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Platforms and
Ecosystems

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Introduction
 In the mid-2000s, Nokia, Samsung, Motorola, Sony Ericsson, and LG
dominated the mobile phone industry, controlling 90% of global
profits.
 Apple's iPhone emerged in 2007, rapidly capturing market share and
transforming the industry dynamics.
 Shift in Market Dynamics:
 By 2015, the iPhone alone generated 92% of global profits, leaving
former incumbents struggling.
• Despite classic strategic advantages – technology, brand, efficient
processes etc.

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Why did Apple succeed?

 Apple leveraged innovative design and capabilities, positioning itself
against powerful incumbents.
 Exploited the power of platforms
Network Effects in Action
 As the number of participants (developers and users) increased, the
value of the platform grew.
 The App Store, by January 2015, offered 1.4 million apps, generating
$25 billion for developers.

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The Power of Platforms

 Platform businesses bring producers and consumers together in high-
value exchanges.
 Information and interactions are key assets, creating value and
competitive advantage.
iPhone as a Platform:
 Apple envisioned the iPhone and its operating system as more than
products, aiming to connect app developers and users.
• Two-sided markets, network effects, and the App Store's success played a pivotal role.

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Key Takeaway
 Failure to adapt to the platform model and understand the new rules
of strategy can lead to long-term competitiveness challenges.

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Pipeline to Platform
Transformation
 Platforms have existed for years – Malls, newspapers etc.
 Information technology has diminished the reliance on physical
infrastructure, making building and scaling platforms simpler and more
cost-effective.
 Platforms revolutionize traditional business models, connecting
consumers and merchants in ways that redefine industries.

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Key Characteristics of
Platforms
Reduced Ownership of Physical Assets:
1. Profound reduction in the need for physical infrastructure and assets.
2. Information technology facilitates easier and cheaper platform
development and scaling.

Frictionless Participation and Network Effects:

1. IT enables nearly frictionless participation, strengthening network effects.
2. Enhanced ability to capture, analyze, and exchange vast amounts of data,
increasing the platform's overall value.

Examples of Platform Businesses:

1. Uber, Alibaba, Airbnb—examples of platforms disrupting and transforming their respective
industries.
2. Spectacular growth leading to industry upheaval.

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Platform Ecosystem Structure

[Link]
Control intellectual property and governance.

[Link]
Serve as the platform's interface with users.

[Link]
Create offerings within the platform.

[Link]
Utilize the offerings provided within the platform.

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Platform Ecosystem Structure

Creators of the platform’s

Buyers or users of the
offerings ( for example, apps
offerings
on android

Producers Consumers

VALUE AND DATA EXCHANGE AND

FEEDBACK

Interfaces for the platform

(mobile devices are Providers
providers on android) Controller of platform IP and
arbiter of who may participate
Owners and in what ways ( google
owns android)

PLATFORM

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Comparison with Pipeline

Businesses
 Pipeline Businesses:
• Create value through a linear series of activities (value-chain model).
• Inputs undergo a series of steps to transform into a finished product.
• E.g., Apple's handset business operates as a pipeline.

 Platform Businesses:
• Combine various players and interactions within an ecosystem.
• E.g., Apple's App Store transforms its handset business into a platform.

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Coexistence of Pipeline and

Platform Models
 Firms can be both a pipeline and a platform.
 While pipeline businesses remain competitive, the entry of platforms
into the same market often results in platform dominance.
Industry Response:
 Established pipeline giants (Walmart, Nike, John Deere, GE) are
incorporating platforms into their models to stay competitive.
Conclusion:
 The transformation from pipelines to platforms is reshaping industries
and redefining competitive landscapes.
 Embracing platforms allows businesses to thrive in the digital age.

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Key Shifts in the Move from

Pipeline to Platform
Shift 1: From Resource Control to Resource
Orchestration
 In a pipeline model, firms gain an advantage by controlling
tangible and intangible assets.
 Platforms shift the focus to assets that are hard to copy,
emphasizing the community and resources contributed by
members.
 The network of producers and consumers becomes the
chief asset in a platform ecosystem.

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Key Shifts in the Move from

Pipeline to Platform
Shift 2: From Internal Optimization to External
Interaction
 Pipeline businesses optimize internal processes to create
value across the entire product chain.
 Platforms create value by facilitating interactions between
external producers and consumers.
 Emphasis shifts from dictating processes to persuading
participants, requiring essential skills in ecosystem
governance.

