Platform-spotting: How to identify platform in your product?

Many of the successful platform companies started with linear products-based business and moved towards platform-business ones later. Most of the Big Techs (except Facebook) began their journey with digital or physical products. Other successful platforms like Tencent started with a PC-based messaging product, OICQ (now QQ), in 1998 and moved to platforms with Weixin (now WeChat) in 2011;   OpenTable, founded in 1998, started with GuestCenter – SaaS for restaurant management. Until they reached a critical mass, they didn’t adopt the patron side of the two-sided platform; Zomato, now an OpenTable rival, started with a restaurant information portal in India; Square started with Square Card Reader and later created Square App Marketplace; Intuit also took a similar approach as Square with Quickbooks.

Several other tech companies who successfully embraced a platform business benefitted from the advancement of the internet and connected technologies, allowing them to have a near-zero marginal cost of distribution. The new asset-light companies like Airbnb, Uber, Lyft took a platform first approach. On the other side, the incumbents, like Apple and Amazon, have taken a hybrid approach, i.e. a combination of linear and platform business model, to capitalize on the strength of each.

Not every company, however, makes a successful leap. In 2011, Johnson Controls started Panoptix – an OEM agnostic energy efficiency platform. By 2013 it started inviting 3rd party developers on the platform, and in 2015, it was closed due to lack of traction. GE also experienced similar setbacks with Predix, a platform for the industrial internet of things (IIOT). Before acquiring PayPal, eBay tried to establish its payment system – Billpoint but failed to attain a critical mass. As part of the research of their book- The Business of Platforms, Annabelle Gawer, David Yoffie, and Michael Cusumano have studied around 250 of Forbes Global 2000 public companies. The authors identified 209 companies that had failed between 1995 and 2015 and compared them to 43 successful ones. They identified four common patterns that lead to failures – Mispricing, mistrust, hubris, and mistiming.

SaaS is not Platform

Having worked in Product Management & leadership roles for more than a decade, I see a common issue with product-oriented companies: they very soon become feature factories. Product teams spend a lot of time understanding their customers, adding features to the backlog, prioritizing these features with the founders, executives and engineering team to have a set of glittering features for a new release to add to the product. When it comes to scalability, many products lean towards the SaaS model to achieve scale economies potential and then claim to have a ‘platform‘. By no definition, such a SaaS company can be called a ‘platform‘ company: It is still a linear business. There are some common misconceptions and critical differences, but this is probably becoming a topic for another article.

At no point, I intend to imply that products are simpler to build. On the contrary, a product that offers a good value proposition for its customers has a fair shot in the market. Still, a product limits the market potential as it has low network effects potential. Besides, as I already mentioned, most successful platforms start as successful products, services, or one-sided platforms. Companies that understand the market potential, structural, and management differences between a linear product-oriented and non-linear platform-based company see the latter as a lucrative method for generating high potential growth in the digital age and typically get started with one side by offering their products or services valuable and attractive enough.

How to do platform-spotting?

While pivoting from a product-oriented company to a platform-based one looks attractive, it is challenging to execute it. A company willing to transform its product into a platform must start with identifying the potential platform opportunities. The question then is, how do you recognize such opportunities? Here is a simple ‘Platform-spotting‘ framework that can help you getting started.

Identity

“If organizational identity does not evolve to accommodate the activities and beliefs that accompany a platform-based business, dissonance may result between those involved in building the platform-based business and those historically involved in the product-based business, inhibiting an organization’s ability to successfully transition”– Elizabeth Altman and Mary Tripsas

A product-based company looking to evolve into a platform-based company could require a shift in the company’s identity and the associated attributes such as the business model, value proposition, key activities, channel partners, customers, revenue & cost models, and success metrics. This identity shift could be challenging to adapt to since it has implications on how a company defines its business. Therefore it becomes foremost and critical for the company and the stakeholders to identify and embrace the North Star by which it will navigate in the future. Nokia & RIM (Blackberry) both were engineering-driven companies, and when they tried to attempt platform strategies, they faced challenges internally and externally because of their deep-rooted past identities.

Moat

“What we refer to as a “moat” is what other people might call competitive advantage . . . It’s something that differentiates the company from its nearest competitors — either in service or low cost or taste or some other perceived virtue that the product possesses in the mind of the consumer versus the next best alternative . . . There are various kinds of moats. All economic moats are either widening or narrowing — even though you can’t see it.”– Warren Buffet

When a company has declining unit costs with the increased business size, it has developed Scale economies, e.g. Amazon.

Switching costs occur when the customers of a company are expected to incur value loss ( money, effort, time or psychological) from switching to an alternate supplier for additional purchases, e.g. SAP.

Brand recognition or other intangible assets such as patents and regulatory licenses allows the company to charge premium pricing by taking the benefit of increased willingness to pay for the product or prevent competitors from copying the product, e.g. Apple. 

Your product has Same-Side Network Effects, if the value of your product or service increases exponentially with the addition of an additional user, e.g. Microsoft Windows.

If a company has built moat through a defensible product, it is likely to have one side of the platform already onboard. In other words, you have partly solved the classic chicken-or-egg problem; the remaining challenge then is to identify the other side, devise an attractive value proposition and get it onboard.

Interactions

“Interactions on platform resemble any economic or social exchange … in every such exchange the producer and the consumer exchange three things: information, goods or services and some form of currency”– Geoffrey G. Parker, Marshall W. Van Alstyne and Sangeet Paul Choudary (Authors of Platform Revolution)

Can you think of a cost-effective design to facilitate the exchange of information between two sides (one of them must be the existing customers of the product) who want to but currently cannot connect and interact easily on their own? The platform’s success depends on –

• How much value this interaction provides to the participants on both sides
• Whether it is the most critical and frequent form of activity ?
• And what tools and governance rules a platform can provide to make the interaction easy ?

Network Effects

“Network effects are the best form of defensibility. “James Currier, NFX

Network Effects occur when the value of a product or service to a customer is increased by the use of the product by others. Same-side network effects act as a form of defensibility, but they are more suitable for products. They enhance the adoption of products or services, thus increasing the product or service’s value to the existing customers. 

Same-side network effects aren’t as applicable to platforms because platforms have two or more sides exchanging value. Instead, it would be best if you thought of ways to generate positive cross-side network effects. Cross-side network effects refer to the increase in the value of your product or services to your existing or prospective customers by adding users to another side. When identified prudently, the second side with the most substantial cross-side network effects creates an interdependent cycle between the two sides of the prospective platform. This self-reinforcing feedback loop or the flywheel is the key to sustained platform growth.

Other carefully designed platform features, such as curation, communication, and collaboration, also help in boosting the cross-side network effects.

Differentiation

A product-centric company can achieve scale economies & mass customization with its core customer group. However, it is challenging to serve the long tails (a concept taken from statistics and popularized by Chris Andersen in business) in your market. Longtails have niche needs that might or might not fit into your standardized product offering for the masses as it:

• Jeopardizes your core product innovation
• Compromises scale economies
• And is financially unattractive for you to pursue

If you can identify long tails in your market that are potentially attractive to third parties, you can transform your core product into either an aggregator or an extension platform. Third-party participants can leverage the core product innovation to create and capture value for themselves by serving the niche segment with their tailored needs while yielding solid returns for the platform. A distributed network of innovative producers enables the platform owner to serve many micro-markets from one platform.
Many companies like Amazon, Shopify, Salesforce and Nike+ have adopted mass differentiation strategy with great success.

The above framework will help you evaulate the potential platform opportunities in your products or services and inch closer towards a platform.