The power of digital platforms to profitably disrupt industries continues to impress. Platform leaders like Amazon, Facebook, Airbnb, Uber and Google redefine user experience and expectations. Their ongoing success pushes incumbents to alternately revisit core business assumptions and seek regulatory relief.
What really makes them work? True platform innovators aren’t just market matchmakers using data-driven algorithms to drive better buyer-seller matches; they invest in new value creation. In platform markets, cultivating user capability becomes as strategically important as reducing transaction costs. Successful platforms empower their users.
Where traditional business models sell products and/or services, matchmaking models sell reduced transaction costs. The platform investment model, however, creates multi-sided surplus — more value to sell.
As a seller, who would you rather be? Choice One means going it alone to build product and find buyers. Choice Two enters markets with low friction to access many buyers and suppliers. Choice Three, however, offers Choice Two’s lower coefficients of friction but also facilitates co-investment which both makes your product better and gives you data-driven insights from innovative use and innovative users.
As a buyer, who would you rather be? Choice One requires going it alone to identify relevant offers and judge the sellers’ claims of quality. Choice Two presorts and helps prioritize your choices and cuts your logistics costs. Choice Three has all Choice Two’s benefits but educates you on new alternatives and protects you from deals gone bad.
In classic microeconomic terms, where firms previously focused on how best to manage transaction costs, platforms require top management to creatively cultivate transaction surplus. How should leaderships invest to make their users – not just their platforms – measurably better?
For example, Airbnb data scientist and economist Peter Coles recently described how the sharing economy company was testing a new pricing tool designed to make people more comfortable and confident they were getting fair value from their listed property. Coles, speaking at Boston University’s recent Platform Strategy Research Symposium, emphasized that helping participants become better entrepreneurs was essential to the platform’s overall success. Giving its hosts customized information, insight and advice about pricing their property, Coles observed, would lead to better outcomes for Airbnb’s ecosystems. Improving user capabilities would measurably improve Airbnb efficiencies.
Similarly, Facebook’s Blueprint courseware initiative launched in 2015 champions new user capability. Originally intended to support advertising agencies, Facebook created a training and education platform to teach advertisers how to use Facebook’s myriad advertising, marketing and experimentation tools more effectively. With over 50 e-learning modules in subjects from Instagram to A/B experimentation, Blueprint’s appeal quickly went beyond agencies to smaller businesses and entrepreneurs.
Though still early, “we’re extremely happy with adoption rates,” said one Facebook executive (in conversation with one of us). More importantly, Blueprint users say their training delivers results that are worth the time and effort. Needless to say, they can share success stories on Facebook.
Alibaba founder and CEO Jack Ma goes further, asserting his firm is in the business of solving social problems. Before the company’s $155 billion IPO in 2014 — the largest initial public offering in history — he observed, “we want to help small businesses grow by solving their problems.” The goal is not simply to match buyers and sellers but rather to “expand the boundaries of business.” Alibaba does this by providing sellers with tools and analytics from other transactions to inform sellers’ decisions. It also uses these transactions to make literal investments in small to medium enterprises on terms more favorable than those from a bank.
This same socially shared educational/advisory capability can be seen in SAP’s carefully built developer community. On launch of their ERP ecosystem, independent software vendors (ISVs) and SAP partners had no reason to help one another. SAP could help match them to buyers but bidding against one another for new contracts they often viewed each other as competitors.
After SAP opened a platform to develop, share, and track expertise everything changed. Volunteers answered each other’s questions both to demonstrate their own expertise and to foster a greater sense of community. Improving access to and expertise of partners was so effective that research out of Georgia Tech showed ISVs who joined the platform significantly increased sales and had a much greater likelihood of an IPO. This study highlighted the essential co-creation of value.
Recognizing the value of investing in partners can solve a social problem of the so-called and so-so named “sharing economy.” When private contractors lose the benefits of insurance and education that they had with full time jobs, their willingness to conduct transactions falls. People whose homes are trashed by unruly guests won’t list them; people whose riders run off without paying won’t drive them.
Yet these “e-lance economy” worst cases highlight how strategic social investment wins. Uber, which originally pushed insurance costs onto their drivers, has dramatically increased coverage options. The company also invests in drivers by helping them buy new cars. Airbnb had originally declined to indemnify hosts but now offers $1M in coverage. Upwork, which provides a freelance labor market offers its partners the chance to participate in free online courses. Investing in one’s partners is the difference between matching an adolescent to a job at McDonald’s versus training that can match a teenager to a job at McDonnell Douglas. The former facilitates a transaction; the latter is a value-added human capital investment.
That’s why smart platforms invest in capabilities and that makes “users creating value for other users” fast, simple and easy. That’s the essence of network effects.
In other words, when platforms think about investing in sustainable growth, investing in greater capacity and greater efficiency doesn’t go far enough: platform management should strategically invest in the capabilities, competence and creativity of its users.
The platform investment model suggests a framework of next steps for organizations that want to go beyond better matchmaking:
See and segment users as assets. Who are your “Pareto Users,” that is, the 20% of users who generate 80% of the revenues or post most of the complaint, compliments and suggestions? Which users could become 10%, 50% or 100% more valuable with better information, advice or apps? Which users can your platform make more valuable both to you and them over the next 12 to 18 months? In platform environments, user value should go beyond the volume of transactions to measure the value users create for each other.
Target users for online education and training. Borrow best practices from Facebook, SAP and Airbnb. What courseware, templates and training modules would measurably improve user abilities to leverage their desires and your platform? Is there a platform – or user – “Salman Khan” who can tutor your platform participants to get more value from you? This isn’t about sales or marketing; this is about quickly boosting the human capital and capabilities of the people who make your platform work. Could you create three 90-second sessions that could literally transform a typical user into a potential power user of your platform?
Identify risk the platform can absorb better than the individual. Risk-pooling is the idea behind mutual funds and mutual insurance. The platform can and should take on risks that individuals can ill-afford. Payment platforms, for example, are in a far better position to identify and mitigate fraud than individual users. The obvious result is that people protected from fraud are far more likely to use their credit cards resulting in a win for consumers, merchants, and the platform alike. More transactions occur on platforms where partners are protected.
Think APIs and SDKs. Application Programming Interfaces (APIs) and Software Development Kits (SDKs) are the secret sauce for digital platform innovation and enhancement. For example, early in its online presence Netflix opened public APIs from which users created links to New York Times movie reviews and ways to discover niche content. An API can give your best users the chance to better customize and personalize your platform to their needs. APIs and SDKs give users the permission and the power to create value for themselves.
Identify buyer needs for which the platform can cultivate new supply. Upwork hosts job boards of the top categories of listings that have gone unanswered. By investing in online training tools, the platform can increase the skill level and supply base of the freelancers able to perform these jobs. Any user search on a platform that fails to find a target represents an opportunity to invest in a supply partner.
A platform investment model is fundamentally different from the efficiency model that drives most platforms today. Sure, your strategy can be to attract as many buyers and sellers as there are people on the planet, but a sustainable model can only come from making all those users and partners more valuable. That’s platform leadership.
Marshall W. Van Alstyne ([email protected]) is a professor and chair of the information systems department at Boston University Questrom School of Business. He is also a co-author of Platform Revolution (W.W. Norton & Company, 2016) and the April 2016 HBR article “Pipelines, Platforms, and the New Rules of Strategy.”
Michael Schrage, a research fellow at MIT Sloan School’s Center for Digital Business, is the author of the books Serious Play (HBR Press), Who Do You Want Your Customers to Become? (HBR Press) and The Innovator’s Hypothesis (MIT Press).