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Why some platforms succeed ... while most fail

The Business of Platforms

One of the most important business models of the 21st century is, without question, the platform model, which powers many of today's biggest and most disruptive companies. Innovation platform, such as Google Android, Apple iPhone operating systems, and Amazon Web Services enable third-party firms to add complementary products and services to a core product or technology. Transaction platforms, which include the likes of Amazon Marketplace, Airbnb, and Uber, bring together producers and users in efficient exchanges of value, and they leverage network effects—the more participants, the greater the value produced.

In their recent book, The Business of Platforms: Strategy in the Age of Digital Competition, Innovation, and Power, Michael Cusumano, David B. Yoffie, and Annabelle Gawer, reveal the principles that have made platform businesses the most valuable firms in the world and the first trillion-dollar companies.

The book, based on a study of more than 250 platform businesses, also reveals that most platforms fail at an alarming rate. The authors explore the sources of failure, offering powerful advice for managers who want to avoid the obvious mistakes. They grouped the most common mistakes into four categories: (1) mispricing on one side of the market, (2) failure to develop trust with users and partners, (3) prematurely dismissing the competition, and (4) entering too late.

Mispricing on one side of the market
A successful platform often requires underwriting one side of the market to encourage the other side to participate. Knowing which side should get charged and which side should get subsidized may be the single most important strategic decision for any company, and it’s a decision many get wrong. For example, Sidecar was a ridesharing company that came before Uber and Lyft, but they pursued a conservative slow-growth strategy instead of a more aggressive one, which allowed Uber and Lyft to pull into the lead.

Failure to develop trust with users and partners
Building trust is typically done through rating systems, payment mechanisms, or insurance. Without this trust, users of the product have to make a leap of faith, which many aren’t willing to do. eBay in China is a good example of failure to develop trust. They used PayPal as their payment mechanism, but Chinese customers weren’t familiar with this type of ecommerce. eBay’s competitor, Alibaba, used an escrow model that didn’t release payment until the consumer was satisfied, which created trust and thus neutralized eBay’s advantage.

Prematurely dismissing the competition
A common misconception about products is that once the market tips in your favor, you’ll be the long-term winner. Often this is true. But there’s a more useful way to think about tipped markets: it is the winner’s opportunity to lose. Overconfidence can produce spectacular failures. When browsers were coming onto the market, Microsoft was first with Internet Explorer, but eventually poor execution and innovation let Firefox and then Google Chrome take over.

Entering too late
The most classic mistake a business can make is waiting until it’s too late. At that point, no matter how great the product is, it probably won’t break through the clutter. Microsoft is again a good example of this type of failure. When smartphones were coming into the market, Microsoft’s Windows phone entered the space five years after Apple and three years after Google. At this point, users were not likely to consider a phone that wasn’t Apple or Google. Microsoft was simply too late. If startups are cognizant of pricing, trust, competition, and timing, they can avoid the mistakes that tank other products, and instead find success.

Buy the Book.

Platform Strategy: Building and Thriving in a Vibrant Ecosystem
In this two-day program, participants eager to develop or launch a digital platform approach will learn why and how their business strategies may need to be revised to be successful.

Managing Product Platforms: Delivering Variety and Realizing Synergies
This course introduces participants to the concept of “commonality" or product platforms—the sharing of components, processes, technologies, interfaces and/or infrastructure across a product family. Successful product platform management software allows companies to develop better products more easily, improve product family planning and lifecycle management, and increase corporate profitability.

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