A team writing for the ‘Harvard Business Review’ attempts to answer why certain platforms fail and why others succeed by looking a six key errors.
When we take a look at the internet landscape, it would be hard to miss the platforms—Facebook, Uber, and Airbnb to name a few. A platform doesn’t necessarily have to be a social network or an app that connects people. Both iOS and Android serve as platforms, and provide value because they allow an ecosystem of other products to flourish.
While there are a lot of successful platforms out there, you can quickly forget how difficult it is to build these businesses. And for every success story out there, there many more failures from many well-funded startups. Does Rdio or WebVan ring a bell?
In a recent Harvard Business Review article called “6 Reasons Platforms Fail” a team of successful writers attempted to answer that question. As a result, the team researched why and how the managers understand how platforms operate and compete.
“Platform businesses bring together producers and users inefficient exchanges of value – Uber, for example, connects drivers and passengers just as YouTube connects videographers and viewers,” the study reads. “And, they leverage network effects – the more participants on the platform, the greater the value produced. Managerial mistakes that inhibit value exchange or network effects can kill a platform.”
Here are the “key errors” that managers can make that can break a company’s and team’s hard work:
1. Failure to optimize “openness.”
Most of a platform’s value is created by its participants — the producers, the customers, and the general users. You need to look at this as a balance. You need to have an open enough environment where the network effect thrives, but not too open where you can’t control the environment and gain some revenue.
2. Failure to engage developers.
Opening a platform to others outside your team to create extensions to your platform is essential. But you can’t just open it to developers and expect them to flock. You have to be very diligent about illustrating the value they will get in return. More importantly, a platform needs a team of people spreading the good news of your organization’s value and giving you constant and quality feedback.
3. Failure to share the surplus.
When users interact with a platform, they are doing it because they are getting a value in return. That’s a given. But as a leader in creating a platform, you have to ensure that everyone gets a return for their participation. “A simple rule for platform managers is to take less value than you make, and share value fairly with all participants,” says the article.
4. Failure to launch to the right side.
When you launch a platform, you have launched to specifically targeted people. At any given time, you can’t make everyone happy, and you can’t market to everyone. As a result, you have to be very careful on who you emphasize your marketing messaging. And just sometimes, it can be just as important to attract consumers over producers, and other times it is just the opposite. You have to weigh in the options and plan accordingly. When you begin to launch a platform, you need to understand that your short-term audience will ideally be a small subset of your longer-term, larger audience. When Facebook first launched, they targeted universities, and then attracted a wider audience. When Uber started their services, they limited to only certain cities.
5. Failure to put critical mass ahead of money.
Sometimes you have to wait for the return on your investment before you have a solid amount of users on your platform. “Even after the subsidies end, platform monetization that comes at the expense of building network effects is rarely sustainable in the long run as it works against the core mechanism by which platforms create value at scale,” says the study.
6. Failure to imagine.
The biggest mistake of managers these days is to not try and create a platform at all. There are many examples of tech companies who suffered for not creating a platform like an environment where a number of its users can bring value to their devices. Before the iPhone, other companies dominated the electronic landscape. Do you remember? Sony was the champion of portable electronic devices while Hewlett-Packard dominated the personal and scientific calculator market. Now today, anyone can download music or a calculator onto their Android or iOS device, and these two companies are rarely thought of for their personal electronics. Why is this? It is because both Google and Apple realized early on that their company would benefit by exploiting a platform, and HP and Sony did not.
While we can’t account for every factor on a business and platform success, we can account for how managers act. While following these points will not ensure that you will be successful, following these points will ensure you didn’t make the same mistakes as others.