Author: Sangeet Paul Choudary

Platform junkie, Early stage internet guy, Currently advisor to multiple platform startups. Patterns of success/failure teach us more than isolated instances of them. Sangeet writes on his own blog called Platform Thinking (http://platformed.info). Platform Thinking has been ranked among the top blogs for startups, globally, by the Harvard Business School Centre for Entrepreneurship. Follow him @sanguit or visit his blog at platformed.info
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What the Uber-Lyft war teaches us about success and failure in the on-demand economy

This article is based on the book Platform Scale, written by Sangeet Paul Choudary. Platform Scale is available for free download for a limited period between October 5th and October 9th. To access additional bonus content, check the book website here.

The on-demand economy is bringing together technology and freelance workers, to deliver us services in exciting new ways. We are increasingly using our cell phones as a remote control for the real world.

Every week, we see a new platform come up that connects consumers with freelance labor. New companies are forming in almost every service vertical. But not all these companies clearly understand what determines success and failure of on-demand business models.

Success in the On-demand economy

There are two critical factors that will determine the success of a company in the on-demand economy: multihoming costs and interaction failure.

MULTIHOMING COSTS

In computer networking parlance, mutihoming refers to a computer or device connected to more than one computer network. In the world of platforms, this notion is an important one. If your producers and/or consumers can co-exist on multiple platforms, you face a constant competitive threat. Eventually, it may be difficult for clear winners to easily emerge.

Multihoming costs are relatively high for developers to co-develop for both Android and iOS. Multihoming costs are high for consumers also because of the cost of mobile phones. Most consumers will own only one. However, multihoming costs for drivers to co-exist on Uber and Lyft are relatively low. Most drivers participate on both platforms. Given the ease of booking rides, multi-homing costs are very low on the consumer side as well.

In a previous article on TechCrunch, I had elaborated in detail how multi-homing could be prevented by creating long-term stored value within the platform.

For on-demand platforms, this is important because multihoming allows producers (service providers) to co-exist on multiple platforms. With a limited supply of service providers available, this can lead to interaction failure.

INTERACTION FAILURE

Interaction failure happens when the producer or consumer (or both) participate(s) in an interaction, without the interaction reaching its logical, desired conclusion. Imagine a merchant setting up a listing on Ebay that never gets any traction, or a video enthusiast uploading a video on YouTube that fails to get a minimum number of views. Quite often, these outcomes could be the result of poor quality listings or videos, but they could also be owing to the platform’s inability to find the right matches. Producers and consumers who experience interaction failure get discouraged from participating further and abandon the platform.

If reverse network effects set in, this can eventually lead to an implosion of a platform. In the initial days, interaction failure regularly leads to the chicken and egg problem. To understand these phenomena better and how they could impact your platform, I’d recommend this post on reverse network effects and this one on the chicken and egg problem.

Bringing it together – The Uber-Lyft war

Interaction failure is especially important for on-demand platforms. Imagine a consumer requesting for a service and the service never arriving. Imagine, in turn, a producer receiving a request, preparing to fulfill that request, only to find that the request gets cancelled. In both cases, the consumer or the producer may decide to abandon the platform.

This is exactly what Uber had in mind when it waged its war on Lyft. Unethical as that was, I’d like to focus on that to glean lessons for building the next Uber for X.

In some of the largest cities we see drivers drive for both Uber and Lyft, and other competitors. It’s not uncommon for these drivers to switch between the two platforms multiple times a day. With a limited supply of drivers in a city and the cost for a driver to connect to an additional platform so small, we see drivers multihoming on both Uber and Lyft. This has naturally led to intense competition between the two companies and Uber infamously resorted to a playbook to create interaction failure on Lyft using questionable tactics.

Uber decided to target interaction failure on Lyft, by contracting third party employees to use disposable phones to hail Lyft taxies. Before the Lyft taxi arrived at its pickup location, the Uber contracted employee would cancel the ride. With so many cancelations on the Lyft platform, drivers would become frustrated driving for Lyft and, in some cases, switch over to Uber. Lower drivers would lead to further frustration for consumers as they would have to wait longer for their requests for cabs to be fulfilled, eventually spurring them to abandon the platform. This loop is illustrated below.

When multihoming costs are low, producers and consumers will connect to many platforms. With multiple platforms sharing the same producers and consumers, it is difficult for a business to build defensible networks. Thus, it is difficult for a clear winner to emerge in the market. With many platforms operating and defensibility low, interaction failure becomes a key factor in determining long-term winners.

What does this mean for you?

SangeetpaulblogIf you’re building the Uber for X, you need to ensure that you’re tracking a metric that helps you determine the degree of interaction failure on your platform. Freelancers that don’t get business within X days, requests that don’t get satisfied within Y minutes, may all be indicative of interaction failure. The exact measure of interaction failure will vary by platform and the importance of tracking interaction failure will, in turn, depend on the multihoming costs.

About the author: Sangeet Paul Choudary is the author of the book Platform Scale, available for free download for a limited period between October 5th and October 9th. He also writes the blog Platform Thinking.

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Announcing Platform Scale, the book: The pre-orders campaign is now live

Are you building a marketplace, social network or a platform?

Do you ever describe what you’re doing as the Uber for X, Airbnb for Y or the Twitter for Z?1

Do you want to understand why certain startups scale and others fail?1

Over the last few years, I’ve been obsessed with platform business models and their ability to scale. Unlike traditional enterprises, platforms do not scale by scaling internal employees and resources. Instagram gets to a billion dollars with 13 employees while Uber doesn’t own any of the taxis it dispatches. They scale through network effects. As more producers use the platform, consumers find greater value, and vice versa.

what-is-platform

Announcing Platform Scale – The Book

I’ve written about this topic extensively on the blog. And now, I’m bringing it all together as a book meant specifically for entrepreneurs and innovators.

order-now

Platform Scale is a maker’s manual, a guide, for entrepreneurs, innovators and makers looking to build platforms and benefit from this new form of scale. The book provides codified, actionable steps to design and implement platform-based businesses. Platform Scale is a book about unlocking the scale advantages that are possible in today’s connected world.

If you’s building a marketplace social network or a platform, you need to understand Platform Scale. Click to tweet

platform-scale

Why did I write this book?

I wrote this book because the rules of achieving scale are fundamentally changing but they aren’t understood very well. Platforms need to focus on interactions between users, not simply growth. They need to invest in building feedback loops that keep re-engaging users. The traditional metrics of user growth and active usage do not apply anymore, tracking actual interactions between users is far more critical to scale. We need a new playbook to achieve scale in a world of platforms.

goal-of-platform

Platform Scale – The Book Trailer

To learn more about the book, watch the trailer below:

If you’d like to pre-order your copy of Platform Scale, just click on the link below to get to the pre-orders campaign:

order-book

Platforms may be more important than you think

Platform Scale lays out the new rules for scale in today’s connected world. Even if you are not building a platform, you can benefit form the same principles that powered the growth of successful platforms like the ones in the image below.

platform-business-model

If you’ve ever wondered how to solve the chicken and egg problem for a platform or wondered which metrics best show success of a platform, you’ve seen the need for a structured approach to building platforms. That’s what Platform Scale aims to provide.

This article was originally published on Sangeet Paul Choudary’s personal blog Platform Thinking – A blog about building early stage ventures from an idea to a business, and mitigating execution risk.

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How Alibaba, Android and Airbnb change the geometry of business

This article was originally published on Sangeet Paul Choudary’s personal blog Platform Thinking – A blog about building early stage ventures from an idea to a business, and mitigating execution risk.

A keynote laying out the shift that platforms are bringing about in the nature of business today. 

One of the central concepts I talk about on this blog is the shift from linear business models to networked business models: from Pipes to Platforms. The business priorities while building these two contrasting forms of businesses are very different and I’ve explored that in detail inan earlier essay here.

We also note that this shift has already happened in several industries. I explore that in detail in the essay here. (I would highly recommend reading both essays in tandem even if you’ve read them separately earlier.)

Media has already been transformed by this shift and become social. Telecom has been transformed by the explosion of the app economy. Professional services of all kinds are being transformed with the rise of the peer-to-peer sharing economy. And I believe that significant opportunities exist in the manufacturing and traditional goods industries for platforms to come in and create new markets. The rise of the Maker Movement and the growing democratization of 3D printing will accelerate this shift further.

There are three fundamental changes that accompany every such shift in the industries that start getting transformed:
1. New networked markets get created
2. New sources of supply start to emerge
3. New consumption patterns are created

We looked at all these shifts in detail in the rise of YouTube, Airbnb, Elance-Odesk, and to a lesser extent, Kickstarter, in this essay here.

To bring all of these concepts together into one cohesive whole, I want to share a keynote that I delivered earlier this year as the closing keynote at CrowdSourcingWeek 2014. I was invited to speak at the G20 Summit events in Brisbane last week and I shared a further more evolved point of view on how resource-intensive industries like oil and gas and mining will also change because of platforms and how new job creation will be spurred by the creation of new markets.

In this essay, I would like to share the first keynote from CrowdSourcing Week 2014. I hope to share the second set of thoughts from the G20 Summit events in the coming weeks. The video doesn’t incorporate the slides but much of the talk should be self-explanatory.


Industries are getting transformed. While it’s important for startups to understand how things are changing, it’s even more important for the old guard to realize that the traditional rules of business do not apply any more.

One of my constant endeavors through this blog is to address both sides and help share the message of how many of the fundamental rules of value creation in business have changed forever.

Tweetable Takeaways

The three key takeaways from the video, the new rules of business in a networked world:

The Ecosystem is the new Warehouse  Tweet

Community Management is the new HR  Tweet

The Network Effect is the new Scaling Strategy  Tweet

This article was originally published on Sangeet Paul Choudary’s personal blog Platform Thinking – A blog about building early stage ventures from an idea to a business, and mitigating execution risk.

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Why social networks that pay you may be a bad idea

One of the most common questions I get asked, while talking about platforms, relates to the issue of labor on platforms. Facebook and Twitter, among others, get a lot of value from their users and make billions of dollars, but the users don’t see much kickback.