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Key Shifts in the Move from

Pipeline to Platform
Shift 3: From Customer Value to Ecosystem Value
 Pipelines aim to maximize the lifetime value of individual
customers.
 Platforms seek to maximize the total value of an
expanding ecosystem through a circular, iterative, and
feedback-driven process.
 Sometimes, subsidizing one type of consumer is
necessary to attract another type.

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Why are platforms beating

pipeline businesses?
1. Platforms excel over pipelines because of efficient scaling due to elimination of gatekeepers,
more freedom to the customers
Gatekeeper Inefficiencies:

• Pipelines rely on inefficient gatekeepers to manage value flow from producer to consumer.
• Traditional publishing industry example: Editors select books based on instinct and guess work; a
time-consuming process.
Amazon's Kindle Platform:
• Kindle's platform allows anyone to publish, relying on real-time consumer feedback.

• Growth is rapid and efficient as market signals come from the entire community of readers.
• More examples –

Traditional higher education's one-size-fits-all model vs. platform education (Coursera) offering
selective services.

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Why are platforms beating

pipeline businesses?
2. Platforms outshine pipelines by unlocking new sources of value creation and supply.
Transformation in the Hotel Industry:
• Traditional hotel growth involves physical expansion, real estate scouting, and property
investment.
• Airbnb disrupts this model by applying the platform concept, connecting hosts directly with
consumers.
Airbnb's Platform Model:
• Airbnb operates without owning rooms; it's a platform connecting hosts and guests.
• The platform charges a 9–15 percent transaction fee for each rental, fostering a decentralized
approach.
Change in Supply Dynamics:
• Platforms redefine supply by unlocking spare capacity and community contributions, vs
• Traditional businesses which rely on just-in-time inventory; platforms run on not-even-mine
inventory.

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Why are platforms beating

pipeline businesses?
Examples of Platform unlocking supply and creating disruption:
• RelayRides (Turo) transforms car rentals by borrowing from the community, challenging traditional car
rental companies.
• YouTube's content model surpasses TV networks, leveraging user-generated content.
• Viki disrupts media value chains by using an open community of translators and licensing subtitled
videos globally.
Impact on Traditional Competitive Landscape:
• Platforms expose new supply avenues, challenging businesses with fixed costs.
• Hotels compete with platform-based firms benefiting from spare capacity through the platform
intermediary.
Sharing Economy Dynamics:
• Sharing economy fundamentals: idle items find utility, e.g., cars, boats, lawnmowers.
• Rise of platforms facilitates trust in sharing with strangers, reducing transaction costs and creating new
markets.

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Why are platforms beating

pipeline businesses?
3. Platforms gain a competitive edge by leveraging data-based tools to establish robust
community feedback loops.
Kindle's Community Feedback Model:
• Kindle platform relies on real-time reactions from readers.
• Community signals determine the popularity of books, enhancing the platform's efficiency.
Diverse Application of Feedback Loops:
• Platforms like Airbnb and YouTube utilize similar feedback loops.
• Feedback influences competition with traditional hotels and television channels.
Efficiency Through Community Signals:
• Platforms gather community signals on content quality (YouTube) and service provider
reputation (Airbnb).
• Subsequent market interactions become highly efficient, aiding users in finding suitable content
or services.

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Why are platforms beating

pipeline businesses?
Negative Feedback Impact:
•Products receiving overwhelmingly negative feedback disappear from the platform.
•Ensures quality control and user satisfaction.
Contrast with Traditional Pipelines:
◦ Traditional pipeline firms rely on control mechanisms (editors, managers) to ensure quality.
◦ Control mechanisms are costly and inefficient to scale.
Wikipedia's Community Feedback Success:
•Wikipedia showcases the power of leveraging community feedback to replace
traditional supply chains.
•Traditional encyclopedias, like Encyclopaedia Britannica, were once created through
centralized supply chains.
•Wikipedia's platform model builds a comparable information source by engaging a
community of external contributors.

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Why are platforms beating

pipeline businesses?
4. Platforms redefine the traditional firm structure by inverting their focus
from internal to external activities.
Inversion Process Overview:
•Platform business turns inside out, emphasizing external activities.
•Functions like marketing, information technology, operations, and strategy
shift towards external elements.
Marketing Transformation:
• From broadcast to segmentation to virality to social influence
• From push to pull.
Information Technology Transformation:
• From back-office ERP systems to front-office CRM systems to social media and
big data.

