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Platform strategy, explained

Got a bad case of platform envy? Find out why “seeding” and “coring” matter, and be open to a better way.

By Zach Church  |  June 16, 2017

Amazon-books

Amazon, one of the world's most successful platform companies, opened brick-and-mortar book stores in part to draw new users to platform-enabled products like Kindle and Echo.

Why It Matters

Your platform pitch sounds great on stage or in the boardroom, but the reality is so much harder. Failure is around every corner. A good platform strategy will help you dodge the traps, and may even send you in a different, more prosperous direction.

What is a platform?
Platforms are environments, computing or otherwise, that connect different groups and derive benefits from others participating in the platform. The underlying concept covers companies from Google to Facebook to video game platform Steam to Taser (more on that later). 

“’Platform Strategy’ is one of our few courses where participants can spend an hour debating on what they are learning about is,” MIT Sloan Professor Catherine Tucker tells students in her executive education course on platform strategy. “Don’t get hung up on definitions. Being a platform or not is more of a range than a set point.”

What is platform strategy?
A platform strategy is an approach to entering a market which revolves around the task of allowing platform participants to benefit from the presence of others. In traditional competitive strategy, it is generally assumed that customers can determine their willingness to pay for the product or service independently. This assumption breaks down when studying platforms, as platform participants’ participation is interdependent with the choices of other users. This is why the formulation of a platform strategy requires somewhat distinct tools to help platform entrepreneurs and managers tackle the challenges of value creation and value capture.

Arguably, your platform strategy is more critical to success than the idea behind the platform itself. Building a platform, especially after a decade of buzzworthy attempts and a few huge successes (Amazon, eBay, Uber, Airbnb), is really, really hard. There are countless ways to flub this. A solid platform strategy will answer two key questions: How will you attract customers? And how will you make your technology the core of an ecosystem?

Seeding users is the most critical step to platform success
Tucker says she can tell right away that someone has a platform strategy if they have a plan to drive the first users to a platform “when there is nothing there.” 

“That is a plan for how you get over the chicken and the egg problem,” she says. “If you’re the only person in the world on Uber, it’s really not that good. I so often find that many people, because they’ve got a product mentality, think about features. They show me pictures of their user interface and how the app’s going to be really cool and all these kinds of things. But rather than having a feature mindset, you have to have a seeding mindset.”

While there are a number of ways to seed users into a platform, the strategies all have the potential to backfire. For example, recruiting a marquee user to kickstart the platform and draw other users can backfire if that user usurps control of the platform’s governance. Or focusing on low prices or free services can backfire when users become accustomed to and anchored on that low price for the long run.

You have customers. Now you have to make them talk.
Tucker calls it “coring,” that is, making your platform the core of an ecosystem, the place where users meet and make connections, where commerce happens. And that requires some policing, some governance.

Remember the early days of eBay? The service was, at its core, a search platform. People listed hard-to-find or unique items for sale. Other people bought them. But scams were abound.

“People were selling plasma TV boxes with stones in them,” Tucker says. At the time, eBay saw itself as a matchmaker, not responsible for the quality of the products or the transactions. Today, the company offers disagreement resolution, buyer protection plans, and occasionally will refund wronged users directly, earning itself a reputation of reliability.

Uber, meanwhile, is dogged by allegations that it does not support drivers and disavows itself of responsibility when riders are assaulted.

“For it to go well, it’s not how well the Uber app works or how beautiful its interface is,” Tucker says. “It’s also how well that driver behaves on that Uber ride. And so you have to adopt a policeman or a governance role, which is quite alien for the average product manager.”

Building trust can happen a number of different ways. Apple has strict developer guidelines for its app store. Airbnb rewards property owners for building up good reviews and posting accurate photos of their properties. The players may be different, but the platform must provide predictability and reliability. 

Appstore-2Trust matters. Apple’s strict development guidelines for its app store helped it grow its user base. In return, the company gets 30 percent of all app store purchases.

“You’re designing a new way for these participants to interact,” says MIT Sloan Professor Pierre Azoulay. “There are a lot of non-pricing rules involved. Who can join, what kind of information you get to have on what’s happening on the other side, how open the data that’s generated by your platform is to others, how easy it is for others to play with that data.” 