The economics of free-labor platforms

Social networks like Facebook and Twitter leverage free labor from a global talent pool to deliver a business that has near-zero marginal costs of value creation. A mouthful of words but it essentially means the following.

In traditional Pipe models, every act of value creation has an associated marginal cost associated. There are fixed costs of running the pipe’s infrastructure (i.e. the factory, personnel, equipment etc.) and there are marginal costs associated with the production of every new unit of a good or service in that Pipe business. While most Pipe businesses have a good handle of fixed costs, a lot of optimization work focuses on reducing marginal costs, as that directly helps the company scale. If you can produce more units at less cost per unit, your margins improve and your business scales.

This is where free-labor platforms like Twitter and Facebook becomes interesting. They drive marginal costs of value creation to zero. Facebook incurs practically no marginal costs associated with the creation of a new status update. YouTube, likewise, has no marginal costs associated with creation of a new video. It may incentivize the creation of some videos for a variety of reasons but the video creation cost isn’t borne by YouTube.

This allows such platforms enormous leverage. Coupled with the network effect, that creates a natural pull for value producers (in case of YouTube, video uploaders) as the network scales, this model of free labor is guaranteed to create a form of scale, hitherto unprecedented.

These platforms then monetize the value created (in the form of attention, data etc.) but do not pass back any proceeds to these value creators. YouTube, unlike many other platforms, does share some money back with some producers, but most other platforms are run on free labor.

As a result, one of the common criticisms often leveled against such platforms is the argument that they live off free labor and should logically/ethically/morally ‘do the right thing’ and pass some of the kickback back to the users.

That’s a good idea, right? Think Network Effects

When it comes to platforms, the good ideas are typically the ones that strengthen the network effect and the bad ideas are the ones that weaken it.

Is paying value creators a good idea? Only if it leads to desirable interactions on the platform, that in turn, strengthen the network effect.

Every networked platform needs to structure the right incentives for its users. These incentives may be organic (fun, fame, fulfillment) or inorganic (fortune). But platforms need a balance of incentives that leads to the right types of interactions.

Paying someone to use Facebook or LinkedIn may, for instance, possibly encourage the most undesirable interactions. Teenagers in need of some quick money may fill up a professional network. Even when structured on a model that rewards quality, users would tend to game the system. If higher votes mean more money, entire alternate markets could get created to game the system, buy votes and make money. Such markets already exist for gathering fake fans and followers (and votes, actually).

Essentially, shifting the balance of incentives towards inorganic incentives may often lead to unforeseen governance issues.

The problem gets compounded when you realize that higher governance leads to inordinate friction for new users. What sets apart platforms like Wikipedia and Reddit is their reasonably high quality despite the fact that they are open. But this comes at a cost. New users find it very difficult to break through the hierarchy of the Wikipedia and Reddit communities. But conversely, that hierarchy and tight control over actions is exactly what ensure these communities create quality output.

Any platform that functions well on organic incentives may face issues with weakening network effect and frictional governance when moving to inorganic incentives.

The Poverty Line on Platforms

The other issue with paying your users is that it isn’t actually as good an idea as it sounds. Most platforms rely on social feedback as a measure of quality. Votes, likes, ratings, followers etc. typically indicate quality. If platforms were to reward their users, they would likely reward them on the basis of some such parameter that signifies social feedback.

A curious issue with social feedback is the fact that it makes the rich richer and the poor poorer. If I already have more followers on Twitter, I find it easier to add a few more. If my videos are already popular on YouTube, I am likely to have more subscribers making it easier for every subsequent video to also become popular. As a result, platforms develop a poverty line. Users below this line languish in oblivion hoping for their 15 minutes of fame.

The challenge with any form of monetary incentivization is that it would award the rich (in terms of social feedback) way more than it would avoid the poor. This, in turn, discourages the poor (again, in terms of social feedback) all the more from participating further. A feedback loop sets in and the poor start to abandon such a platform. We already see this in Twitter’s challenge in engaging new users who have just been on boarded.

Summary

This leads us back to the original debate. Is it a good idea to build a social network that rewards its users? If it can do that without harming the network effect, creating clunky governance, or disincentivizing certain types of users, it possibly is a good idea. But more often than not, we see things work out the other way.

Hence, the entire hue and cry about Facebook not sharing money with its users when it makes some $x per user, is too simplistic an argument to be judged purely on ethical grounds. And platforms that take the moral high ground on launching in competition with free-labor platforms often realize that they completely messed up the balance of incentives.

There is a reason why platforms which cater to organic incentives well, perform better than the more transactional ones.

Tweetable Takewaways

Social networks that pay users often fail when they end up weakening network effects. Tweet

Platforms with high friction discourage new users from coming on board. Tweet

Platforms reward some users disproportionately owing to the rich-becomes-richer feedback loop. Tweet

This article was originally published on Sangeet Paul Choudary’s personal blog Platform Thinking – A blog about building early stage ventures from an idea to a business, and mitigating execution risk.

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Platform Thinking: How To Get Startup Ideas

How does one find new startup ideas?

Every business is built around solving a customer pain. Solving a customer pain creates value which in turn, if successfully harnessed, can be monetized. Platforms, in particular, connect demand and supply to solve customer pain on both sides.

Platform Thinking And Startup Ideas

One of the patterns for new startup ideas, that I often see in platforms, is the following:

Match an unmonetized/unvalued surplus with an unsatisfied scarcity. 

This requires a unique combination of two factors:

1) Unmonetized/unvalued surplus: This implies that there is some form of surplus which cannot be monetized at the moment. However, given the opportunity, the owners would want to monetize it. A similar dynamic exists for surplus that isn’t currently valued by an audience/market (e.g. a person’s creativity).

2) Unsatisfied scarcity: The second important factor is scarcity. More specifically, scarcity that isn’t currently optimally satisfied. There might be solutions to the scarcity but none of them are optimal enough.

startup-ideasA good balance of both factors is required. If the scarcity is already being addressed, there may not be any need for a new solution. If the surplus is already monetized, it may be difficult for the producer to engage with more means of monetizing the surplus.

Hence, both aspects are equally important for the platform to exist. Also, depending on which of the two aspects is stronger, the seeding of the platform may start either with tapping the demand or with harnessing the surplus.

At the very outset, let me clarify that this is one of many different patterns for finding new startup ideas. Even among platforms, many different form of patterns exist.

Understanding Surplus And Scarcity

Surplus may exist in various forms. It may be a surplus of time, attention, money, physical commodities. Let’s look at a few examples below:

AirBnB: 

A surplus of accommodation in a particular location during a certain time period

MEETS

A scarcity of accommodation in that same location during the same time period.

Amazon Mechanical Turk, TaskRabbit: 

A surplus of time to perform certain tasks

MEETS

A scarcity of time to perform those same tasks.

KickStarter, IndieGoGo: 

A surplus of investable capital

MEETS

A scarcity of capital

SkillShare: 

A surplus of niche skills and talents

MEETS

A scarcity of niche skills

Quora: 

A surplus of knowledge on a niche topic

MEETS

A scarcity of knowledge on the same topic

Zilok, Rentoid, Neighborrow:

A surplus of physical items

MEETS

A scarcity of those same physical items

YouTube: 

A surplus of niche creativity

MEETS

A scarcity of niche entertainment

This model isn’t limited to online networks alone. Offline spaces also allow this model if you can achieve concentration of supply within a limited physical space. Coworking spaces like The Hub are an example of such a model, matching a surplus of office space with those in need of one.

A Final Note On Platform Ideas

For a given idea,

1. Identify the commodity that’s being traded, a target segment where a surplus exists and a segment with a scarcity

Again, surplus and scarcity that are currently not being utilized or satisfied are likely to come on board much faster.

2. Determine degree of overlap between the two target segments to allow the transfer to occur

Since scarcity and surplus need to be matched, there should be a high level of overlap between the two sides. Hence, it often helps to start by targeting a micro-market which provides a good concentration of demand and supply.

3. Determine factors based on which the two sides will be matched

The matching needs to be determined based on certain factors to ensure that the scarcity and surplus successfully satisfy each other. Quora determines matches through an “Ask To Answer” feature which surfaces the users most likely to have an answer to a certain question based on their history of answers on that topic. AirBnB matches accommodation surplus with scarcity based on time (exact dates) and location (exact place).

In summary,

Match an unmonetized surplus with an unsatisfied scarcity. 

This article was first featured on Sangeet’s blog, Platform Thinking (http://platformed.info). Platform Thinking has been ranked among the top blogs for startups, globally, by the Harvard Business School Centre for Entrepreneurship

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Piggybacking Mechanics: Whatsapp, Instagram And Network Effect Marketing

Welcome to the age of the zero-dollar marketing startup. WhatsApp, and earlier Instagram, have officially become a permanent part of startup lore for having built multi-billion dollar businesses without (reportedly) spending a dime on marketing.

Meanwhile, Airbnb has grown from a hipster community of mattress-renters to the world’s largest provider of accommodations without spending even a fraction of what traditional hotel chains spend in marketing.

Marketing is dead! Or that’s what many would have you believe. A great product sells itself, of course! Fire the marketing team!

Well… not quite!

The fastest growing networks on the internet – Airbnb, Instagram, Facebook, YouTube, Snapchat – may not have spent much on marketing, but they all have one thing in common: Each of these networks piggybacked on top of another pre-existing network.

Facebook and Bebo grew on top of the network embedded in our email. Many networks, including Instagram, grew on top of Facebook itself. For a while, Airbnb grew on top of Craigslist, while Snapchat and WhatsApp have leveraged the mobile phone’s organic network, the phone book, to create networks native to mobile,

If you’re building a social network, marketplace or platform and you haven’t considered piggybacking on a network, you need to think again.

Much so-called ‘growth hacking’ relies on testing of cause-and-effect and optimization of funnel conversions. But in the early days of a network or a marketplace, startups are faced with a radically different problem. Why will users come on board when there’s no one else there? Why will producers set up shop in a marketplace that is not yet frequented by consumers and vice versa?

