In Part 2 of this blog series, we’ll look at the leaders of the platform revolution and at how they leverage critical characteristics to create successful business models.
The goal of this blog series is to explain the platform business model revolution and look at its impact on the insurance and benefits industry.
Platforms seem to be everywhere. Chances are, you were on a platform while drinking your coffee this morning. You might have been looking at an article a former coworker posted on LinkedIn, or maybe you kept track of an old friend on Facebook. Maybe you ordered that part for your son’s bike on Amazon… and those are just the obvious culprits.
Platforms have changed how we buy, how we commute, how we vacation, and how our most dominant businesses scale. So far, they’ve dominated simple transactions, but they’re coming for the insurance and benefits industry too.
Let’s review a bit.
If you haven’t read Part 1 of this series, you may want to take a moment and do that, but I’ll summarize it quickly in a few bullet points:
- Platforms are interactive ecosystems that connect people, resources, and organizations to create and exchange value.
- Platforms are not software, but software programs and technology solutions are frequently an element of platforms.
- For a platform to succeed, it has to focus on the health, size, and growth of its supporting network. The best platforms find ways to grow their networks in scalable chunks and leverage marketing and promotion to sustain that growth.
- Platforms rely on the stakeholder experience – if customers don’t receive value, they won’t be back. That value should extend to both the seller side and the buyer side of the transaction because without a great user experience, even incentivized platforms fail.
- Platforms can scale exponentially at an incredible rate.
Even with the right elements in place, though, it’s important to know that platform businesses are not guaranteed to succeed. In fact, in a study of over 250 platform businesses launched over the last 20 years only 43 have been successful. This brings us, rather conveniently, to Part 2 of this series, where we’ll look at common elements of successful platforms and how they’ll impact the insurance and benefits industries.
Commonalities of success
One of the things I ask business people, particularly entrepreneurs, is this: “What differentiates a successful business or product from a failure?” Almost universally, the answer is some summary of a simple to understand, but difficult to emulate formula. For example, “tools, timing, and talent” or “innovation, foresight, and perseverance.” One very honest respondent said, “luck and funding,” which I appreciated.
Luckily for us, what makes a successful platform business is more concrete, though equally hard to emulate.
The most successful platforms are structured elastically.
One of the amazing aspects of a platform is that it turns the traditional business asset structure on its head.
If you were to look at any valuation of a business right up to the 1990s, most business assets were tangible goods: buildings, machinery, inventory, warehouses, etc. At some point on the list, you might have run into intangible assets like brand value, process, and reputation.
It’s different for platforms. Their value is almost always based on intangible things like network membership, traffic, reputation, brand awareness, and engagement, all of which create a network of users. Sure, there’s an investment in infrastructure and technology, but these are farther down on the list and, believe it or not, are somewhat commoditized.
This inversion is also why these companies can scale so quickly. The hard costs aren’t inventory or infrastructure, the hard costs are in technology. The elastic nature of these platforms’ primary assets and the flexibility of modern cloud-based technology mean that the value and impact of platform businesses can scale simultaneously with their networks, which are the real assets.
The most successful platforms compel membership and interaction to create a healthy network.
For a platform to be successful, people have to want to interact with it. Without that interaction and involvement, there’s no content on the site or value to inspire new users to become a part of the network. This creates a real chicken and egg situation: without traffic, there’s no value, and without value, there’s no traffic.
Believe it or not, many of us had our first platform interaction long before Facebook or Reddit. In the early 2000s, if you had a hobby and an internet connection, you were most likely a member of a forum or chat room related to your interest. These forums worked by having a group of individuals – some knowledgeable, some passionate, some curious – share info on a topic. The collective knowledge base, information exchange, and banter were the value that compelled interaction, built the community, drove the traffic volume, and created the advertising and sponsorship opportunities that funded the site.
Some platforms take it even farther by incentivizing interaction, which is particularly effective in multi-sided platforms.
Let’s look at a physical example for clarity.
Auctions are a physical, multi-sided platform for transactions. You have the sellers on one side, the buyers on the other, and the auction house in the middle profiting by creating the network and compelling the interaction.
The auction house gets a percentage of each sale to offset their expenses for promoting the event, securing the location, creating the listings, valuating the inventory, providing the entertainment and refreshment, processing the transfer of ownership, etc., all of which are designed to incentivize the buyer’s interaction.
If no buyers show up, there are no sales.
Similarly, if there are no sellers offering highly enticing, interesting, or rare objects, there are no sales, so the same auction house may offer reduced commissions or transport and processing discounts to compel sellers to want to list their items. If that strategy works, the auction house can lose a little money on one side and make it back on the other. Costs on one side may drive profit on the other, and the platform can adjust – as needed – to address market shifts, which is a formula eBay tweaks in its business model to make sure both sides stay engaged.
The most successful platforms are focused, curated, monitored, and controlled.