“All of that needs to be decided,” Azoulay says. “And it needs to be decided very early on.”

Don’t just be the ‘Uber for …’ Think about how your platform will make new connections.
The pitch is so obvious that it’s a well-mocked cliché. “We’re Uber for dog-walking.” “We’re Uber for coffee.” “We’re Uber for child care.” While some of these companies have carved out a niche with an Uber-like on-demand platform, many more have failed.

Tucker points to Axon as an example of a company reinventing itself as a platform leader with a unique value proposition. The company, formerly called Taser, still makes stun guns for law enforcement and for personal self-defense. But its new focus begins with body cameras and includes data storage and collaboration tools. Connections are built between police officers and other law enforcement staff and attorneys with the goal of boosting efficiency, such as reducing the time officers spending writing and filing reports.

Beepi, a platform for used car purchases founded by an MIT Sloan alumnus, also connected users in a new way. The company, which folded earlier this year after a cancelled sale, sought to replace the usually fraught used car buying process with a certified inspection (inspectors were employed by Beepi) and free delivery. Car sellers and car buyers could complete a transaction without meeting and without a test drive.

“They had this insight about how to design the interaction between buyers and sellers, and that was the role of the inspector,” Azoulay says. “This is a place where a platform strategy is not a crazy thing to want to implement, because if you’re successful, you’ll practically fix the market.” 

Beware “platform envy.”
Grab a copy of Forbes, Entrepreneur, or Inc. from the past five years. There’s a decent chance the face on the cover is a platform company CEO. When a company like Airbnb hits big or Salesforce pivots to a platform strategy, words like  “billionaire” and “genius” start getting thrown around. It’s easy to fall for the idea that building a platform is a pathway to success — if not at Mark Zuckerberg levels, at least within your industry.

But Azoulay, who teaches competitive strategy and innovation strategy, among other courses, reminds students not to get starry-eyed.

“Platform strategy is, in some sense, one of the most ambitious ways of entering a market you could have, because it requires coordinating the behaviors of multiple parties that might not know each other, that might not even want to know each other,” Azoulay says. “You’re sort of this orchestra conductor, and as a result of being very ambitious, it also fails very often.”

“You’re right to be platform-curious, but you shouldn’t necessarily be platform-envious,” he says.

Tucker and Azoulay encourage students in their platform strategy class to think about where their company fits best within a platform ecosystem. Generally speaking, platforms create new connections and new opportunities for trade. All participants in a platform ecosystem stand to gain. Being a savvy, successful participant may offer a path to profit without the enormous risk of managing the platform itself, if you’re willing to cede the glory in favor of growth and stability. Just be sure you retain control of your data, Tucker says.

Ready to go deeper?
Register for Platform Strategy: Building and Thriving in a Vibrant Ecosystem, a two-day MIT Sloan Executive Education course taught by Azoulay and Tucker twice each year.

Read “Matchmakers: The New Economics of Multisided Platforms,” co-authored by MIT Sloan professor emeritus and dean emeritus Richard Schmalensee, and “How companies become platform leaders,” a classic and still-relevant 2008 MIT Sloan Management Review article by MIT Sloan Professor Michael Cusumano and University of Surrey Professor Annabelle Gawer.

The experts.

azoulay-platforms

Pierre Azoulay is a professor of technological innovation, entrepreneurship, and strategic management at MIT Sloan. His general research interests lie at the intersection of technical change, labor, health, and organizational economics. Most of his work deals with the organization of the “ideas sector” of the economy and the consequences of different institutional arrangements for innovation and economic growth. He teaches courses on strategy and technology strategy. He is a research associate at the National Bureau of Economic Research.

Tucker-platforms

Catherine Tucker is a professor of marketing at MIT Sloan. Her research interests include how technology allows firms to use digital data to improve their operations and marketing, and in the challenges this poses for regulations designed to promote innovation. She has expertise in online advertising, digital health, social media, and electronic privacy. She conducts much of her work at the intersection of marketing, economics, and law. She is co-editor of Quantitative Marketing and Economics, and a research associate at the National Bureau of Economic Research. She is chair of the MIT Sloan PhD program.