The classic chicken and egg problem cannot be solved by pulling in users and optimizing conversions. Before network effects set in, users will neither get activated nor will they get engaged.

Set a network to catch a network

To grow a network, you need to think like a network. To get enough users on board to create network effects, you need to piggyback upon another network. Piggybacking on a thriving network works wonderfully as long as your platform is complementary to that network and delivers additional value to the users there.

As far as growth strategies go, there are few strategies that are more scalable and sustainable as engines of growth.

Paypal got almost all its traction by piggybacking on eBay and offering a much superior payment method than the painful check-over-mail. It solved the pain points around payment on eBay providing instant payments without the hassle of credit cards and assuming much of the risk of online fraud.

Soon enough, Paypal was the predominant mode of payments on eBay and rode its growth to become synonymous with online payments.

But not all piggybacking stories end happily ever after. Apps that have leveraged Facebook to grow aggressively, have found their business jeopardized with a change in Facebook’s news feed algorithm. Startups that tried to emulate Airbnb and siphon users away from Craigslist were sent cease and desist letters. Even Paypal was banned on eBay for a while before the marketplace had to accede to the wishes of the users.

So what does it take to successfully piggyback a network?

The Biology of Piggybacking

Successfully piggybacking a network is more complex than simply choosing a network and executing an API integration. A startup looking to piggyback on an underlying network needs to understand the nature of its relationship with that network.

Borrowing analogies from biological systems, there are three types of relationships between your startup (the Guest) and the underlying network (the Host).

The Happy Clownfish

In certain cases, a partnership model may be initiated by the Host i.e. the underlying network.

Much like how colorful clownfish (Guest) inhabit sea anemones (Hosts) whereby each party gains protection from their respective predators, both networks benefit from each other.

For example, Facebook’s partnership with Spotify, following its launch of frictionless sharing, is designed in a way that both Facebook and Spotify benefit.

Facebook needed greater engagement among users and Spotify needed listeners, even though the implementation of frictionless sharing has much that can be improved. Earlier, Zynga, Slide and RockYou benefited from a similar relationship with Facebook, piggybacking on Facebook for growth by providing value to Facebook users, while improving user engagement and retention on Facebook.

The Hitchhiking Remora

Not all networks may initiate partnerships the way Facebook did. In fact, most don’t.

In such cases, it is the prerogative of the guest (your startup) to be backward compatible with the host, much like a remora attaching itself onto a shark and feeding off it, you need to figure out a way to embed your functionality in the host network.

YouTube gained early traction by piggybacking on MySpace. Engagement on MySpace was built around musicians who needed a way to showcase their talent. At the time, online video was broken. YouTube fixed that with its flash-based one-click video experience and MySpace users finally had an answer to their problems.

Flickr solved the pain of sharing pictures in the blogosphere. Every blogger putting up a picture on his blog helped showcase the service to others. Flickr rapidly grew to become the fifth most visited website on the internet by the time Yahoo lapped it up.

As these examples demonstrate, these relationships start without an explicit partnership. The Guest makes a conscious decision to make its functionality and content embeddable in the Host network. If such embedding solves a key user pain point, the users start embedding Guest functionality into the Host network, driving adoption. The chicken and egg problem is solved as more users on the Host get exposed to this functionality and migrate to start using the Guest’s functionality.

The Bloodsucking Parasite

Finally, some networks may actively discourage any form of guest-host relationship. In these cases, the startup needs to reverse-engineer an integration with the host. Such piggybacking is generally non-consensual.

Airbnb reverse-engineered a de facto ‘integration’ with Craigslist and offered users on Craigslist, an alternate, more convenient and safer destination for their interactions. Airbnb stole the network interactions away from Craigslist and was promptly blocked by the Host as soon as it realized what was afoot.

Skype, Viber and WhatsApp have similar relationships with carriers where they piggyback the connections created by the carriers (via the user’s phone book) to provide an alternate communication channel.

Viber rode this success to a $900M acquisition recently,and WhatsApp was acquired by Facebook for $19 billion in cash and stock.

Sidenote: It is interesting to note Skype, Viber, and WhatsApp are able to arbitrage users because of a lack of effective carrier data discrimination. That is to say, carriers are well aware of WhatsApp allowing users an end-around onerous SMS fees, but feel powerless – at this point in time – to raise network data rates to make it unprofitable for WhatsApp, forcing users back to SMS.

How To Succeed With Piggybacking

While piggybacking may seem attractive, startups need to be aware of the relationship they have with the host network and pursue strategies accordingly.

More importantly, not all piggybacking is successful. The stories above suffer from survivorship bias and are useful only when understood in the context of the factors that dictated their success and spelt failure for other startups that tried similar strategies.

In general, everyone wins in The Happy Clownfish scenario.

But in most Hitchhiking Remora relationships, the Host controls the relationship with the piggybacking Guest. This is specifically the case whenever the Host launches an open-access API upon which startups build off that to access the Host’s network. While remora may add value by plucking parasites, fickle sharks have been known to bait-and-switch and devour orbiting remoras.

The Bloodsucking Parasite relationship is a lot easier to anticipate and is always antagonistic. In most cases, it triggers an instant immune system response, which, translating to business, amounts to legal action.

The only long-term sustainable network-piggybacking, then, is the Happy Clownfish. Both the clownfish and the sea anemone need each other. Their respective physiologies are a clue. A clownfish will never grow poisonous tentacles to sting potential predators and a sea anemone will never grow fins to swim.

To be a clownfish in a sea anemone, your network needs to provide high-contrast, high-value-add differentiation with significant barriers to entry, otherwise you risk coming across like one of thousands of commoditized remoras. Facebook doesn’t want to build its own music library and Spotify isn’t interested in connecting the world outside of music.

There are three factors that determine success with piggybacking:

1. If the host explicitly calls for piggybackers, be the first to the party

When Facebook opened its platform to external developers, Zynga jumped on board and gained rapid adoption. Many startups that followed failed to get such adoption because users had become more sophisticated to the viral invites by that time and Facebook, as well, started dampening the spread of these invites subsequently.

Being the first to the party helps to get users deeply engaged before they get sophisticated and start ignoring messages from other services that follow.

Be the first clownfish to get to your sea anemone.

2. If you can build for backward compatibility, ensure you add value to the underlying platform

YouTube solved a problem for MySpace bands. Flickr solved a problem for bloggers. Paypal solved multiple pain points for buyers and sellers on eBay. Be the useful remora that eats the little parasites on the shark.

3. Be the first to reverse-engineer before the host wises up

When stealing traction parasitically, it pays to be the first to discover the chink in the armor of host network. Airbnb gained traction before Craigslist wisened up. But every startup that has tried that strategy subsequently has failed to replicate the same success and has instead been caught in a legal quagmire.

Being first to piggyback a host network is the most important determiner of success. There is typically a time window while these strategies work. And almost always, first-to-the-party wins. When the host wants you to piggyback, there’s a window while it will be effective. When the host doesn’t want it, there’s a window before which the host wises up. In either case, being first helps.

The story of many of today’s large social networks and marketplaces follows similar trajectories. Bringing in users through linear funnel hacking tactics often prove counter-productive. Finding a new network and piggybacking it helps gain traction among enough users simultaneously and build network effects.

So the next time you hear about a startup boasting a zero dollar marketing budget and putting it all on building a great product, think again! Piggybacking is the new marketing for the age of the network effect.

Note: This article  first appeared on TheNextWeb. This article was co-authored with Patrick Vlaskovits, the NY Times BestSelling Author of The Lean Entrepreneur.

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Platform Metrics: the core metric for platforms, networks and marketplaces

You become what you measure. From my experience working with clients across enterprises and startups, the most common reason for failure and inefficiency is the focus on convenient, but inappropriate, metrics. Your technology doesn’t determine the business you build. Neither does your organizational capability. The metric you optimize for is the single biggest factor that determines which business you end up building.

Metric Design

The importance of choosing the right metric is more far-reaching than we often believe. A metric is a bit like a commander’s intent in an army. At battle, there are a lot of variabilities and unexpected contingencies which cannot be pre-planned for. The Commander’s Intent is a simple rule of thumb that helps soldiers take local, individual decisions towards a cohesive, larger goal.

Metrics work in much the same manner. Once you set a metric, the entire team organizes its efforts around it, and works relentlessly to optimize the business for that metric. It’s often fancy to have a large dashboard with multiple graphs tracking hundreds of things. But to be truly effective, an organization/team/individual should be solely focused on optimizing for one metric.

As a result, identifying and designing the right metric is critical for business success. More often than not, I’ve seen the following general observation to hold true:

If you’re asking someone to optimize for more than one metric, you’re setting them up for failure. 

Often, ratios help capture multiple movements in one metric. Whether you think of the financial ratios that traditional business managers track or the DAU/MAU that app developers relentlessly track today, ratios tend to be important as they explain concentration rather than quantity.

Pipe Metrics

This discussion of metrics is especially important in the world of platforms and networked businesses. Platform businesses are a lot more complicated than traditional pipe businesses. Pipes optimize unidirectional flow of value. Hence, metaphorically, releasing bottlenecks at any point should help with the flow. The Core Metrics for pipes, naturally, then, measure smoothness of flow and/or removal of bottlenecks. Inventory turnover is one such metric to check how often the flow of goods/services moves through the pipe. All forms of Output/Input ratios for intermediary teams on the Pipe are, again, checks to understand rate of flow and identify creation of bottlenecks.

Platform Metrics

But this tends to be much more complex in the case of platforms where flows are multi-directional. Moreover, they are interdependent because of network effects. E.g. optimizing activity on the producer side may have unexpected implications on the consumer side. On a dating network, allowing over-access to men may be unattractive for women. Hence, even if you have two different teams optimizing for two different metrics on the producer and consumer side, the activities of one team may adversely impact the pursuits of the other team.

How then does one go about deciding on platform metrics?

The Business Of Enabling Interactions

This takes us back to a theme I repeatedly talk about. If I had to condense the essence of Platform Thinking in one line, here’s what it would be:

We are in the business of enabling interactions.