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Why are platforms beating

pipeline businesses?
Finance Transformation
• From shareholder value and discounted cash flows To stakeholder value and interactions outside the firm.

Operations Management Transformation

• From optimizing internal inventory and supply chain systems To managing external assets not directly controlled
by the firm.
◦ Examples include Uber, Facebook, Alibaba, and Airbnb.

Strategy Transformation:
• From controlling internal resources and erecting competitive barriers To orchestrating external resources and
engaging vibrant communities.

Innovation Transformation:
• No longer confined to in-house experts and R&D labs; produced through crowdsourcing and contributions from
independent participants in the platform.

Balancing Internal and External Resources:

• External resources complement, not replace, internal resources.
• Platform firms emphasize ecosystem governance over product optimization and persuasion of outside
partners over internal control.

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One-sided platforms, multi-sided

platforms (MSPs) and resellers

One-sided platform Side-A Side-A

Sale of essential input Affiliation with the MSP Sale of Goods and Services

Side-A MSP Reseller

Sale of final product Affiliation with the MSP Sale of Goods and Services

Side-B Side-B Side-B

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Multi-Sided Platform (MSP)

Definition: A technology, product, or service that creates value primarily by enabling
direct interactions between two or more affiliated customer groups.
Key Feature: Direct interaction and affiliation of multiple distinct customer groups.
Examples:
• eBay (buyers & sellers)
• Airbnb (hosts & guests)
• Apple iOS (developers & users)
• Facebook (users, advertisers, developers)
Strategic Challenge: Overcoming the "chicken-and-egg" problem—attracting all sides
to achieve critical mass.

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One-Sided Platform
Definition: A platform that creates value for a single group of affiliated
users without enabling direct interaction between distinct groups
Key Point: No direct interaction or affiliation between multiple
customer groups.

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Reseller
Definition: A firm that buys products from suppliers and resells them to buyers, without
enabling direct interaction between the two.

Suppliers Resellers Buyers

Provide products to resellers Control key decisions (pricing, advertising, Purchase from resellers
customer service, order fulfillment)

Examples:
Supermarkets
Retail shops
Trading companies
No Direct Interaction: Suppliers and buyers do not interact directly; all transactions are
mediated by the reseller.

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Challenges with Platform

Businesses
Indirect (Cross-Side) Network Effects
 Definition: The value to users on one side increases as the number of
users on the other side grows.
 Challenge: Platforms face a "chicken-and-egg" problem—each side
waits for the other to join, making it hard to reach critical mass.
 Example:
 eBay: Sellers want more buyers; buyers want more sellers. If neither joins
first, the platform struggles to grow.
 Grabon: Merchants want lots of consumers; consumers want lots of deals.
Rapid imitation by competitors diluted network effects.

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Challenges with Platform

Businesses
Multihoming Costs
Definition: The costs for users to participate in multiple competing
platforms simultaneously.
Challenge: If multihoming costs are low, users can easily join many
platforms, making it hard for any single platform to dominate.

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Challenges with Platform

Businesses
 Economies of Scale
Definition: Cost advantages that a platform gains as it grows larger.
Challenge: Achieving scale is crucial, but if competitors can also scale
quickly, it's hard to sustain an advantage.

Facebook vs. MySpace Payment Platforms (PayPal, Square)

Facebook achieved greater economies of scale in The more users and merchants onboarded, the
user base and infrastructure, allowing it to lower the cost per transaction, but rivals can also
outcompete rivals. scale rapidly.

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Network Effects
 Network effects are the impact of a platform's user base on the value created for
each user.
 Networks can be categorized according to the number of distinct user groups
 Networks with homogeneous users are called one-sided networks
• Example – a telephone network, a stock trader

 Networks in which there are two distinct user groups are called – two-sided
networks
• Examples – credit cards (users and merchants), video games (developers and gamers)

 In a two-sided network, members of each group have a preference regarding a

number of members in the other group – cross-side network effects.
 Networks can also be 3-sided or more
• Example – YouTube (content consumers, content providers, and advertisers)

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Cross-side and Same-side

Network Effects in a Two-sided
Network

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Positive and Negative Network

