How to Avoid Platform Traps
Companies as diverse as Apple, Facebook, and Uber all have transformed industries through platform business models. But the increasing popularity of platform strategies masks a difficult truth: Such strategies are hard to execute well — and are prone to several common pitfalls.
Groupon Inc. founder Andrew Mason was fired from his job as Groupon CEO in February 2013, after the company had pursued a money-losing growth strategy.
Image courtesy of Flickr user The DEMO Conference.
We live in the age of platforms. Facebook, Google, Amazon, and Apple — many of today’s most successful technology businesses have at their core a platform-based business model. Platforms are multisided networks that bring together two or more distinct types of users and facilitate transactions among them. eBay, for instance, links buyers and sellers; Playstation links game developers with gamers; Apple’s App Store transfers applications from software developers to iPhone and iPad users. Increasingly, entrepreneurial startups are embracing a platform approach; look no further than fast-growing young companies such as Uber and Airbnb.
Today, many entrepreneurs and established businesses are trying to copy the success of existing platform businesses. Executives often assume that the key is to grow the sheer number of users and developers as quickly as possible, believing that “get big fast” is the most reliable way to win a competitive advantage.
The reality is more complex. The profit potential of a platform that dominates a market is enormous, but a lot can go wrong along the way — as examples from a number of industries illustrate.
Platform Trap #1: Growth With No Strategic Focus
Adding content to a platform as quickly as possible has been long acknowledged as a powerful weapon in the battle for platform dominance. A large supply of increasingly varied content increases the value of the platform to consumers and encourages more users to join it. The aim is to create a virtuous circle: The more the audience grows, the greater developers’ incentive to contribute to the platform, and the greater its attraction to consumers. Another strategy is to offer limited but exceptional content and entice customers with “killer apps” that are only available on the platform.
Sometimes, however, companies try to combine these approaches: Offer a lot of content, but make sure some of it is exceptional and exclusive to the platform. This third way sounds good in theory, but our research shows that combining these strategies usually creates problems. (See “Related Research.”) The case of Groupon Inc., the online coupon company, exemplifies the risks of pursuing unfocused growth.