This is much like the Commander’s Intent I mentioned earlier and has important implications. Irrespective of how big your firm is, how complex the operations are, the goal should always be to optimize the core interaction.

1. Identify the Core Interaction that your platform enables

2. Remove all bottlenecks in the Core Interaction to ensure that it gets completed across Creation, Curation and Consumption

3. Ensure that the Core Interaction is repeatable and repeats often

From a metrics perspective, this essentially means that the Core Metric that rules everything should measure interactions.

If you’re running a platform business, you need to start measuring and optimizing your core interaction. 

Metrics Design Around The Core Interaction

So we get the fact that we need to measure interactions. However, we still need a measure, a number that shows the Core Interaction is working well. As with all metric design, it is still possible to choose the wrong metric despite understanding the importance of measuring the Core Interaction.

To design the right metric, let’s revisit what the Core Interaction on a platform actually entails.

From earlier essays in this series, we note the following:

1. A platform enables exchange of information, goods/services, money, attention etc. between the producer and consumer. For a visual guide to how this works, check the article here.

2. The exchange of information always occurs on the platform. The other exchanges may or may not occur on it.The exchange of information enables every other exchange to take place. To understand the mechanics of this, refer this article.

3. The exchange of information is the key source of value creation across all platforms and can be visualized as the Core Interaction of the platform. To understand the structure of the Core Interaction in detail, check the article here.

4. The Core Interaction has three parts: Creation, Curation and Consumption of the Core Value Unit

Let’s now look at the different types of platforms and tease out relevant key metrics.

Transaction Capture

Some platforms capture the transaction between producers and consumers. These platforms typically track actual transactions. Platforms like the Amazon marketplace may measure gross value of transactions. Those like Fiverr (which have fixed value per transaction) may simply measure number of transactions. Airbnb tracks number of nights booked. This is a better indicator of value creation than simply tracking number of transactions. At the same time, it doesn’t care about value of transactions (spare mattress being booked vs. castle) as the goal is simply more value created irrespective of type of customer.

Transaction Tracking

Some platforms can track the exchange of goods and services in addition to capturing the exchange of money. ODesk, for example, can track number of hours of work delivered by the freelancer (producer), a key measure of value creation. Clarity.fm can track duration of the consulting call between an expert and the information seeker.

Market Access

Some platforms are unable to capture the transaction, the exchange of money. They create value by allowing producers access to consumers. In these cases, one of the common metrics tracked is the platform’s ability to generate leads. OpenTable specifically tracks reservations. These are not the actual transactions at the dinner table, but serve as a proxy for the value created. Some platforms may track overall/relevant market access. Dating and matrimonial sites often talk about number of women registered as that determines the value that a user can expect to get.

Co-Creation

One of the key properties of platforms is the fact that external producers can add value. Whether it is new apps on an app store, new videos on YouTube or new pictures on Flickr. In these cases, one is tempted to solely track these co-created Value Units. However, Creation forms only one-third of the Core Interaction. The proof of the pudding, in such cases, lies in repeat Consumption. Some platforms may track the total consumption, some may track the percentage of Value Units that cross a minimum threshold of Consumption. I tend to favor the latter as measuring and increasing the percentage of units that get minimum consumption ensures that the platform focuses on getting more producers who create relevant units that will be consumed. It also ensures that, over time, the feedback loops (in the forms of notifications to producers) will encourage creation of the kinds of units that get greater consumption.

Quality as Value

Some platforms may create value largely by signaling quality. Reddit is one such example where Curation is more important than Creation or Consumption. Such platforms may track reputation of users and create feedback loops that encourage users to participate often, gain karma and use that to participate further in the curation process.

Market Attention

Platforms where the Core Value Units are content e.g. YouTube, Medium, Quora etc., the engagement of Consumer Attention serves as a key metric. Measuring number of videos or articles uploaded or number of videos viewed or articles read is often not enough. These give indications of Creation and Consumption but not of Curation. We need some indicator of quality as well. This is why many such platforms track the percentage of content which gets a minimum engagement. Medium tracks views and reads separately indicating that it requires a minimum commitment from the Consumer to determine quality of the content.

The Easy Metric Fallacy

While working with companies on this, I’ve often noted the following:

1. Creation is the most common metric tracked. Number of apps, number of videos, number of sellers etc. This is misleading.

2. In the case of Market Attention category platforms, Consumption is the most common metric tracked. This is an improvement but still not a measure of quality.

3. Curation is rarely tracked and is often the most important metric that determines the health of the platform.

4. The measure of transactions that should be tracked varies with type of platform. In some cases, number of transactions may suffice, in other cases, volume of transactions may matter.

5. The metric that best explains interactions will change over the life cycle of the platform and it’s critical to identify points at which these transitions occur. Companies often make the mistake of sticking on with an older metric when their business has scaled. Identifying and vetting the Core Metric at every point is very important.

Counter Metrics

While measuring the platform’s ability to create interactions is important, it is equally important to measure its failure to close interactions. I will explore this further in a subsequent post.

The Way Forward

The discussion on metrics is deep and cannot be done justice in one post. I’ll cover this more as we move further in the series. The key point, though, remains:

On a platform, the Core Metric that rules them all must measure and optimize the Core Interaction.

Tweetable Takeaways

For platforms, the Core Metric to be tracked must measure and optimize the Core Interaction.Tweet

The goal of a platform is to repeat and optimize the Core Interaction that creates value. Tweet

This article was originally published on Sangeet Paul Choudary’s personal blog Platform Thinking – A blog about building early stage ventures from an idea to a business, and mitigating execution risk.

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The Three Design Elements for Designing Platforms

What does the traditional world of manufacturing have in common with the way networked platforms work? How can a basic understanding of factory design help us change the way we think about designing internet platforms, marketplaces and social networks?

I’ve written previously about the distinction between pipes and platforms. If you haven’t already read it, you must definitely check it out. It lays out many of the basic principles that underlie the strategies I discuss on this blog.

The fundamental shift, I believe, the world has seen, is the move from linearity to networks. Putting 3D printers and other recent maker movement trends aside, factory-based manufacturing has traditionally remained the same. And that’s what I refer to as Pipes, as captured by the graphic below:

Pipes are characterized by the firm as the producer and a linear flow of value.

In contrast, Platform Thinking allows for users as co-producers. Value doesn’t flow linearly from a firm to the consumer. Producers and consumers are connected with each other over a network. The platform’s role, unlike a Pipe’s, isn’t production. The platform connects producers and consumers over a network and provides them the tools to interact with each other. It then uses data to match them with each other.

Business Design for Fifth Grades

Let’s look at business design at a very high level. At a fairly abstract, stratospheric level, the goal of business is the creation of value and the capture of some part of it to generate a profit.

If we get back to Pipe Thinking, and take the example of manufacturing, value is created in a factory or on an assembly-line.

The factory’s goal is value creation. 

The factory does this by setting up a set of value creating actions that add value on to the product.

There is an end-to-end process that is responsible for value creation.

But here’s the most important, yet obvious, bit. There is a unit of production and consumption which moves through these processes AND gathers the value that is added to it by the factory. Finally, in the hands of the consumer, this unit delivers value to the consumer.

We call it the product, the object that is manufactured in a plant. It’s the car running through Toyota’s assembly line or toothpaste tube getting filled out at Colgate-Palmolive.

This object is the basic unit of production and consumption in the industrial world. 

So if we think of it, the design of a manufacturing plant goes about in the following manner:

  1. Start with the object you’re creating; the product.
  2. Lay out the steps required to create it (value-creating actions)
  3. Design the process that encapsulates this flow of action
  4. Design the factory (and organization) that can execute this process.

The factory design enables the process.

The process design enables value creation.

But all of this starts by first looking at the unit that is being created, determining what value needs to be created on it and designing the entire business in a way to facilitate that value creation.

It doesn’t work the other way round. You don’t start with building a factory and an organization and then deciding how you structure the process. Any change in the organization or factory infrastructure is started by a change in the process which is started by a change in the need for value creation (often because of customer feedback owing to which you tweak the product).

SO… WHAT?

So all this sounds great, you say! You just told us a bunch of obvious things using some fancy words. Where are we going with this?

I believe the fundamentals of business never change whether you’re in an agrarian economy, an industrial economy or an information economy. Let’s use what we already know from the above and figure how this applies to platforms.

Business design, as we just noted, doesn’t start with the factory, it starts with the unit that is produced. Unfortunately, in the design of a lot of networked platforms, we see the design process start from the factory i.e. the website or the app. That, instead, should be the last step in the design phase.

Let’s take a step back and get back to the Pipe:

Now, let’s watch it change when we talk about Platforms:

There are two key changes that happen as we move from pipes to platforms.

  1. The value creation shifts from inside the Pipe to outside the Platform.
  2. The producer role shifts from inside the Pipe to outside the Platform

 

These are the two fundamental shifts captured in all the talk about Open Innovation. And these are the two fundamental shifts we need to be aware of while designing platforms.

(Note: The platform can be the producer in many cases but most platforms will allow for external production in some way or the other.)

So let’s go about the job of designing platforms.

INTRODUCING….

1) THE SEED

As in the case of Pipes, let’s start with the unit that is produced or consumed. This is the most interesting part. When we think of platforms or any form of internet businesses, we rarely think of what is being produced or consumed, we think of it in terms of a website or an app, or some other physical/visual manifestation. In actuality, since we’re talking about information businesses, the unit being produced and/or consumed should be content/information.

Seed and Parties, no Platform

What is YouTube? A website? An app? A platform for the hosting (production) and viewing (consumption) of videos?

Kickstarter? A platform for the hosting (production) and backing (consumption) of projects!

Twitter? A platform for the creation (production) and consumption of tweets!

Etsy? A platform for selling (production) and buying (consumption) actual physical products leveraging information about them (listings)!

Uber? A platform for booking a car leveraging information (car availability) to match producers (taxi drivers) with consumers (taxi seekers)!

Irrespective of the actual exchange being physical or digital, the unit that powers the matchmaking of producer with consumers (on the platform) is an information unit.