Effects
Positive Network Effects:
• Positive network effects occur in well-managed platform communities.
• A large user base enhances the value for each user.
• Main source of value creation and competitive advantage in platform
businesses.
• Example – Fax machines.
• More users on the network increases willingness to pay (WTP) for a new user

Negative Network Effects:

• Negative network effects arise in poorly-managed platform communities.
• Growth in numbers can reduce the value produced for each user.
• Example – more fax machines may eventually lead to network congestion
• Negative network effects reduce WTP for a new consumer

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Strength of Network Effects

Metcalfe’s Law
 Closely tied to the concept of network effects, where the value of a
product or service increases as more people use it.
 Metcalfe's Law states that the value of a telecommunications network
is proportional to the square of the number of connected users.
 This means that as the number of users on a network increases, the
value of that network grows at an even faster rate.
 For example, a network with 10 users is considered to have 100 times
the value of a network with 1 user.

 Is Metcalfe’s Law applicable to businesses?

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Strength of Network Effects

After an initial period of
accelerating growth, WTP
increases at a decreasing rate due
to –
 Budget and attention constraints
• Example - No time to send 70
million faxes

 The fact that late adopters

conduct fewer transactions
• Example – no need to send a fax to
strangers in Bolivia

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From Supply Economies Of Scale

To Demand Economies Of Scale
 Network effects represent a transformative economic phenomenon driven
by technological innovation.
Twentieth-Century Industrial Era:
• Giant monopolies built on supply economies of scale.
• Supply economies of scale driven by production efficiencies, reducing unit costs
as quantities increased.
• Examples include British Bessemer process, German Haber-Bosch process,
Thomas Edison's inventions, and Henry Ford's mass production.
Twenty-First-Century Internet Era:
• Monopolies created by demand economies of scale.
• Coined by Hal Varian (Google's chief economist) and Carl Shapiro (business
professor).
• Demand economies of scale leverage technological improvements on the
demand side, focusing on social networks, app development, and more.

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TWO-SIDED NETWORK
EFFECTS
Two-Sided Network Effect Defined:
Two sides of the market are involved, each attracting the other:
• In Uber: Riders attract drivers, and drivers attract riders.
• Similar dynamics in other platform businesses: Google’s Android, Upwork, PayPal, Airbnb.

Positive Feedback and Network Growth:

Two-sided network effects with positive feedback stimulate network growth.
Businesses invest to attract participants to one side, knowing the other side will follow.
Examples: Uber's strategy of offering free rides, spending to attract both drivers and riders.
Strategic Spending for Growth:
Platform businesses may spend to attract participants to one side of the market, accepting
financial losses initially.
Demonstrated in Uber's use of investor money to provide free rides, creating a virtuous cycle.

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Economic Sense in Two-Sided

Markets
 Economic sense in accepting financial losses in Market A if it enables growth in
Market B.
 Example: Local bar offering discounted drinks to female customers (Ladies'
Night), attracting men who later pay full price.
Strategic Consideration:
 Financial losses in Market A are acceptable if the profits in Market B outweigh
the losses.
 Emphasis on the need for a strategic balance between the two markets.

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Scaling Network Effects:

Frictionless Entry And Other
Scalability Tools
 Network effects hinge on the size of the network, highlighting the importance of scaling platforms
rapidly.
Case Study: Google vs. Yahoo:
• Yahoo's hierarchical, human-edited database struggled to scale with the exponential growth of the
internet.
• Google's page rank algorithm, leveraging web links and crowd choices, provided a scalable model.
• Frictionless entry: Google's approach allowed organic growth by matching both sides of the network.
Frictionless Entry and Scaling:
• Frictionless entry is crucial for a platform's rapid and unrestricted growth.
• Threadless, a T-shirt company, exemplifies the benefits of almost frictionless entry, enabling rapid
scaling.
• Weekly design contests involve external participants, reducing the need for internal talent.
• Minimal handling and inventory costs due to outsourcing production.
• Scalability advantages became evident as the platform grew in popularity.

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Google’s page rank algorithm

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Scaling Network Effects:

Frictionless Entry And Other
Scalability Tools
Scaling Both Sides of the Market:
•Uber and Airbnb examples:
• Proportional growth of both riders and drivers for Uber.
• Airbnb faces the challenge of scaling both hosts and guests.
• Coupons or discounting to balance participant numbers on both sides.

