Platforms are hot nowadays. The success stories of companies like Facebook, eBay, and Booking.com are inspiring entrepreneurs and business leaders around the world to join the gold rush. With the democratization of underlying technology, the road to fame and financial returns far exceeding 25% OP seems wide open. At least, so it seems…
Unfortunately, today’s reality is quite different. In the past few years, I have witnessed the (non-existent) rise and (quick) fall of many platforms in the automotive, wearables, and retail spaces. Sometimes the starting point—i.e., the value proposition—was wrong, but more often, these companies missed out on one important thing: understanding the essence of the platform economy.
Many companies—irrespective of their size and track record—are too focused on their business concept and tend to forget that, at its core, a platform is about bringing people and/or businesses together. It is about matching supply and demand—two elements that typically do not come together without some help, even if the value proposition is very appealing to the target audience.
To make this more explicit—starting a new food market without cool stalls and bars will not get you much traffic. Similarly, doing that without an audience will not attract many suppliers. Ensuring you have sufficient food lovers and stalls from day one, and making every effort to make both feel at home, is key if you want to build a loyal, returning community.
Platform Economics in a Nutshell
Knowing that a platform is about matching supply and demand, one might say that it will always be successful as long as these elements are in equilibrium. And in theory, that is correct. However, reality shows that traffic on a platform typically does not grow along the equilibrium line. Instead, the growth of such a business is characterized by three discrete phases, as shown in Figure 1.
The first phase, which I like to call “Fight for Existence,” is characterized by a strong need to attract more volume to the platform. Early adopters join with certain expectations regarding the number of users, often exceeding the actual user count. Therefore, significant marketing efforts are required to build an installed base, reaching the point where supply and demand are in equilibrium for the first time—the so-called point of critical mass. Reaching this point quickly is crucial, as failing to do so will inevitably lead to failure. Unfortunately, this is often forgotten when companies join the gold rush.
Referring to the food market example, this first phase is equivalent to the period when the market is awkwardly empty. If the market fails to ramp up and attract more customers and vendors, people will stop coming—there will be no one to meet and not much to eat—and the stalls and bars will leave until nothing is left. However, if the food market manages to do a successful grand opening and continually attract more people, it will quickly become a cozy place where people from all over town come to meet new friends and taste new foods.
Once the point of critical mass is reached, a platform transitions into the second phase of its growth journey, which I call “Surf the Wave.” In this phase, the company’s focus should shift from aggressive marketing to active community and content management. By facilitating and stimulating interactions between various players, the platform will be able to further increase its perceived value and fully lock in its users. At this point, the platform can maximize its returns through lead generation, sponsored advertising, etc.
Again, using the food market example, this phase corresponds to the stage at which the market is relatively crowded with many returning customers and popular fixed food stalls and bars. By inviting a music band or hosting a cooking event occasionally, the market can reinforce its position as the place to be for meeting new friends and tasting new foods, potentially increasing rent fees or imposing a more favorable revenue-sharing scheme.
However, at some point, the platform will reach, and potentially exceed, the point of maximum mass, transitioning into the phase I call “Reduce the Tension.” At this stage, the company is pushing the size of its installed base too much, diluting its core values. Additionally, the acquisition and retention cost for each new user is likely to rise significantly, negatively impacting the platform’s overall profitability. Therefore, the company should take a step back and rationalize its offering to focus on what really matters.
Returning to the food market example, this phase equates to when almost the entire town is visiting to meet new friends and taste delicious food. However, in its efforts to attract every last citizen, the market has spent so much on marketing and events that it neglected to maintain and further boost the cozy vibe that made it the place to be.
A Few Things to Do Before Joining the Gold Rush
So, what does it take for a company to successfully join the gold rush? Here are the five things I would advise them to do, at a minimum:
- Define the value proposition and target audience of the platform. Ideally, the former is co-created with these target customers, solving one or multiple unmet or latent needs.
- Understand the shape of the supply and demand (or growth) curve and the point at which critical mass will be reached. Classical quantitative market research methods are typically sufficient to gain this understanding.
- Set a marketing budget aligned with the number of users the platform needs to acquire quickly (i.e., the critical mass), while also considering the competitive landscape in which it will operate. The more hostile the environment, the more resources will be needed.
- Implement the right performance dashboards to monitor whether the platform is finding success or about to hit rock bottom. Good KPIs to track include the total number of users, the number of active users, the average acquisition cost per user, the platform run cost per user, etc.
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Hire a team of excellent content and community managers early on to delight the user base and ensure they remain engaged. Depending on the platform’s approach, content may also be created by users themselves, requiring only good moderators.
By following these pieces of advice, one should be well-prepared to pick up their shovel and start digging for gold.