Start with the unit! If you’re designing the Twitter for X, look at what the Tweet for X looks like.

If there is one thing that’s central to Platform Thinking, it’s this. Large platforms look clunky, you don’t know where to start. Start with the unit that is being produced or consumed – I like to call this the Seed – build out from there. More on this in one of my subsequent posts.

Start with the Seed!

2) THE INTERACTION

Great! So we started with the unit. What’s next?

In the case of Pipes, one moves from the unit to the process that adds value to the unit all through.

There’s one interesting difference between Pipes and Platforms though. Consumers don’t typically add value in real-time to this unit. They just consume. On platforms, consumers may add value as well. A creator may take a picture on Flickr but consumers may tag it. A creator may upload a video on Youtube but consumer votes determine how often it gets consumed. There are various ways in which consumers add value.

So what’s the counterpart of the process in Pipes? A set of actions involved in the creation and consumption of value?

I like to think of this as the Interaction. Every Platform has at least one Interaction.

Seed, Parties, Interaction

Creator uploads video, Consumer watches it, votes upon it. This is the primary interaction of YouTube.

Creator starts a project, Consumer consumes it, backs it etc. The primary interaction on Kickstarter.

The interaction is essentially a set of actions required for the creation and consumption of Seeds on the Platform. (This is an incomplete view but I’ll get further into it in a subsequent post, to avoid detracting from the main point.)

Note that a platform may have multiple seeds and multiple interactions but there will specifically be one that is core to the value proposition of the platform. YouTube is not a place where you go to create and consume comments, it’s a place to create and consume videos. In most cases, the primary seed and interaction are fairly obvious. In subsequent posts, we’ll look at a few cases where these are not.

3) THE PLATFORM

Finally, we come to the platform. Once you know the seed and design the interaction as a set of actions, platform design is a lot simpler.

You’re just creating a network and an infrastructure that enables this interaction. 

Seed, Parties, Interaction, Platform

Well, there’s a lot more depth there but for the purposes of this article (remember, we addressed this to fifth graders somewhere up there), the key point here is that platform design should start with the seed, flesh out the interaction and then design the platform as a consequence. Not the other way round.

Even with platform design, one must distinguish between the system and the interfaces. YouTube is a complex system but has many different interfaces/functionalities for creators, viewers, brands, advertisers, media houses etc. on different channels like web and mobile.

The design of the interfaces should be true to the design of the system. And that is achieved when one starts by focusing on the seed and the interactions it enables.

I’m going to be digging into this in detail over the next 2-3 months to lay out a detailed framework for designing and running networked platforms. I’d love to hear your thoughts first up, whether you agree or disagree.

THREE KEY PRINCIPLES

Let’s quickly recap the three key principles of platform design:

1) Platform design should start with defining the value that is created or consumed, the Seed.

2) The Seed should lead to the actions that enable the creation and consumption of that value.

3) Only in the last step should one go about designing the system and interfaces that enable those actions.

There is a fourth key element missing here, the role of data. I will be covering that in future posts. For this post, in particular, I wanted to focus on the contrast between pipes and platforms. The role that data plays on a platform is very unique to a networked world.

It’s been a late start to the year but I’ve spent the last three weeks bringing a lot of my thinking on platforms together in an effort to start creating a structure around it. I’m getting that stared with this post.

Everything old is new again! Hopefully, the magic lies in using the old to interpret the new!

This article was first featured on Sangeet’s blog, Platform Thinking (http://platformed.info). Platform Thinking has been ranked among the top blogs for startups, globally, by the Harvard Business School Centre for Entrepreneurship

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How Startups Compete with Friction in Product Design

Startups need Traction. A startup which doesn’t get discovered doesn’t go anywhere. This is all the more critical for platform businesses which rely on their users to create value and network effects. In the specific case of platform businesses, Traction dictates the value that is created. A social network without enough users or a marketplace without enough activity isn’t going anywhere. Traction essentially refers to the additional value that is created on these businesses by the users using it, value created through interactions between users.

Often, one of the core principles of building for Traction is removing Friction from the product experience. Friction comes in the way of users using the product and, hence, in the way of value creation. Friction may result from anything that acts as a barrier to a user for using the product. Friction may be created by design (e.g. users are curated before they get access) or by accident (e.g. poor product navigability).

Traction and Friction don’t go well together. We’re living in an age where frictionless is increasingly synonymous with desirable design.

But Friction continues to have an important place in the world of platform businesses. Getting Friction right is critical to the success of an internet startup. Through this essay, I’d like to explore some of the top design considerations while building for friction.

As with all design considerations, the ultimate goal of a platform startup (marketplace, community, social network, UGC platform etc.) is to facilitate interactions.

Hence, as a rule of thumb:

Friction is a good thing if it facilitates the interaction instead of coming in the way of it.

Let’s dig further!

The Traction-Friction Matrix

This is pretty much how the traction-friction trade-off works out:

Traction 1

High Friction-Low Traction: There are two reasons your startup may be in this quadrant: by design or by accident. You’re either curating who gets access or you’re suffering from really bad design.

Low Friction-High Traction: Again, a startup hits this quadrant for one of two reasons: frictionless experiences by design or lack of checks and balances.

High Friction-High Traction: This is a great place to be and ultimately successful startups migrate to this quadrant after starting off in one of the quadrants above.

Low Friction-Low Traction: This is clearly the worst quadrant to get stuck in for too long.

 

Movements in the Matrix

1. Pivoting around Friction:

 

2. Avoiding friction altogether: CraigsList pretty much allows anyone to do anything, except for a few categories that it polices and a few categories where listing are paid.

 

3. Embracing friction with scale: Quora has been increasing friction as it scales. Anyone could ask a question in the early days but asking a question now requires the user to pay forward in points.

4. Relaxation of norms:  App.net started off with high friction with a $50 subscription fee. However, it has gradually reduced friction to allow for traction.

5. Scaling the country club: Several invite-only platforms have successfully scaled with this model.

 

 

Design Considerations For Friction

As mentioned earlier, Friction, like every other design consideration, should lead to smoother and better interactions between users on the platform. With that as a guiding principle, let’s look at a few case studies where Friction works well.

Interestingly, two platforms in the same vertical and category often compete and co-exist by being in two different boxes in this matrix, as the examples below demonstrate.

Friction as a Source of Quality

Some platforms risk losing activity (interactions) when there is a lot of noise on the platform. Women tend to avoid dating websites which attract stalkers and men with poor online etiquette. Clearly, noise leads to lower probability of interactions.

Some dating websites invest in incentivizing women to join the network. An alternate model is to increase friction on the other side and curate the men that get access to the network. Sites like CupidCurated have taken this approach as a way to differentiate themselves from existing dating sites which relied on incentivizing women.

High Friction-Low Traction: CupidCurated

Low Friction-High Traction: Match.com

Friction to Create Trust

Some interactions may require a minimum guarantee and an environment of trust. Hiring a babysitter is different from asking a question online. False positives can cause much greater damage in the former case.

In such scenarios, Friction in the form of curation of babysitters provides a critical source of value. In contrast, the Friction-less Craigslist is hardly the destination for finding babysitters online.

High Friction-Low Traction: SitterCity

Low Friction-High Traction:  Craigslist

Friction as Signal

In both examples above, Friction not only controls who gets access to the platform, it also creates some form of signal about those getting access. Curation of babysitters yields exact parameters which would be used by parents for making a decision. Hence, Friction also helps with signaling.

Interestingly, financial markets work with signaling too. VCs, in private markets, are responsible for due diligence and determining whether a startup is worth investing in.

Crowdfunding tries to disrupt venture capital but most current models (like Kickstarter) merely unlock new sources of funds, they don’t necessarily provide the expertise curation and signaling that a VC fund would. Startups like RockThePost are working on the Country Club model and allowing only heavily curated startups to raise money through their platform. In this way, the platform is placing a bet on the fact that signaling and curation need to be part of the platform, to credibly provide an alternative to venture funds.

High Friction-Low Traction: RockThePost

Low Friction-High Traction: KickStarter

Friction on One or Both Roles

Most platforms support two distinct roles: consumers and producers. In all the examples above, Friction was being applied to only one side. This is the model used in most cases. However, where there is  high overlap between the two roles i.e. the same user produces as well as consumes, Friction can be applied to both roles. Quibb is an example of a network that applies Friction across the board. It works for Quibb because users want to be part of an exclusive community, to benefit from superior quality interactions. But more often than not, applying Friction on both sides comes in the way of creation of network effects, as demonstrated in the next example.

High Friction-Low Traction: Quibb

Low Friction-High Traction: Reddit

Friction as a Barrier

For all the hype and fanfare surrounding App.net’s launch, the platform has never quite lived up to its initial stand of providing an alternative to Twitter. There were two design considerations that were fundamentally flawed in this case:

1) Applying Friction to both producer and consumer roles. The core value of Twitter is the ability to build a following. By restricting who could access App.net, the platform limited its ability to deliver that value to producers.

2) More importantly, the source of Friction did not guarantee any form  of quality, trust or signal. Friction was created by charging an access fee. That didn’t help make interactions on the platform better in any way. If any thing, it just came in the way of these interactions. App.net realized it wasn’t getting anywhere and subsequently brought down the access fee, through a series of revisions, by 90%.

High Friction-Low Traction: App.net

Low Friction-High Traction: Twitter 

In summary, the following is a non-exhaustive list of design questions to consider while introducing Friction onto a platform.

A. Do you add Friction to one side or both sides?

B. What criteria are used to create Friction? Does it improve quality and add value?

C. Does Friction lead to higher likelihood of interactions?

D. Is the interaction high-value or high-risk? In other words, how important is trust, signal or quality as a source of value?

Tweetable Takeaways

Friction in design is helpful if it facilitates the interaction instead of coming in the way of it. Tweet

Two competing platforms can co-exist by varying the levels of friction in their design. Tweet

If you’re restricting access, it better provide additional value. Think SitterCity, not App.net. Tweet

Every element of platform design should be aimed at incentivizing interactions. Tweet

This article was originally published on Sangeet Paul Choudary’s personal blog Platform Thinking – A blog about building early stage ventures from an idea to a business, and mitigating execution risk.