Side Switching as a Growth Facilitator:

•Some platforms encourage users to switch sides, contributing to growth.
•Uber and Airbnb recruit new drivers/hosts from their existing user pools.
Scalable business models, frictionless entry, and side switching collectively
lubricate network effects.

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Negative Network Effects:

Their Cause And Cure
 Shift from positive to negative network effects can lead to platform failure.
 Negative effects arise when growth hampers the ability to find the best
matches, demanding effective curation.
Negative Network Effect Example: OkCupid:
•Scale led to issues: attractive women bombarded by less attractive men,
causing dissatisfaction.
•OkCupid's curation strategy:
• First level: Matching based on compatible interests.
• Second level: Addressing comparative attractiveness, protecting users from
mismatched attention.
• Result: Improved satisfaction for both attractive women and less attractive
men.

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Comparison of Network effects

across different networks
 Network effects are stronger in matching networks
1. When transactions involve heterogeneous demand and supply
 Example – buyers and seller of homes vs buyers of mortgage

2. When users conduct sequential transactions

 Example – repeated purchase of identical items (DVDs, video games)

3. When users are mobile

 Examples – Credit cards

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Strategies to Avoid /
Reduce Multihoming

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Exclusive Contracts
Lock in one side so they cannot also list/work on a competitor’s
platform.
e.g., Apple Arcade deals with exclusive game developers
Amazon private label brands sold only on Amazon
Streaming rights in sports (IPL rights with Disney/Jio)
Effect: Forces a “single-homing” ecosystem.

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Superior Integrated User

Experience
Make switching / dual usage unattractive:
 tight integration
 frictionless UI
 seamless payments
 faster delivery
 guaranteed trust
 e.g., Apple App Store + Apple ID + Apple Pay → switching to an Android
store is costly.

Effect: Users voluntarily avoid multihoming because this platform feels

complete.

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Loyalty Programs / Rewards

Reward staying exclusive:
 Coins, points, cashback, subscription perks
 e.g., Swiggy One / Amazon Prime → bundling lowers outside op ons
 Credit card platform tie-ups
Effect: Economically irrational to maintain multiple platforms.

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Bundling & Ecosystem Lock-In

Offer complementary services that work better inside a single platform:
 App + cloud + storage + payments + hardware
 e.g., Apple (iPhone + iCloud + iMessage)
 Amazon bundling Prime → Video + Music + Delivery
Effect: User feels “everything is here → no need for second pla orm.”

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Network Effects + Reputation

Moat
The more users on one platform, the weaker the incentive to multihome
 eBay’s seller ratings tied to identity
 Uber driver ratings cannot be transferred to Ola
Effect: Reputation becomes platform-specific capital → hard to
multihome.

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Data Lock-in
Owning the user relationship & data:
 Personalized recommenda ons → improve with usage
 Data is not portable to competing platforms
 Example: Netflix viewer history = non-transferable; Google photos
Effect: Learning curve → staying is rewarded.

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Pricing Architecture
Platforms sometimes make dual participation costly:
 fee structures
 minimum commitment
 tiered access

 Example: enterprise SaaS marketplaces (like AWS Marketplace, Azure

Marketplace, Salesforce AppExchange) offering volume discounts →
going multi-platform raises cost.
 Example: iTunes subsidized songs → to make users buy iPods
Once locked into iTunes library, switching cost increased → less
multihoming

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Why Marketplaces LOOK

Attractive (Myth)?
Asset-light business model
High percentage margins
Small team, scalable
Looks profitable → on paper
But,
×Lack of trust in sellers
×Quality uncertainty
×Poor/inconsistent buyer experience
×No accountability for fulfillment
×High friction for sellers

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When is the reseller

model better?

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Condition 1: Scale Effects

 High-demand products
 One large aggregator can get lower cost
 Economies of scale in logistics, warehouses
 Example: Amazon (for high-volume SKUs)

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Condition 2: Aggregation &

Complements
 Products are more valuable when bundled
 Cross subsidy is possible
 Example: iTunes + iPod (cheap music → sell device)
 MSP cannot force bundling

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Condition 3: Buyer/Seller
Expérience
 Standardisation matters
 Fast shipping, easy return, trust, warranty
 Marketplace cannot enforce uniform quality
 Example: Gazelle

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Condition 4: Market Failure /

Trust Gap
Marketplace collapses when:
 Quality is uncertain
 Seller credibility is low
 Buyer risk is high
 No reputation transfer available
Reseller → reduces uncertainty
Example – OLX vs Cars24

