Platform leadership strategies

The causality dilemma of ‘which came first, the chicken or the egg’ is highly relevant to platform leadership strategies. Consider eBay’s merchants as ‘chickens’ and eBay buyers as ‘eggs’. Platform leaders employ a range of tactics to establish their platform, reach platform liquidity and ultimately ‘tip’ their platform into being the dominant player.

Covered in this article

  • Difference between two sided and multi-sided platforms
  • How to develop a new platform when a previous platform did not exist?
  • How to build market momentum around your platform and ultimately win the war?

Taking a two sided platform, one must cater for two types of entities. On the business side, there are users that want to use your platform to solve a business need, and they are often willing to pay to use your platform in return. An example of this would include eBay merchants [sellers].

On the other side, there are entities that want to use your platform because it solves a technical need. Merchants on eBay are willing to pay eBay a fee because of the value proposition that they offer through increased market reach, simple payment processes, inventory management and functionality of their platform.

Strategies relating to platform leadership require one to cater for each side of the platform. For some platforms (eg. eBay) both entities are required to commit simultaneously in order for the platform to operate correctly. Platform liquidity can be achieved through the following two frameworks:

  • Coring: How to develop a new platform when a previous platform did not exist?
  • Tipping: How to build market momentum around your platform and ultimately win the war?

Coring

The issue of coring can be broken down into two parts. Firstly, the platform leader or wannabe must develop a set of technological solutions that solve an essential problem for the market. For instance, eBay developed an auction system that enabled buyers and sellers to exchange goods. This was first a technical solution that others had not previously developed.

Secondly, the platform leader or wannabe must solve a business need for all stakeholders involved – hence incentivising their commitment to the platform. Both of these dynamics should help ensure that the equilibrium decision for all stakeholders is to join the platform. That is to say, that joining the platform is more economical and rewarding than not joining the platform.

Cusumano et al (2008) outlined a range of business and technological actions that a platform leader could take during the process of coring:

Technological Actions

  1. Develop an essential technical solution that is key to the market
  2. Build an extensible platform that enables 3rd party developers to build upon it
  3. Limit the amount if intellectual property you expose
  4. Ensure 3rd party developers are bound to your platform

Business Actions

  1. Solve an important business problem for the market
  2. Incentivise 3rd party developers to build upon your platform
  3. Protect your primary revenue stream whilst enabling 3rd party developers to monazite their efforts
  4. Create high switching costs to competing platforms

A good example of a platform leader that successfully cored their platform is Google’s advertising platform – AdWords & AdSense. This is a multi-sided platform (MSP) that has been exceptionally successful for the company – generating over 20 billion dollars in 2009 alone.

As we look at each side of Google’s advertising platform, we will see how they’ve successfully cored their product offering. That is to say they solved both a technological and business problem for all stakeholders involved.

On the advertising side, Google solved the technical problem that many advertisers faced – how to reach a specified target group over the internet. The business solution that they solved was that they managed to do it in an economical and cost effective manner when compared to traditional advertising methods.

On the advertising network side (AdSense), the technological problem that Google solved was how to place highly relevant advertisements on a particular web page. The business solution that they solved with this technical solution was that website owners could then better monetise their website in comparison to tools existing at the time.

On the user side, Google solved the technical problem of searching a huge proportion of the internet in fast manner that returned results that were more relevant than the competitor. The business problem that the user experienced a reduction in search costs visa vi time spent searching.

Tipping

“Tipping is the set of activities or strategic moves that companies can use to shape market dynamics and win a platform war” (Gawer and Cusumano 2008). As such, ‘tipping’ is closely related to incentive models or positive feedback loops.

On the technology side, the platform leader must ensure that the incentive to join the platform becomes greater as more users and complementers join the platform. Such a dynamic is generally associated with platforms that have strong network affects.

On the business side, the platform leader must ensure that the business incentives for all stakeholders continue to increase as the user base and complement community grow.

Cusumano et al (2008) outlined a range of business and technological actions that a platform leader could take during the process of tipping:

Technological Actions

  1. Develop unique value propositions that are difficult to replicate
  2. Move into adjacent markets by bundling features into your product offering

Business Actions:

  1. Create strong incentives for complementers to develop on your platform
  2. Consider a pricing mechanisms to attract a larger user base
  3. If falling behind: Consider rallying competitors to form a coalition

Continuing on from the previous example of coring, Google’s advertising business also illustrates a good example of tipping. On the user side, Google tracks every search made and every link clicked. This information is fed back into the system which is then used to improve the search algorithms. So the more users that use Google Search the better it becomes (technological solution) and the less time users will spend searching (business solution).

On the advertiser’s side, the tipping dynamic is inter-linked with the other two stake holders. As the number of users increase, the addressable market for advertising increases. This in turn drives more advertisers online until the cost-per-click (CPC) value stabilises as per supply and demand. However, this increased pool of advertisers has resulted in more competition for popular keywords positioned at the short end of the tail. This dynamic encourages advertisers to bid on more obscure keywords positioned at the long end or the tail. As a result, advertisers are able to more granularly target an increasingly large addressable market for a fee which derives an acceptable level of ROI.

On the content network side, we can see incentive feedback loops that are connected to the other 2 stakeholders of the MSP. As discussed, the increased number of users searching on Google ultimately drives a more granular long tail of keywords being bidded on by an increasingly large pool of advertisers. It is this dynamic that drives more website owners to include Google adverts on their site – as a more granular long tail of keywords benefits contextual advertisements as the advert placement will be ever more relevant to the content its being displayed alongside.

In short, Google advertising MSP is a good example of an interdependent MSP that has strong network effects which result in compelling incentives for stakeholders on each side of the platform to join or to spend even more time and money using the platform.

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