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Owning the Transaction – Why Marketplaces Need to Think Like SaaS Businesses

Marketplaces are difficult businesses to get off the ground. A marketplace without buyers cannot attract sellers and vice versa. In fact, the infamy of this proverbial chicken and egg problem detracts entrepreneurs from the challenges that a marketplace presents after it has successfully gained adoption and is successfully matching buyers with sellers. After all, marketplaces for products, like Ebay and Etsy seem to have it all working for them once they gain adoption.

Why the EBay of Remote Services Behaves Differently

Services marketplaces, however, present a unique challenge. Most services marketplaces cannot facilitate a transaction before the buyer and seller agree on the terms of the service. Also, actual exchange of money often follows the delivery of the service and the delivery of the service requires the buyer and seller to directly interact with each other. Connecting buyers and sellers directly before facilitating the transaction cut weakens a marketplace’s ability to capture value. The party that is charged is naturally motivated to abandon the platform and conduct the transaction off-platform.

Marketplaces that fail to capture the transaction often resort to a lead generation, paid placement or subscription-based revenue model. The classifieds model has traditionally worked on paid placement. Dating websites and B2B marketplaces work on a subscription-based model while several financial comparison engines work on a lead generation model. However, lead generation models are attractive only at very high levels of activity and subscription-based revenue models make the chicken and egg problem worse than it already is. If your monetization model involves extracting a cut from the buyer-seller transaction, you need to figure out a way to own the transaction.

Solving the buyer Decision-Making Problem

Services marketplaces like Fiverr, Groupon and Airbnb try to solve this problem by preventing the users from directly connecting before the actual transaction. These marketplaces typically try to provide all the information that a buyer needs to make a transaction decision. Groupon features services from sellers that are largely standardized. While less standardized, Airbnb and Fiverr try to provide enough information for the buyers to make a decision without having to contact the seller.

Additionally, some marketplaces charge the buyer ahead of the transaction and remit money to the service provider after the provision of services, thus providing some insurance to the buyer, encouraging her to transact.

The Two-Pronged Challenge of Professional Services Marketplaces

Unfortunately, the above strategies fail with professional services marketplaces for two reasons.

First, it is much easier to take the transaction off-platform in the case of marketplaces connecting professionals. Freelancer marketplaces like Elance or expert marketplaces like Clarity are particularly prone to off-platform transactions for two reasons:

a) Clients need to know information about service providers before making a transaction decision

b) Once the end users know each other, they can potentially connect directly on LinkedIn or other networks, thus avoiding the platform cut

Second, professional services marketplaces require discussions, exchanges and workflow management during the provision of services before the actual charge can be levied. As a result, charging the buyer ahead of the transaction is all the more complicated.

So how do professional services marketplaces own and retain the transaction?

To own the transaction, professional services marketplaces need to think like SAAS businesses!

This may sound counter-intuitive. After all, a marketplace’s goal is to connect the two sides, complete the transaction and get out of the way, isn’t it?

Clarity’s early success illustrates that a marketplace’s role may be a lot more than just connecting buyers to sellers. Clarity connects advice seekers with experts. Traditionally, such marketplaces would connect the two sides, charge a lead generation fee and allow them to transact off-platform. Clarity provides additional call management and invoicing capabilities that serve to capture the transaction on the platform. Since the call management software manages per-minute billing, advice seekers have the option to opt out of a call that isn’t proving too useful. For the experts, the integrated payments and invoicing provides additional value. There is enough value for both sides to prevent them from leaving the platform to avoid the cut.

Clarity is one of many examples of platforms which are using workflow management solutions to capture the transaction. Services marketplaces like Elance focus on providing work-tracking and billing solutions that provide value to both sides and capture the transaction on-platform.

When marketplaces behave like SAAS businesses, the following design principles are commonly observed:

1. The SAAS workflow tools should create additional value for both sides, not just for one. This prevents either side from abandoning the platform for the transaction.

2. The SAAS tools should remove frictions in the interaction.

3. The interaction management tools should feedback into some form of on-platform reputation. Reputation is an added source of value that ensures stickiness to the platform. Clarity calls are followed by a request for rating the other side. Over time, the rating increases discoverability of an expert on the platform and acts as social proof for further callers.

The Added Benefit of Engagement and Stickiness

Workflow and interaction management tools also help make the platform more sticky. The traditional marketplace model has a very transactional use case. There is no need for a user to return often to such a marketplace. Users turn up only when they’re looking for something specific. With workflow management tools, the post-matching interactions are also captured on the platform, which encourages users to return often and to actively use the platform.

Secondly, a marketplace is only as good as the liquidity of available suppliers. As a result, there is no real need for a buyer to stick to a particular marketplace, transaction after transaction, especially if two or more competing marketplaces have similar liquidity and choice. Workflow management solutions help create stickiness because the requirement of on boarding on and learning new workflow management tools acts as a greater barrier to switch and can potentially keep users loyal to a particular marketplace.

The SaaS-First Marketplace

In recent times, we have been seeing the model flipped. Businesses are now building SAAS workflow solutions first to get entrenched among the demand side and then opening out the marketplace, to get suppliers in. An invoicing service spreads out to become a B2B order management platform. A payroll software provider expands to append a marketplace that can bring in freelancers which are then managed using the same payroll software. This also solves the chicken and egg problem by staging the launch of the marketplace.

Summary

In general, if you run a marketplace that requires services to be exchanged remotely, provisioning workflow management solutions to facilitate this exchange is a great way to own the transaction and create greater engagement and stickiness for users.

Tweetable Takeaways

Owning the transaction is the key success factor for a marketplace. Tweet

SAAS tools for workflow management help retain the transaction on a marketplace. Tweet

The new durable marketplace model: Start with a SAAS business, open up one side to create a marketplace. Tweet

This article was first featured on Sangeet’s blog, Platform Thinking (http://platformed.info). Platform Thinking has been ranked among the top blogs for startups, globally, by the Harvard Business School Centre for Entrepreneurship

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The One Feature That Changed Social Networking Forever

What is the single most important innovation that Facebook ever came up with?

Before I answer that, let’s think of the real value for users on a social network. Social networks are a classic example of the platform business model where users create all the value and there is very little value until users come on board. Real value for every individual user, then, is the value that his network is capable of creating.

Most communication and networking products have never truly succeeded in capturing this value on an ongoing basis. E.g. I might be connected to a lot of users on a communication product but I need to be actively engaged in a conversation to benefit from these connections.

This is why the News Feed is Facebook’s most important innovation. It allows users to constantly benefit from the surge of activity in their network neighborhood. It’s a stalker’s delight, a lurker’s guilty pleasure. But the News Feed is the single most important innovation that changed social networking from a user-centric to a network-centric activity.

It changes the use case for an entire product category. Post the News Feed, social networking was no longer about staying connected with a friend or even with a group. For the first time, social networking was about staying connected with one’s entire network.

The move from transaction to engagement

The News Feed represents a leap in the evolution of online communication and networking products. Online communication and networking have traditionally been transactional in nature. Email has always been a transactional product. Chat is transactional as well. We use these products only when we want to engage in an actual exchange (of information) with someone else.

Early social networks were built along the same lines. Imagine the days of Orkut, Bebo and, even, MySpace. Social networking, back then, was an extension of the existing communication models around email and chat. You typically logged on to connect with friends. If you didn’t want to connect with friends, you just never logged on. The dominant use case on these social networks was transactional.

The News Feed changed that! It moved social networking from a transactional use case to an engagement-driven use case.

Engagement products need to provide a minimum guarantee of activity to keep the user engaged. Transaction products, in contrast, need to ensure liquidity and the assurance that the user can complete a transaction conveniently.

If you think of Facebook pre-News-Feed, users used the platform largely to communicate with others. The News Feed shifted value in the platform from mere connections (and communication) to content (and engagement).

First among equals? 

By no means is the news feed the only determiner of engagement on Facebook. The decision to allow developers to build out an app economy on top of Facebook and the creation of social use cases on top of Facebook (most notably gaming and gifting), clearly helped the engagement cause. However, across all initiatives that Facebook ever took, the one that has been most persistent and that eventually took over as the default home screen – the first ‘feature’ that a user is exposed to on every log in – is the news feed.

The representation of the network effect

In traditional social networking, the feature that the user kept returning to was his own profile, with some notifications alerting specific network activity. This is why having the News Feed as the default Home Page is rather important. It changes social networking from a user-centric to a network-centric activity.

The News Feed embodies the very concept of the network effect. It shows that the network effect isn’t simply a function of the number of other nodes you are connected to but also of the nature of the links that connect you with them. A user’s past interaction with other nodes is a great determiner of the strength of ties between nodes. A real world network would have certain ties stronger than others. The news feed captures this and creates a user-centric view of the network.

This is also why I believe Facebook deserves credit for pioneering the news feed. An activity stream or news feed like feature was already present in Twitter, and before that, on Flickr. But these never gave an accurate representation of the network and were at best, mere activity streams aggregating the activity at neighboring nodes. There was no focus on the nature of the link with neighboring nodes. This is where Facebook’s focus on optimizing the news feed algorithm creates a more accurate representation of one’s network than ever before.

A stronger network effect? 

One might argue that the news feed also creates a stronger network effect. With traditional social networks, you could have a few hundred friends but it was arguably the same 10 friends bringing you back to the platform. This meant that losing those 10 friends to another platform could signal the need for you to make the move as well. With the news feed, a stream from a much wider circle of friends constantly hits you. When the central use case shifts from communication with individual friends to interaction with the overall network (via the news feed), it could potentialy make the network more resilient to a situation with reverse network effects.

Beyond social networking

Moreover, this doesn’t apply only to social networks. Any business model which relies on user-generated content can benefit from a well-architected news feed. Even marketplaces, which have traditionally been transactional, are creating engagement with a news feed.