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Decision Framework
Choose RESELLER if:
 High demand / economies of scale
 Bundle or complement products
 Experience needs control
 Trust gap / quality uncertainty
Choose MSP if:
 Long-tail variety
 Many niche sellers
 Self-regulating quality

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Multi-Sided Platforms:
Foundations and Strategy
Multi-sided platforms (MSPs) create value by enabling direct interactions
between two or more distinct customer groups. Examples include
Alibaba, Airbnb, Facebook, Apple’s iOS, and American Express. MSPs
reduce search and transaction costs, benefiting from powerful indirect
network effects that make them central in their industries. This
presentation explores four strategic challenges MSPs face: how many
sides to bring on board, design decisions, governance rules, and pricing
structures, along with when alternative business models may be
preferable.

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Foundations of Multi-Sided
Platforms
Platform and Intermediary Indirect Network Effects
Roles MSPs benefit from indirect
MSPs act as both platforms and network effects: the more users
market intermediaries, enabling on one side, the more attractive
interactions among multiple the platform is to other sides,
distinct customer groups, unlike creating high barriers to entry but
one-sided platforms or resellers. also a chicken-and-egg problem.

Switching and Multihoming Costs

High switching or multihoming costs help MSPs maintain market
dominance, as seen in the contrasting fortunes of Groupon and
LivingSocial.

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Strategy Challenge #1: How

Many Sides to Bring On Board?
Examples of Side Choices Trade-Offs
• LinkedIn operates a three-sided • More sides can increase network
platform (users, recruiters, advertisers) effects and revenue sources but add
and is exploring adding corporate complexity and potential conflicts.
users and developers. • Industry structural economic factors
may limit the number of sides on the
• Microsoft Windows connects users, platform. Example – XBOX
developers, and hardware makers, • Too many sides can limit the
while Apple sticks to a two-sided innovation potential of a platform
model with users and developers. • Starting with fewer sides and vertical
integration can help overcome initial
challenges.

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Strategy Challenge #2: MSP

Design
 Functionality and features of an MSP can be decided based on a simple
cost-benefit analysis

 But,

Balancing Conflicting Examples Principles

Interests eBay’s PayPal acquisition Design decisions should favor
Design choices often create reduced transaction costs and the side most critical to long-
trade-offs between sides, such increased revenue, while its term success, not necessarily the
as advertisers wanting more Skype acquisition failed due to largest revenue source, and
exposure versus users preferring misaligned user preferences. experimentation can help
less intrusion. mitigate risks.

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Strategy Challenge #3: MSP

Governance Rules
Types of Governance Rules Examples
• Access rules: who can join the platform? • eHarmony uses strict screening and
• Interaction rules: what can members controlled communication to ensure
do on the platform? quality matches.

• Nintendo’s strict game approval

contrasts with Sony and Microsoft’s
more liberal policies.

• Apple’s iOS tightly controls app

development, while Google’s Android
is more open.

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Governance Principles and

Market Failures
Quality vs. Quantity Trade- Market Failures Requiring
Off Governance
• “Lemons market failure” due to
quality uncertainty (e.g., 1983
Stricter governance improves
videogame crash).
quality but increases costs; MSPs
• Low quality suppliers drive
must balance these to maintain
out high quality suppliers
ecosystem health.
• Excessive competition
reducing incentives for
innovation.

• Failure to invest in positive

spillovers among constituents.

Examples of Governance Enforcement

Roppongi Hills enforces tenant policies to promote complementary benefits;
e-commerce sites use rating systems to maintain trust.

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Strategy Challenge #4: MSP

Pricing Structures
MSP Loss-Leader Side Profit-Making Side

Advertising-supported media Users Advertisers

Alibaba, eBay, Rakuten Buyers Sellers

Payment systems (American Express, Users Merchants

Visa, Square)

Videogame consoles Users Game developers

PC operating systems (Windows, Mac OS) Application developers Users

• MSPs should charge higher prices to the side with lower price elasticity.
• Charge more to the side that derives more value from the platform
• Charge more to the side with more market power

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Monetization: Capturing the value

created by network effects
How can we generate revenues without reducing our positive network
effects?

Can we devise a pricing strategy that strengthens our positive network

effects while reducing our negative network effects?

Can we create a strategy that encourages desirable interactions and

discourages undesirable ones?

