Multisided platforms and Network Effects
A business model that’s become very popular in many industries is Multisided Platforms. In essence, a platform is a digital space where groups of people connect to share something that’s valuable for at least a portion of them.
One familiar example of a multisided platform is Uber, the ride-sharing company. Through Uber, car owners who happen to have some time to spare can connect with people who need a ride, all in real time.
The platform then, through geolocation and billing systems, makes the connection between the two possible and facilitates a commercial transaction.
A similar application of multisided platforms can be found in other businesses including Amazon, where sellers around the world connect with buyers; in social media, where people share stories with friends and family; and app stores where app developers connect with mobile users.
The power of multisided platforms lies in the “Network Effects” they create, where the value for their users increases with the number of users.
The classic example to explain network effects is the landline telephone. There was not much incentive for the first telephone user to have one since she didn’t have anyone to call, but as the user base grew the value for all users increased as they had more people they could speak to.
Network effects produce virtuous cycles that reinforce the value of the network for its users. In the case of Uber, for example, having more drivers attracts more users, while more users attract more drivers.
The same happens in an app store, where more app developers attract more users, and more users attract more developers.
In some instances, the platform collects data from members and transforms it into information that’s useful for all users. Google Maps for example uses data from individual mobile devices to assess traffic and provide accurate directions.
There are some cases of platforms being successfully used in industrial and business-to-business (B2B) applications as well. Cohealo, for example, is a platform where healthcare providers share specialized equipment with other facilities for a fee.
Similarly, intelligent thermostat Nest uses information from its user network to improve its performance for all its owners.
In most cases, a platform connects a group of people that owns something that’s valuable for another group and facilitates the exchange of that information, most times adopting the role of curator or matchmaker, so it’s pretty easy to see how this could be used across a wide number of industries.
Platforms are in most cases a business model on their own, with most of them charging a transaction fee of some sort to capture part of the value created by the transaction they enable.
In some cases, you may improve the value offered by your products and services and leap ahead of
For example, Chinese internet security company Qihoo 360 has created a platform around its antivirus product 360 Safeguard which collects data from its large user base to help improve malware detection for all users.
The more people use their product, the better it gets at detecting viruses for everyone.
Platforms can be great value amplifiers for some business models, especially during the emergence and growth phases of an industry when they can help captivate a large user base, something that could later become a competitive advantage for the products.
A downside of platforms is that they need a lot of care. They cannot just be created and left to their users. They need to be continually updated, improved and taken care of, since a platform that is not well managed could negatively affect a company’s brand and become a liability instead.
Platforms can be greatly improved in many cases through the implementation of machine learning algorithms to help understand, classify and curate the information for users.
Finally, let’s make a few clarifications about some concepts that are usually confused with platforms.
First, a platform is not a community. Online communities are spaces where users can interact with other users, normally in an open format such as forums.
A platform on the other hand is a space that facilitates a transaction of valuable information between users. In some cases, the platform will provide users with tools to amplify the value they create (e.g. filters on Instagram and Snapchat), or the platform itself will use the data to produce valuable information (as Google Maps does for example).
On a platform, users can usually switch roles as they wish. On eBay, for example, a buyer can become a seller whenever she wants and vice versa, and can even play both roles at the same time.
Communities are great tools to help companies engage with customers and users of particular products, but they are a passive means of interaction, whereas on a platform there is usually some data curation involved.
Second, gamification is also not a platform. Gamification is another term commonly mixed up in the whole platform conversation, but gamification and platforms are not the same. They are in fact entirely different business models.
In a gamification business model, users usually interact with an application to generate some scoring system that drives loyalty. Most loyalty programs which give customers miles and points are examples of gamification applications.
There are many ways to use gamification for business purposes. Verizon Wireless for example encourages community members to write reviews and help other users to earn points. Those with the most points gain recognition and authority within the community while helping build Verizon’s brand.
In another example, American footwear and apparel company Nike launched a gamification platform called NikeFuel Missions where users of their app and wristbands can compete against each other based on the amount of physical activity they log on the system.
The community features specialized advice from professional athletes like Calvin Johnson, Allyson Felix, Alex Morgan and Neymar Jr. who help users achieve new levels and gain points in the game.
Gamification works around the idea of making interaction with the company fun and can truly help companies build brand loyalty. Platforms, on the other hand, focus on the exchange of valuable information with or between users.
They both have particular uses and applications, but they should not be confused since they are very different things.
Wu, Sun. Strategy for Executives, this book can now be downloaded for free here.
Choudary, Sangeet Paul; Parker, Geoffrey G.; Van Alstyne, Marshall W. Platform Revolution: How Networked Markets Are Transforming the Economy and How to Make Them Work for You. W. W. Norton & Company. Kindle Edition.