Design principles

The key design consideration is relevance. A news feed should help with personalized discovery. This introduces another tension. Relevance and personalization often tend to reinforce things that we are already interested in. A personalized feed should factor in some form of serendipity to ensure that users do not get increasingly served only those objects that reinforce their preferences. (Designing for serendipity is far from trivial and merits a post in itself, sometime soon.)

If you’re building a networked product, think of what embodiment of the network can be delivered to the user. The News Feed is brilliant because it takes a user’s network and individual actions and builds out something that results when the two are superimposed on each other. This is exactly how our social experience works in the real world. Our world is shaped by a consequence of the actions that we take with our environment. None of that is, of course, simple enough to be replicated through a mathematical model. But the news feed is a great approximation.

Tweetable Takeaways 

How social networking moved from a transaction-first to an engagement-first model.Tweet This.

How to build products that deliver value from network effects. Tweet This.

The one feature that transformed social networking forever. Tweet This.

Design principles for building products that capture network effects. Tweet This.

This article was first featured on Sangeet’s blog, Platform Thinking (http://platformed.info). Platform Thinking has been ranked among the top blogs for startups, globally, by the Harvard Business School Centre for Entrepreneurship

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Why #Hashtags are the future of monetizing social media

You can’t invite people to a party and try to sell them stuff. Pretty much every starry-eyed startup that went after eyeballs gets it by now. Over the last seven years the web has moved away from a consumption medium (think NY times) to a creation-consumption medium (think Twitter, Facebook). But we’ve been very tardy in reshaping business models for this new model of the web. Interestingly, the solution to this monetization problem may lie with a small insignificant key on your keyboard. Read on.

Why are we failing at monetization today?

Traditional online media worked on a Pipe model, targeted only consumers and got away with monetizing eyeballs. Social media works on the Platform model, supports both creators and consumers, and has tellingly failed with trying the same old monetization strategies. 

Media Monetization 101

The monetization of any form of media is driven by mining of context and using that (or some other consumer action) as a proxy for intent. Advertisers then pay to have their ads matched with the right intent. Here are a few examples:

Keywords on a page: Context E.g. AdSense

Search query: Intent E.g. AdWords

Location: Context E.g. FourSquare

Monetization works by harvesting user intent and serving messages/information relevant to that intent. The better you are at harvesting intent, the more effective your monetization is going to be. 

Why is this model breaking down?

Mining context and intent goes for a toss in the world of social platforms. Users are the new content creators and content isn’t necessarily structured. With the older media model, the content creators (typically the media houses) were creating content to cater to search engines. The content was designed for text mining algorithms right at the point of production. With social media, the creators of content (all of us) don’t care about structure. In fact, online conversations are getting more unstructured by the day. Consequently, mining these conversations for context and intent is a crazy task, riddled with false positives. And false positives always lead to spam.

This is why the Hashtag is so important to the future of the web. 

Enter the Hashtag

Engineers would like to be known for the tech innovations that they engineered but Chris Messina will probably go down in history as the guy whose random blog post helped structure a new era of media. In a 2007 post, Messina suggested the use of Hashtags for the first time for Twitter.

This week, Facebook rolled out Hashtags.

It’s interesting to revisit that original blog post and figure out how Platform Thinking is so rare (and important) and how most of us just prefer to think in Pipes. 

Hashtags and Platform Thinking

If you think of media as a Pipe where content creators create stuff and push it out for us to consume, the content creator takes great pains to structure the content. Every piece of content will be carefully drafted in a category, will be peppered with keywords for search engines to gobble and will be structured so that the context can be easily mined.

If you look at the proposals from Stephanie and Brian, they advocate the use of pre-defined groups to regulate conversations around certain contexts. This is a typical Pipe Thinking model. Provide the constraints and force the creators to work within those constraints. It works very well when media is created within the boundaries of a firm.

When media is created by users, as it is today, one cannot afford to think in terms of constraints anymore. This is where Messina’s advocacy of the Hashtag is so brilliant. If you’re thinking in terms of Platforms, you’d want to make the creation process as easy as possible for users, yet ensure that they leave you with enough hints around intent and context. This is what Flickr did when it allowed users to tag pictures instead of forcing them to fit pictures into pre-defined categories. This is what Messina advocates in this post when he argues against users having to operate within groups and allows users to define context and intent on the fly.

Through Hashtags!

Top-down classification and forcing creators to fit within categories or groups is a hangover from Pipe Thinking; an editorial view of the web. A social view of the web requires a more bottom-up approach.

If you think of the social web as a flow of information, pre-defined categories and groups limit the channels in which information can flow. Hashtags, instead, allow creation of channels on the fly to suit the needs of the information creator. 

If you’re still thinking Semantic search alone, you’re in the wrong game

When the world first saw an explosion of user-generated content, people realized that Google’s keyword and link-driven approach to ranking information wasn’t going to work forever. Semantic search was hailed as the next savior.

I have nothing against semantic search. I just believe algorithms are still fairly limited in mining human intent from unstructured conversations. And the web is gradually, but definitively, moving towards unstructured conversations.

The solution to mining unstructured information doesn’t lie in creation of more sophisticated algorithms alone. It lies in, first, solving the problem at the point of production and allowing the new creators to easily append some structure to the information.

That is exactly what the Hashtag does!

If you’re building a platform that enables and promotes unstructured conversations, and you want to go beyond just being a communication tool, to creating a corpus of sticky content, hashtags can help transform unstructured conversations to structure, right at the source.

Tweetable Takeaways

Hashtags are the new keywords, and the key to monetizing social media.

Tags are the new categories, hashtags are the new keywords!

This article was first featured on Sangeet’s blog, Platform Thinking (http://platformed.info). Platform Thinking has been ranked among the top blogs for startups, globally, by the Harvard Business School Centre for Entrepreneurship

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Marketplace Metrics: The Three Success Factors

Marketplaces are difficult businesses to run. Like all multi-sided platform businesses, they suffer from the classic chicken and egg problem: the technology has no value unless buyers and sellers are present and you can’t get the buyers on board unless you have sellers and you can’t bring in sellers without having buyers. Hence, building a marketplace is a lot like building two separate companies simultaneously, each dependent on the other.

There are three factors that determine success for a marketplace business:

LIQUIDITY OR CRITICAL MASS

The lifeline of a marketplace (and any platform business for that matter) is liquidity. Liquidity is a state where there are a minimum number of producers and consumers on the marketplace and there is a high expectation of transactions taking place. This is similar to the critical mass of users that is needed on a social network for users to find value in the network. Critical mass is a state where there is enough volume of supply and demand, for transactions to start sparking.

The first and most important metric to watch out for is the percentage of listings that lead to transactions within a certain time period. This serves as a proxy for the efficiency of the marketplace. Merely increasing the number of buyer and seller sign-ups doesn’t serve a purpose unless this metric starts rising. The time period would depend on the category. AirBnB listings would find transactions sooner than listings on a buy-and-sell  real estate marketplace. This could also depend on ticket sizes within the same category. Fiverr and oDesk are both services marketplaces but the turnover on Fiverr is most likely higher, owing to the much smaller ticket sizes.

To get to liquidity, the marketplace also needs to solve the chicken and egg problem and get both buyers and sellers on board. Marketplaces leverage a variety of tactics for circumventing this problem including building single user utility, stealing traction and piggybacking other platforms.

MATCHING: CURATION OF PRODUCTS/SERVICE

Users visit a marketplace with a highly transactional intent and want to find what they’re looking for at the earliest. In this aspect, transaction businesses are remarkably different from engagement businesses. A user visiting AirBnB or Yelp has a specific intent in mind. Hence, the quality of the search algorithm and the intuitiveness of the navigation are critical to delivering value. In contrast, a user visiting Pinterest often wants to spend some time and consume content on the platform. Hence, the infinite scroll!

The efficiency of discovery and matching is critical to a marketplace’s success. Percentage of searches that lead to listing profile visits within the first page of results is one such metric. When listings are served instead, as a feed, the clickthrough per session can serve as a proxy as well. The best metric to track matching efficiency varies with the business model of the marketplace as well as the category.

TRUST: CURATION OF PARTICIPANTS

Building trust is central to marketplaces where transactions carry risk. AirBnB is an example of a player in a high-risk category, that succeeded because of its ability to curate its participants. AirBnB allows hosts and travelers to review each other and has one of the highest review rates among marketplaces. It also takes additional measures to build trust, including having photographers certify a host’s listing.

This was one of the factors that helped AirBnB challenge CraigsListbecause CraigsList never built a strong curation system for participants.

Focus on the trust metric is very important to move from appealing to an early adopter audience to appealing to a mainstream audience. While early adopters use new marketplaces because of the novelty, opening up to a larger market requires the trust and reputation management systems to be alive and kicking.

WHAT’S NOT AS IMPORTANT:

User interface and design are less important with transactional businesses as compared to engagement businesses.

On a marketplace, the ability to search and transact/interact should be as intuitive as possible. Beyond that, the look-and-feel and design are purely hygiene factors. Unlike social networks, marketplaces are transactional and users typically don’t have long visit lengths engaging with the product. Hence, UI is not as important a criterion as the other three mentioned above.

In summary, if you’re building a marketplace:

1. Focus on liquidity, not just user growth

2. At critical mass and beyond, closely track matching efficiency

3. When moving from an early adopter to a mainstream audience, ensure that the trust systems are in place and functioning well.

This article was first featured on Sangeet’s blog, Platform Thinking (http://platformed.info). Platform Thinking has been ranked among the top blogs for startups, globally, by the Harvard Business School Centre for Entrepreneurship

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Why Business Models Fail: Pipes Vs. Platforms

Why do most social networks never take off?

Why are marketplaces such difficult businesses?

Why do startups with the best technology fail so often?

There are two broad business models: pipes and platforms. You could be running your startup the wrong way if you’re building a platform, but using pipe strategies.

More on that soon, but first a few definitions.

PIPES
Pipes have been around us for the last 400 years. They’ve been the dominant model of business. Firms create stuff, push them out and sell them to customers. Value is produced upstream and consumed downstream. There is a linear flow, much like water flowing through a pipe.

