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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?



Connected Vehicles and Internet of Logistics

How to surf on edge of next industrial revolution and profit from convergence of communication, energy, and transportation infrastructure?

In The Zero Marginal Cost Society J. Rifkin explains tremendous shift in new forms of communication, energy creation and distribution, and transport and logistics resulting in  new industrial revolution that is happening now. According to J. Rifkin the changes we observe will converge to general purpose technology–Internet of Everything, which will be a platform consisting Internet of Communication, Internet of Energy, and Internet of Logistics.

J. Rifkin proves that in competitive markets, in order to win the market share, companies will have to continuously increase their productivity, and simultaneously decrease the marginal costs and prices of the goods and services sold. As a result, the marginal costs will be brought to near zero, what means they will not be subjected to the market forces we know today, and companies will have to learn how to profit from sharing economy and lateral economies of scale.

J. Rifkin provides great deal of insights for start-ups and start-up accelerators, which plan to surf on edge of next industrial revolution by helping existing market players to transform. As we all know, Google and Apple maximize usage of their technologies in existing vehicles and develop driverless technologies themselves to win Internet of Logistics. But let’s take a look at what other vehicle industry players do to catch up with new economy paradigm.

BMW  enables drivers to have remote access to their vehicle. My BMW Remote App enables you to check whether your car is locked or not, when you are not sure to have it locked when getting out. It also allows you to sound the horn, flash the lights, and turn on auxiliary heating or ventilation.

Daimpler, Audi, and also BMW in 2015 together purchased Nokia’s digital maps business for USD 3,1 billion to leverage connected cars solutions they work on. Now Mercedes-Benz offers mbrace – a digital concierge package that will help you out with dynamic route assistance in traffic or bad weather.

General Motors offers apps such as MyChevrolet, MyBuick, MyCadillac and MyGMC, which enable its owners to locate the nearest dealers, or schedule car maintenance, and also  find free parking spots. Another app of General Motors – OnStar leverages both geolocalization and big data to offer coupons for Exxon and Mobil gas station, and help you book  hotel rooms while you drive.

Toyota – which recently invested  USD 1 billion  in Toyota Research Institute (incl. research centers near Stanford University and Massachusetts Institute of Technology) -works on open source infrastructure, and develops solutions in telematics to enable safer driving experience. The former one  are also the cornerstone of digital innovation strategy in Mazda.

If J. Rifkin is right about Internet of Logistics, above-mentioned companies, leading in transportation industry, will soon find followers, and other transportation business players will look for solutions enabling them to adapt, distinguish, and compete. It might result in new, unexplored marketspace for transportation and logistics oriented start-ups.

Considering nearly 2 million of companies registered at Angels List, specialization in transportation and logistics seem to be less exploited by start-ups than specialization in energy and communication. Intensity of rivalry in this sector might be, therefore, lower than in the other, densely occupied sectors. On the other hand, because of industry regulation standards and high safety requirements, there might be a need for institutional support for start-ups entering transportation and logistics area.

Luckily there are more and more start-up acceleration programs that  specialize in transportation, logistics, and supply chain. Such accelerators are Dynamo Accelerator from Chattanooga, US, or The Logistics Tech Accelerator organized by RocketSpace with Lufthansa and MAN focused on solutions for smart warehouses, transport, and trade. The Logistics Tech Accelerator’s application process for start-ups opens in September 2016, and plans to kick-off in January 2017 in Vigo, Spain.

So ask yourself, what valuable company in transportation and logistics nobody is building yet.