As part of disappearing down the rabbit hole of platform business economics, I'm writing up the second of Chris Smith's excellent summations of the key dynamics of platform models. I'm doing this mostly for my own benefit but, as always, you are welcome to tag along and it's worth reading the original.
So far I've defined platform business models and how they are different, explored how to managing the demand curves on supply and demand side, and discussed cross-side and same-side network effects, and talked a bit about network dynamics.
When it comes to generating growth for platform businesses, there some key tactics:
The goal of building a platform business is to maximise network value, which might be understood as the summation of value to all users of a network (in other words the benefit value of all transactions minus the cost of all transactions). As Chris says, a good way to think about this network value is to ask what would all the costs be to each side of a platform if the platform wasn't there (for example Airbnb users paying extra for Hotel rooms that weren't located as conveniently, if Airbnb didn't exist).
"The value of a network equals the net value added to each user's transactions conducted through that network, summed for all users" Rod Beckstrom
In the early stages of building a platform, we focus on network value rather than revenue since revenue lags value and revenue collection can act as friction to initial adoption. Increasing network value in frictionless ways enables the effects of cross-side and same-side network effects to be amplified as much as possible.
Strategies should therefore be determined by what will have the highest impact on network value. Different strategies may be applied to grow different sides of the model, meaning that we can represent them on a timeline associated to platform value:
The constant question therefore is where you have leverage, and what the impact may be to different sides of the business. So growth tactics may include incentivising one set of users through features or value adds in order to attract them to the platform and generate demand – this demand can then be used to create leverage through managing access to that demand through a selection of levers. These levers might include:
- Price:- useful in having a direct impact on quantity of users on both sides of a platform. Chris notes that revenue acquisition should generally be focused on the side that is less price sensitive, and subsidies be applied to the other side
- Exclusivity:- locking some users in. This can create prevent competition and so create advantage and margin
- Marquee users:- the acquisition of some high value users can help push the other side into action since they have a disproportionate cross-side network effect
- Opening up the platform:- this can create scale, but quality needs to be monitored closely
Adding value to one side of a market can help to kickstart it, and attract an initial set of users that can then be leveraged against the other side. Creating strong demand side interest (through attractive new features) is often the place to start if you don't have that already. Features created at a very early (MVP) may well be done manually for example (like Uber's initial request handling, or Airbnb founders renting out their own places to get it started), in effect creating a supply-side subsidy. This can create a same-side network network effect (increasing the numbers of suppliers) which in turn can kickstart a cross-side network effect (increasing demand-side numbers). Whilst many platforms focus on kickstarting demand side as the first challenge, it can be done the other way (the example of Airbnb who already had a demand side with lots of people wanting places to stay, but used a growth hack on Craig's List to kickstart supply-side).
When it comes to applying pricing strategies to generate growth, it makes sense to subsidise the more price-sensitive side, and/or the one that creates the strongest cross-side network effects (often by adding value to the platform directly). Price change subsidies should be focused where they can increase demand more. AN example of this might be free tools for developers since they can create features that stimulate demand.
Platforms may be able to charge access fees for joining the platform and/or usage fees for using it. The former will impact the number of users on the platform, the latter the number of interactions/transactions between users (for example software creators will often charge access fees, payment systems usage fees). Charging access fees may help maintain quality of users where that is important, usage fees can be used where costs scale with usage. But pricing should typically be done in a way that doesn't harm cross-side network effects.
Decisions about whether to lower prices or to add value in order to increase quantity if users should really be determined by what has the greater impact on the objective, and the highest ROI on generating network value.
So as Chris notes, the key to building a successful platform is all about:
- Understanding the impact of network effects and demand-curves
- Understanding and optimising for network value creation
- Understanding how to use features, pricing, subsidies and marquee users to attract and extract leverage from each side of the market in sequence
Other posts in this series:
The shift from pipeline to platform models
Platform Economics (1) - managing the demand curves on supply and demand side, cross-side and same-side network effects
Platform Economics (2) – Network Dynamics
And there is more in my book of-course