Over time, the quality of supply on the platform improves, as
we’ve noted with AirBnB. The platform’s ability to match supply
and demand, and curate the best supply, also improves, as in the
case of YouTube.

Chapter 17
How disruptive platforms gain mainstream adoption
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.

THE EARLY ADOPTER a mechanism for reliably solving a pain point and/or delivering
benefit.
To appeal to an early adopter audience, the platform needs to
differentiate itself from every other failed attempt by building this
activity. Subsequently, as more early adopters join, the activity
PLATFORM ‘RELIABILITY’
increases and a positive feedback effect is built.
How does one achieve ‘reliability’ on
Early adopters tend to be tinkerers. They want to be on the next “A platform gains
platforms?
big thing and play around with it. A platform gaining momentum mainstream adoption
with activity is a signal for early adopters to join in. when it demonstrates
A platform becomes consistently useful
robust and reliable
and reliable when it has a strong model curation.” TWEET
However, for a platform to gain broader adoption among a
for curation.
mainstream audience, activity alone may not be enough.
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

also, additionally, curates certain listings by sending certified alone. Building curation systems from the early days of the
photographers to take genuine pictures of the apartment. platform help make it more attractive for a mainstream audience
as the platform grows.
The importance of trust varies with the category (high-risk vs.
low-risk) as well as nature of transaction (remote vs. local, buy vs.
hire/rent).
CONCLUSION
To be effective, a platform needs to reach critical mass, develop

WHY SIGNAL RULES CONTENT PLATFORMS the network effect and foster ongoing activity. This is where the
Magnet and Toolbox roles of the platform come to the forefront.
Content platforms and social networks need to develop a high
signal-to-noise ratio. While early adopters may enjoy tinkering To be efficient, a platform needs to
with a new technology, a mainstream audience needs a reliable have a strong curation system. This is
“Reliability is key to
mechanism for consuming interesting content. Imagine YouTube enabled by the Matchmaker role of the
mainstream adoption of
with a poor search algorithm or without a voting mechanism to platform. platforms. Trust rules
separate the good from the bad. marketplaces. Quality
To reach a mainstream population, a rules content platforms.”
Some platforms like Twitter do not necessarily need curation platform needs to achieve both TWEET
because of the reverse chronological nature of the feed but most effectiveness and efficiency. A strong
platforms need a reliable way of separating good content from trust or curation mechanism builds
bad for a wider audience to find it useful. A high signal-to-noise reliability into the platform, something that’s frequently desired by
ratio ensures that users can use the platform efficiently to find mainstream audiences.
what they’re looking for and be served the most appropriate
content.
A reliable mechanism for curation helps platforms gain

widespread adoption. More often than not, the platform owner’s
focus needs to expand beyond catering to activity and liquidity

Chapter 18
Case Study: How to disrupt Craigslist
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?
THREE FACTORS GOVERNING PLATFORM ADOPTION
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 success of such platforms depends on the following three factors:
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

dynamic sets in and the platform continues to grow on the BUT DOESN’T THE UI SUCK?
strength of its network effect.
A platform connecting buyers to sellers, like Craigslist, tends to
Curation of content: The platform should have a mechanism for be extremely transactional in nature. Users use Craigslist to get a
separating signal from noise. Platforms that encourage user- very specific job done. Content-intensive platforms like YouTube
generated content often have an abundance of content and users or Pinterest, or social networks like Facebook are engagement-
need a mechanism, like search or personalized news feeds, to sift intensive and need a good user experience to engage users long
through the noise. enough.
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.