We see pipes everywhere. Every consumer good that we use essentially comes to us via a pipe. All of manufacturing runs on a pipe model.  Television and Radio are pipes spewing out content at us. Our education system is a pipe where teachers push out their ‘knowledge’ to children. Prior to the internet, much of the services industry ran on the pipe model as well.

This model was brought over to the internet as well. Blogs run on a pipe model. An ecommerce store like Zappos works as a pipe as well. Single-user SAAS runs on pipe model where the software is created by the business and delivered on a pay-as-you-use model to the consumer.

PLATFORMS
Had the internet not come up, we would never have seen the emergence of platform business models. Unlike pipes, platforms do not just create and push stuff out. They allow users to create and consume value. At the technology layer, external developers can extend platform functionality using APIs. At the business layer, users (producers) can create value on the platform for other users (consumers) to consume. This is a massive shift from any form of business we have ever known in our industrial hangover.

TV Channels work on a Pipe model but YouTube works on a Platform model. Encyclopaedia Britannica worked on a Pipe model but Wikipedia has flipped it and built value on a Platform model. Our classrooms still work on a Pipe model but Udemy and Skillshare are turning on the Platform model for education.

BUSINESS MODEL FAILURE
So why is the distinction important?

Platforms are a fundamentally different business model. If you go about building a platform the way you would build a pipe, you are probably setting yourself up for failure.

We’ve been building pipes for the last few centuries and we often tend to bring over that execution model to building platforms. The media industry is struggling to come to terms with the fact that the model has shifted. Traditional retail, a pipe, is being disrupted by the rise of marketplaces and in-store technology, which work on the platform model. 

PIPE THINKING VS. PLATFORM THINKING
So how do you avoid this as an entrepreneur?

Here’s a quick summary of the ways that these two models of building businesses are different from each other.

USER ACQUISITION
User acquisition is fairly straightforward for pipes. You get users in and convert them to transact. Much like driving footfalls into a retail store and converting them, online stores also focus on getting users in and converting them.

Many platforms launch and follow pipe-tactics like the above. Getting users in, and trying to convert them to certain actions. However, platforms often have no value when the first few users come in. They suffer from a chicken and egg problem, which I talk extensively about on this blog. Users (as producers) typically produce value for other users (consumers). Producers upload photos on Flickr and product listings on eBay, which consumers consume. Hence, without producers there is no value for consumers and without consumers, there is no value for producers.

Platforms have two key challenges:

1. Solving the chicken and egg problem to get both producers and consumers on board

2. Ensuring that producers produce, and create value

Without solving for these two challenges, driving site traffic or app downloads will not help with user acquisition.

Startups often fail when they are actually building platforms but use Pipe Thinking for user acquisition.

Pipe Thinking: Optimize conversion funnels to grow.

Platform Thinking: Build network effects before you optimize conversions. 

PRODUCT DESIGN AND MANAGEMENT
Creating a pipe is very different from creating a platform.

Creating a pipe requires us to build with the consumer in mind. An online travel agent like Kayak.com is a pipe that allows users to consume air lie tickets. All features are built with a view to enable consumers to find and consume airline tickets.

In contrast, a platform requires us to build with both producers and consumers in mind. Building YouTube, Dribbble or AirBnB requires us to build tools for producers (e.g. video hosting on YouTube) as well as for consumers (e.g. video viewing, voting etc.). Keeping two separate lenses helps us build out the right features.

The use cases for pipes are usually well established. The use cases for platforms, sometimes, emerge through usage. E.g. Twitter developed many use cases over time. It started off as something which allowed you to express yourself within the constraints of 140 characters (hardly useful?), moved to a platform for sharing and consuming news and content and ultimately created an entirely new model for consuming trending topics. Users often take platforms in surprisingly new directions. There’s only so much that customer development helps your with. 

Pipe Thinking: Our users interact with software we create. Our product is valuable of itself.

Platform Thinking: Our users interact with each other, using software we create. Our product has no value unless users use it.

MONETIZATION
Monetization for a pipe, again, is straightforward. You calculate all the costs of running a unit through a pipe all the way to the end consumer and you ensure that Price = Cost + Desired Margin. This is an over-simplification of the intricate art of pricing, but it captures the fact that the customer is typically the one consuming value created by the business.

On a platform business, monetization isn’t quite as straightforward. When producers and consumers transact (e.g. AirBnB, SitterCity, Etsy), one or both sides pays the platform a transaction cut. When producers create content to engage consumers  (YouTube), the platform may monetize consumer attention (through advertising). In some cases, platforms may license API usage.

Platform economics isn’t quite as straightforward either. At least one side is usually subsidized to participate on the platform. Producers may even be incentivized to participate. For pipes, a simple formula helps understand monetization:

Customer Acquisition Cost (CAC) < Life TIme Value (LTV)

This formula works extremely well for ecommerce shops or subscription plays. On platforms, more of a systems view is needed to balance out subsidies and prices, and determine the traction needed on either side for the business model to work. 

Pipe Thinking: We charge consumers for value we create.

Platform Thinking: We’ve got to figure who creates value and who we charge for that. 

BUT… PLATFORM THINKING APPLIES TO ALL INTERNET BUSINESSES
If the internet hadn’t happened, we would still be in a world dominated by pipes. The internet, being a participatory network, is a platform itself and allows any business, building on top of it, to leverage these platform properties.

Every business on the internet has some Platform properties.

I did mention earlier that blogs, ecommerce stores and single-user SAAS work on pipe models. However, by virtue of the fact that they are internet-enabled, even they have elements that make them platform-like.  Blogs allow comments and discussions. The main interaction involves the blogger pushing content to the reader, but secondary interactions (like comments) lend a blog some of the characteristics of platforms. Readers co-create value.

Ecommerce sites have reviews created by users, again an ‘intelligent’ platform model.

THE END OF PIPES

In the future, every company will be a tech company. We already see this change around us as companies move to restructure their business models in a way that uses data to create value.

We are moving from linear to networked business models, from dumb pipes to intelligent platforms. All businesses will need to move to this new model at some point, or risk being disrupted by platforms that do.

Note: I intend to use some/all of the ideas here as part of an introductory chapter to the book I’m working on and would love to have your feedback and comments.

This article was first featured on Sangeet’s blog, Platform Thinking (http://platformed.info). Platform Thinking has been ranked among the top blogs for startups, globally, by the Harvard Business School Centre for Entrepreneurship

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Users or Customers?

If you’ve been around the internet startup world for long enough, you’ve probably engaged in the user-customer debate at least once. Who’s the user? Who’s the customer? Who should we be focusing on?

I’m going to start off a series of posts talking about the basic elements of Platform Thinking and this being the first, I’d like to talk about the User-Customer debate since that lies at the very heart of how we think about the design of internet businesses.

If we put on the Platform Thinking lens, we essentially do away with the user-customer debate and replace it with a more fundamental view of how your business functions. Here’s how:

Most internet businesses can be viewed as a platform on which value is created and consumed. E.g. YouTube.com is a platform on which video up loaders create value and viewers consumer value. With that in mind, let’s move on…

Who’s the user? 

Quite simply, the user is anyone who uses the product. Now that doesn’t help us too much, so let’s break that down a little.

A user may perform one of two roles:

Producer: Someone who creates supply or responds to demand. If you think of YouTube, whenever a user adds a video, he’s acting in a Producer role, creating supply. A person answering a question on Quora is a producer, responding to demand. 

Consumer: Someone who creates demand or consumes supply. A video viewer is a consumer on Youtube. A question asked on Quora (as well as others viewing the question and answers) is playing a consumer role. 

Note that these are roles, not user segments. If you think of eBay, the sellers are the producers and the buyers are the consumers so we have two distinct segments. But on Twitter, every time you tweet, you are in a producer role, and if you start reading your tweet stream the next second, you’ve moved to consumer mode. 

Splitting the term ‘user’ into these two roles helps us understand the exact motivations and actions for the user while using the product.Understanding the motivations and actions helps us design tools that enable the users to perform these actions instead of loading the product with features. 

Most products have more than one producer or consumer role. E.g. On LinkedIn, professionals using LinkedIn are producers and consumers of interactions and status updates, thought leaders are privileged producers and recruiters are producers of job listings and consumers of relevant user profiles. 

This brings us to the third party in the debate… 

Who’s the customer? 

As in the offline world, the customer is someone who pays. The customer may not be part of the central demand-supply equation. The sole defining criterion for a customer is that the customer pays money to the business. 

The customer may be:

  1. The producer: e.g. Vimeo. Video up loaders can pay for premium features.
  2. The consumer: e.g. New York Times. Readers pay to access news
  3. Someone else: e.g. Facebook. The advertiser is the customer 

Again, multiple parties may be customers. On LinkedIn, we have users (who play both consumer and producer roles) as customers as well as advertisers and recruiters. 

To summarize:

  1. Every internet business has three distinct types of roles: Producer, Consumer and Customer
  2. There may be multiple roles of each type on every business
  3. Producers create supply or respond to demand
  4. Consumers create demand or consume supply
  5. Customers pay  

A few quick examples:  

Zappos.com

Producer: Zappos.com itself is the producer; sourcing shoes and creating supply.

Consumer: Users browsing and buying on the storefront.

Customer: The segment of consumers actually buying shoes.

AirBnB

Producer: Hosts, Review Writers

Consumer: Travelers, Review Readers

Customer: Technically, the hosts are the customers since they forgo a cut of the transaction and share it with AirBnB 

Yelp

Producer: Yelp (creates listings), Review Writers

Consumer: Consumers in the city, Review Readers

Customer: Merchants that advertise 

The New York Times

Producer: The New York Times

Consumer: Readers

Customer: Readers, Advertisers 

I’d love to hear your thoughts. This is the first in a series of posts where I intend to share the essential tenets of Platform Thinking and how to use it to design internet businesses. Feel free to leave your thoughts below.

Note: This article was first featured on Sangeet’s blog, Platform Thinking (http://platformed.info). Platform Thinking has been ranked among the top blogs for startups, globally, by the Harvard Business School Centre for Entrepreneurship.