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Numbers are not enough: How to

find the value in network effects
Exercise Time

Platform: Ad World will provide a listing service for firms to find ad

agencies. Ad World would make it easy for companies that are ready
to begin new advertising campaigns to post requests for bids, and
for ad agencies to post proposals and offers that companies can look
at and respond to.

Question: How should the company monetize?

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Numbers are not enough: How to

find the value in network effects
a) Charge the ad agencies to join the platform and put up their profiles?
b) Agencies pay for premium listings
c) Charge the firms that are seeking services?
d) Charge for individual project listings?
e) All four?

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Ways to
monetize!

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Ways to monetize!
(I) Charging a transaction fee :

 In many cases, this interaction

involves an exchange of money:

 Uber customer pays a driver for a ride,

 eBay/Urbancompany buyer pays a seller

for a product, or a company using Upwork
pays a freelancer for a completed project.

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Ways to monetize!
(I) Charging a transaction fee :

 Platforms that facilitate such monetary

transactions can monetize the value
created by charging a transaction fee,
which may be calculated as:

 either a percentage of the transaction price or

 a fixed fee per transaction

 The latter system, which is simpler to

administer, is particularly appealing when
a high frequency of transactions is
expected without a significant variation in
the transaction size.

427

Ways to monetize!
(I) Charging a transaction fee:

What's the challenge?

 A more serious and persistent challenge is

to capture on the platform itself all the
interactions facilitated by the platform.

 Buyers and sellers who find each other on

the platform are naturally incentivized to
take the interaction off the platform if
they can, in order to avoid paying the
transaction fee.
 Disintermediation

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Ways to monetize!
In general,
 High-value, customized services = MORE disintermediation
 E.g. Advertising / Marketing Services, Legal or Financial Consulting

 Repeat relationship-based services = MORE disintermediation

 E.g. Home Salon or Spa Services

 One-time gig, standardized scope = LESS disintermediation

 E.g.: cab services, food delivery

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Ways to monetize!
 Charging a transaction fee:

 In most cases, the interaction can’t occur until the producer (in this case, the service provider)
and the consumer (the purchaser of the service) agree on the terms of the service, which usually
requires the two to interact directly.

 These direct interactions weaken the platform’s ability to capture value by creating an
opportunity for the parties to make a deal off-platform.

 As a result of avoiding the transaction fee, the consumer can obtain a discount on the service,
while the provider gets to keep more of the total service charge.

 The only loser is the platform company itself.

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Ways to monetize!
 Charging a transaction fee:

 How to solve the problem of offline

transactions?

 Platforms such Airbnb solve this problem by

temporarily preventing participants from
connecting.

 These platforms try to provide all the

information a consumer needs to make an
interaction decision, without connecting the
consumer directly with the producer.
 Incentives based on volume of transactions
 Subsidize one-side so that incentives for
 Service provider platforms that want to disintermediation are reduced
capture and monetize interactions must
create tools and services that benefit both
parties by removing friction, mitigate risk,
and otherwise facilitate interactions.

431

Ways to monetize!
(II) Charging for Access:

 LinkedIn allows recruiters to present job

opportunities to its members and offers
companies the ability to compare and
target professionals based on their
résumés and professional brands.

 LinkedIn’s power as a recruiting platform

encourages users to update their profiles
more often, thereby keeping the platform
active and healthy.

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Ways to monetize!
III: Charging for enhanced access

 Platforms that charge producers fees for either

 better targeted messages,

 more attractive presentations, or interactions

with particularly valuable users are using enhanced access as a monetization technique.

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Ways to monetize!
 III: Charging for enhanced access

Example I: Every website publisher can achieve higher placement for its site through search
engine optimization, a self-managed website design and coding process that produces no
revenue for Google.

 However, some publishers choose to buy premium placement through Google Adwords.

Example II: Dating websites, for example, often allow men to see profiles of women without
revealing identifying details.

 However, users who pay a subscription fee are allowed access to additional information that
enables them to connect directly with other users who interest them.

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Ways to monetize!
IV) Charging for enhanced curation

 When the quantity of content on a

platform becomes overwhelmingly great,
consumers may find it increasingly difficult
to find the high-quality content they want,
thereby reducing the platform’s value for
them.

 When this happens, consumers may be

willing to pay for access to guaranteed
quality—in other words, for enhanced
curation.

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