If Craigslist’s network effects are so strong, and a competitor with acceptable for certain categories (e.g. selling low-value goods), it
better features and design isn’t reason enough for users to can be an important decision criterion for categories with high
switch, why has it been so paranoid about other emerging risk (e.g. babysitters, dating, apartment sharing) or high ticket
platforms leveraging its data and content? Network effects, after investment (e.g. trading used high-end goods).
all, would prevent users from moving to a new platform en masse,
Trust has been a thorn in the flesh for Craigslist. People have lost
in spite of better features.
their lives while engaging in Craigslist transactions. While con
artists abound, asking buyers to part with their credit card
numbers, a more widespread problem lies in the fact that users
ACHILLES HEEL: WHEN TRUST TRUMPS LIQUIDITY
cannot build reputation on the platform over time. Hence, the
To answer this question, let’s revisit the three parameters platform does little to aid a buyer’s decision making.
mentioned above. Craigslist scores very high on liquidity and
network effects. It could definitely improve its signal to noise ratio
by curtailing spam but that is less of a product design problem SO WHY DOESN’T CRAIGSLIST SET UP A REPUTATION
and more a curation problem. The platform has been taking some SYSTEM?
measures towards that by curbing sexually explicit listings and
Craigslist is a horizontal platform, a one-stop source for listings
cutting spam in some categories by making them subscription-
across categories. Trust and reputation are very contextual. The
based.
parameters worth considering when sharing a lawn mower are
However, Craigslist’s real weakness lies in the third parameter: very different from the parameters considered when hiring a
Trust. Marketplaces are built on trust and thrive on trust. babysitter. Craigslist, arguably, may not have high activity per
Transactions require participants to trust each other. Parents category outside the top few verticals so a category-specific trust
looking for a babysitter need a mechanism to ascertain their system may work only for a few categories. A horizontal
credibility. Hosts need to know that travelers camping at their reputation system, on the other hand, while feasible, wouldn’t be
home are reliable, and vice versa. very useful because of the contextual nature of trust.
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.
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.

CONCLUSION
Craigslist is justifiably paranoid about competitors leveraging its

own liquidity to compete against it. Whether it can legally claim
rights over user-generated content is open to debate. But the fact
that Craigslist doesn’t own reputation systems of its own is a key
opportunity for competing marketplaces.
“To disrupt a player with strong network effects, build a better

curation model and a more secure interaction experience.” TWEET

Notes to
readers
Credits: Walter Corno Creative Commons

If you’d like to get more information on
this topic, please refer the blog Platform
Thinking, which is frequently updated
with the latest analysis on this topic.
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would like to share it with your friends,
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Sangeet Paul Choudary, Platform Power

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PLATFORM

Secrets of billion-dollar internet startups

Sangeet Paul Choudary

© 2013 Sangeet Paul Choudary

All Rights Reserved. No part of this publication may be

For all queries, please email, sanguit@gmail.com

Credits: Fran Simo Creative Commons

These factors underlie the importance of platform business

Very briefly, platform business models enable creation and

Wikipedia enables creators to create a knowledge base and

Credits: Petr Jan Juračka Creative Commons

The Building Blocks of Platforms

Source: Platform Thinking 4

transformative technologies: cloud, social, and mobile. The cloud

Source: Platform Thinking 5

blocks. Amazon Web Services has focused on building the

Source: Platform Thinking 6

Overview of Business Models: Pipes vs. Platforms

3. How are internet businesses different from

that we use essentially comes to us via a pipe. All

Source: Platform Thinking 7

Source: Platform Thinking 8

Platform economics isn’t quite as straightforward either. At least

Monetization for a pipe, again, is straightforward. You calculate all P i p e T h i n k i n g : We c h a rg e

On a platform business, monetization isn’t quite as

Source: Platform Thinking 10

I did mention earlier that blogs, ecommerce stores and single-

Ecommerce sites have reviews created by users, again an

THE END OF PIPES

In the future, every company will be a tech company. We already

Source: Platform Thinking 11

Platform Thinking for business in a Networked World

THE ‘STUFF’ APPROACH

Source: Platform Thinking 12

Source: Platform Thinking 13

The ‘optimization’ approach (Avis, Cab Aggregators): There are

The ‘platform’ approach (AirBnB): How can we redefine travelers’

Source: Platform Thinking 14

Source: Platform Thinking 15

A Design Framework for Networked Businesses

THE BUSINESS ENGINE AND REPEATABLE OPERATIONS

Every business goes through three stages:

Creating the engine: Early stage, figuring out the

Stepping on the gas: Scaling by repeating the

Source: Platform Thinking 16

The ‘stuff’ approach: Get employees to do the work

Source: Platform Thinking 18

THE THREE QUESTIONS FRAMEWORK

What are the repeated chunks of work in my business?

The first part involves identifying the activities that need to be

Who is doing the work today?

Secondly, is the work being done manually or algorithmically? If

How can we get someone else to do that work?

Finally, users, like employees, need incentives. Fitting in the right

“Key to scale: If employees are doing something today, get

Source: Platform Thinking 19

Credits: Christian Bachellier on Flickr Creative Commons

Demystifying Network Effects and Virality

“Network effects and virality are very different phenomena.

Source: Platform Thinking 21

Both network effects and virality tend to magnify value and

In fact there are many products that exhibit virality without

There are many others that exhibit network effects without

Source: Platform Thinking 22