Let’s go back to the earlier example of a subject matter-focused forum or chatroom. The success of that particular platform model is dependent on the flywheel effect.
If the forum can start the wheel turning by offering knowledge as the primary value, the member base increases, and new members contribute more knowledge – which, in turn, creates more value to attract more members. The technology can expand rapidly to support growth, profits can scale because there is more traffic to invite advertisers, and the wheel keeps turning.
More value = more visitors = healthier network = more profits.
Also, as the volume increases, costs tend to stabilize or even decrease on a per transaction or per-member basis, which is why it’s often more expensive to have 200 members than it is to have 20,000.
So, the best platforms must be tightly focused. They may address large audiences and offer diverse products, but they need to stay focused on their core audience and primary value proposition. Otherwise, the delicate balance needed to create a successful flywheel can be thrown off.
The internet is full of the detritus of poorly assembled and badly curated platforms that lost their way or that may even have been driven off course by their own membership.
There’s a wildly organic, difficult to control element to platform businesses because they’re driven by human involvement and interest. That interest can drift very easily and even push a platform away from the core market it set out to target, which can unlock new opportunities in some cases but destroy the platform in others. This is why the best platforms enforce strict rules of engagement, curate products or content, mediate disputes, monitor interactions, and provide great customer service support.
Those tight guardrails maintain the platform’s focus and keep the primary audience – or audiences – engaged, thus preserving the flywheel and keeping the network healthy.
The most successful platforms are focused on the network experience.
As I mentioned earlier, the internet is crowded with derelict platforms, lists, databases, forums, and aggregators that failed to offer value or lost their way; these sites do little more than clutter up search results and squat on domains.
Then there are the big failures – the ones that make it into business books and serve as the cautionary boogeymen for the next generation of digital entrepreneurs. Interestingly, and probably unsurprisingly, many of these failures were due to focusing on the wrong strategy in an effort to produce a certain network growth effect.
Many platform failures focused on pricing as their key to success.
Price is a logical and aggressive differentiator; after all, who doesn’t want the best deal? But it gambles with human nature and is likely to create an unsustainable business model. Price differentiation, and the positive network effects it creates, are short-lived and come with their own inevitable disruption built into the model.
It’s easy to launch a business with loss leader prices, build the brand, get the media buzzing, and secure venture capital from frantic tech investors. But eventually, you’ll have to disrupt your own ecosystem because you’ll need to raise your prices at some point.
The price differentiation gamble runs on a few assumptions platform owners tell themselves:
1 – We won’t need to raise prices because we’ll have so many members that we’ll be able to introduce advertising.
2 – Members will value us so much that they won’t care if we raise prices.
3 – Members won’t take advantage of our offer enough to create a loss.
The problem is that all of these assume that your network will behave as expected and tolerate changes. Great examples of price-based networks failing include MoviePass and Pandora. Both companies gambled on human nature and lost.
Other platform businesses bet big on their brand and engagement to create and compel their network. The classic example of the dangers of heavy investment in your brand vs. understanding your network is pets.com.
Heavy advertising (1900% more than their annual revenue) and a ubiquitous mascot weren’t enough to overcome the fact that pet owners wouldn’t shift their buying behavior to make the company profitable.
Brand-driven network effects are expensive and abstract, and without understanding users or building value for the network, they’re almost always destined to fail.
The fate of the failed businesses in the above examples may have been different if the entrepreneurs had focused on creating better experiences for their users and network. The positive network effects created by a great experience can overcome price objections while propagating the brand and increasing engagement.
Many of today’s leading platforms focus on the experience of the user and understand that great user experiences are driven by balancing the 3 C’s – Cost, Control, and Convenience. We are big fans of the 3 C’s here at Genius Avenue.
People might shout and scream when Facebook or LinkedIn changes a feature, or they might rail against the amount of advertising on these platforms, but they keep their profiles active because of the free, slick interface and the convenience of being able to find all their contacts in one place.
Amazon might earn its fair share of bad press, but the convenience and cost benefits it offers tend to cancel out the backlash.
These platforms focus on the positive network benefits created by the user experience; in fact, most of their feature development, analysis, and growth are centered around continually improving it.
It’s a hard formula to beat.
We’ve spent a lot of time reviewing what a platform is and what makes it successful.
The simple, but difficult to emulate, formula for a successful platform includes scalability, involved and potentially incentivized networks, tight curation and moderation, and a focus on the user experience to balance cost, control, and convenience over other distractions.
To date, we’ve only scratched the surface of why this business model is set to revolutionize the insurance industry. Join us for Part 3, where we’ll dive deep into the effect the platform revolution will have on insurance and benefits.
So, in full disclosure, Genius Avenue offers a platform for insurance and benefits providers, brokers, and consumers. Want to learn more about it? Click here.
My special thanks to Parker, Alstyne and Choudary, who are the authors of the excellent book Platform Revolution. I’d be remiss if I didn’t point out that many of the elements in this article were inspired by that work, and I can’t recommend it enough.