Platform Economics – What Matching Users is About?

Nowadays companies can reach valuations exceeding billions of dollars and deliver value the customers look for without even physically owning resources they trade. In times when access to resources is becoming more important than their ownership, economists debate whether we should call this phenomena a sharing economy, community marketplace, or simply uberization of everything.

So what common principles stand behind DogVacay enbling to browse, book & pay for a pet sitter or dog walker, WeWork allowing to find office space or shared desk in city of your choice, or Zilok letting you rent anything ranging from a car through gardening tools to venue for an event?

All these businesses are platforms active in specific, two-sided markets with distinct user groups, who look for specific benefits. Therefore we can call them two-sided platforms. DogVacay matches pet owners with pet sitters, WeWork intermediates between office space and desk owners and office workers and freelancers. Zilok arranges interactions between various lenders and borrowers concluding in transactions.

Principle reason for two-sided platforms to exist is need of intermediary able to match user groups in more efficient way than using traditional approach. In Matchmakers. The New Economics of Multisided Platforms D. Evans and R. Schmalensee explain that connecting buyers and payers in virtual place enables sales, and therefore platform operators can fairly charge for it. Platform intermediaries minimize costs which alternatively users would have invested in traditional research, reviews and recommendations. By doing this platforms organize, simplify and standardize market activity making it easier and cheaper. For example, Airbnb enabling rental of apartments  in over 190 countries in the world charges both hosts and guests which altogether might cumulate in double digit transaction fee earned by Airbnb platform operator from single reservation made.

For providers of goods (e.g. cars, office desk, gardening tools, event venues) and services (e.g. walking the dog) two-sided platforms might become source of alternative and often recurring revenue, and all what is needed is allowing own resources to be advertised and rented.

If you’ll ever consider entering platform business do know that their value strictly depends on the number of users both those whooffer the product or service and on those who are seeking it. This concept is broader known as network effect and the more users you have the more they will pay you to access to bigger network and your margins will improve. This is how LinkedIn intermediating between employers and employees maximizes its platform revenues. On the one hand it offers freemium account for all professionals, who would like to leave their job curriculum online, on the other it charges recruiters , who are eager to pay to browse millions of users. Employees looking for a way to distinguish among other half of a billion of LinkedIn registered users are also eager to pay fee for that. Therefore even if small percentage of your growing user base is eager to pay you can be profitable.

As there are many types of two-sided platforms you might be interested in their typology. Transaction platforms represent one which intermediate in facilitation of exchange of goods and services or transactions between different users, buyers and suppliers. Non-typical transaction platforms are time banks, such as Time Republic or Japanease Furei Kippu schemes.

An innovation platform is another type of two-sided market platform matching owners of challenges or problems to solve with inventors or solvers. These platforms nurture creation of innovation and open communication of solutions looked for. One of the most popular platform of that type is Innocentive, which I wrote about some time ago here.

The last type of platforms I want to bring to your attention  are investment ones that enable you to invest into prospecting business or to be invested in, as in example of crowdfunding platforms, or peer-to-peer lending ones represented by Upstart.

As we might recognize platformization of economy as certain trend, what are the strategies for attracting and building solid base of users to capitalize on two-sided platform business? G. Parker, M. Van Alstyne and S. Choudary detail couple of such strategies in Platform Revolution How Networked Markets Are Transforming the Economy and How to Make Them Work for You.

One of such strategies is “The piggyback” where you need to find an existing platform to connect with its current users. By doing this you lower costs and time of user acquisition time. PayPal initially was available as payment option for eBay users and afterwards it easily  became online payment standard. Another strategy is called “Follow-the-rabbit”. Here you need to set up a pipeline with demonstration project proving your business model can succeed. You charm initial base of users by offering them freemium account and capitalize on other type of user. By growing up significant users base using freemium model one day you might represent dominant standard in the industry, and then start charging for platform usage. “The micromarket” is one where you select niche but influential target market with users, who already interact and by growing this micromarket you gain access to larger one.

What I remembered from my MBA studies from classes on two-sided market platforms with Dr Gal Oestereicher-Singer from Tel Aviv University is that winners in  platform usually don’t have  the “best” product, but most often they have the “best” platform strategy. And this also requires using open (but not too open) interface, modular architecture enabling easy extension of platform functionalities and compelling complements.

So what is your platform strategy?