4 reasons why you should consider a platform strategy

1. Benefit from network effects

One of the key reasons that platforms such as Google, Facebook, Amazon and eBay have been so successful is that they have exploited the phenomena often referred to by economists as network effects. At a basic level, network effects explain how the value of a network or a service becomes disproportionately more valuable to its users the more users there are.

2. Make it more difficult for your competitors

A 2-sided platform that brings buyers and suppliers together can be a powerful way to keep competitors out of your market or, at the very least, make it more difficult for them to succeed. Uber has been able to do this in many large cities. Although the company has competitors, Lyft for example, it would be very difficult for a new entrant to overtake them in places where they are well established. A defensible market reduces the need to consistently spend large amounts on marketing as higher barriers to entry can be more effective than expensive advertising campaigns.

The downside to this for society more generally is the tendency for some platform companies to become too successful and turn into de facto monopolies. The recent call by US Senator, Elizabeth Warren, for the breakup of Amazon, Google and Facebook shows how platform strategies can attract unwelcome attention if they become too large.

3. Cost-effective value creation

At the end of the day, business is about delivering value to customers and receiving payment in return. In a 2-sided platform such as Facebook, that payment may be attention and eyeballs from consumers and advertising dollars from businesses. The key point is that the 2 sides of these platforms provide value to each other with the platform owner acting as an intermediary.

Digital businesses lend themselves to this type of business model as they can be started with relatively little investment and scale effectively as demand grows. From the perspective of the platform owner, this is an attractive proposition as they can leverage these low-cost inputs. eBay, Uber and Airbnb have been able to grow so quickly because they do not need to carry any inventory or invest in infrastructure beyond that required to build the platform. The core value they add is trust, both from the suppliers that they will be paid and from users that the service or product will be delivered by the supplier. Review systems and refund guarantees reinforce the trust in the platform.

The principle of trying to lock customers is long-established. Gillette pioneered it with razor blades; once a customer has bought a Gillette razor handle, they are locked in to buying the company’s blades unless they switch to a competitor’s product. This also applies in the app economy. Having your app on a user’s home screen significantly raises retention rates and reduces customer churn.

Apple has very successfully created an ecosystem of hardware and software around the iPhone that, the longer a user is retained the harder it is for them to leave. When your photos and files are backed up in the iCloud and your playlists are all on Apple Music the less likely you are to invest the time in migrating to Android and moving your files to that platform. So long as your platform is delivering value to users, the more secure your user base is with all the benefits that brings for platform owners in terms of customer acquisition costs.

The economic benefits of being able to execute a platform strategy as part of your business model are clear. Investors are more likely to be attracted to a startup that promises to build a platform from which future innovations can be launched. However, platforms are not just for startups; established businesses should consider whether a platform strategy might be a good way to evolve existing product and service lines. Microsoft is doing this very successfully with its Office software as well as its Azure platform. Perhaps you should consider it too.