In our last article, Money talks. How do services marketplaces make money?, we focused on the main monetization strategies that platform entrepreneurs use to gain critical mass. We mentioned in passing that retaining customers on the platform is actually the biggest challenge of all.
One of the main ways to create value in this particular business context is through user interaction. In fact, platforms are usually defined as digital matchmakers for service providers and customers. They connect several end-user sides.
How does a platform manager influence user interaction?
This article focuses on the role of platform managers as the central actors or “facilitators”, as they provide the infrastructure under the form of a digital platform. After examining relevant network orchestration theories, the discussion will focus on whether network effects matter to strategize user retention efficiently.
Achieving platform stickiness
Platforms are ambiguous in nature. They stand between positions of simple matchmakers and true service providers. They are digital infrastructures allowing individuals and companies to access, or share, existing resources they already possess.
These individuals and companies using the platform are the stakeholders. The platform is the central actor and the manager is the digital infrastructure facilitator. Marketplaces are called “multi-stakeholder platforms”. Not all stakeholders are equal. They don’t weigh the same. In turn, the platform facilitator can influence the stakeholders by orchestrating user interactions.
The platform facilitator as the network orchestrator
Platforms are also deliberate (as they are intended by the platform manager and facilitator) and co-evolutionary (as they evolve as a result of end-user –or stakeholder– interactions) in nature.
Network orchestration theorists assume that the central actor –namely, the platform– can influence and manage the development of a network:
While the ‘coevolution’ requires the central actor to grant some control over the platform to stakeholders, the central actor still remains responsible for developing and orchestrating all core processes and interactions that contribute to value creation and value capture within this platform.
A platform’s infrastructure is prone to evolve over time. Facilitators open opportunities for stakeholders to develop new features on the platform. They would still control the platform, as experimentation would be allowed only using native technological infrastructure.
The platform must capture the value that existing stakeholders create. This is called knowledge mobility. Knowledge mobility is effective in platforms where the facilitator is willing to provide, as well as able to access, the knowledge of the platform users, learn from them, and share those learnings.
Knowledge mobility also increases the platform’s viability and in turn, it becomes more attractive to external users. A virtuous circle is created as new end-users enter the interactive core. As the value of the platform increases, so does its stickiness (i.e., its viability and attractiveness to stakeholders).
In Laczko et al., platform stickiness increases as the result of effective stakeholder management: “attractiveness and the value of the sharing economy platform ‘increases with the number of its users –the more people who use a service the more, new, people will join in.’” Platform stickiness, in other words, reflects the platform manager’s ability “to continuously attract new and maintain existing stakeholders within a platform through the effective orchestration of value co-creation.”
Stickiness isn’t easily achieved. It’s easy to copy a successful mode. The platform needs to continuously offer something new and of value “to lock users in.” If managers focus on increasing stickiness, the platform fails to capture the value the platform creates. If they focus on increasing profitability, the platform becomes less attractive to stakeholders, who will start switching. Prospective stakeholders will be fewer to join.
Platform stickiness and profitability
How does the facilitator ensure the stakeholders’ commitment to the platform? By defining a charter of value or conduct, or by developing features facilitating knowledge mobility, for instance. Once the various end-user communities share the same values and collaborate mutually, they are committing to the platform.
For the platform’s long-term viability, addressing broader stakeholder needs is better than trying to exploit the existing ones. According to Laczko et al., effective customer strategies consist of:
- Aligning stakeholder interest. Reciprocity depends on the stakeholders’ altruism, which leads to higher levels of cooperative behavior.
The content platform established a policy of good behavior to ensure that all contributors “feel safe” about exchanging opinions.
- Empowering all the stakeholders to drive changes and manage activities. For example, by allowing them to introduce and enforce their own cancellation policies or pricing models, manage their own listings.
This may give the impression that the central actor will lose control. It’s not. Increasing both platform control and stakeholder empowerment is possible. To do so, the platform manager must gain operational control, namely, standardize some processes.
Bitcoin, which applies Blockchain technology to finance, sets out to empower misrepresented stakeholders by letting them bypass the traditional, controlled and institutionalized channels. (See post in Medium.)
- Guaranteeing knowledge unification via data tracking. Collecting, analyzing, and consequent unifying of the data enables the central actor to capture value by discovering emerging stakeholder needs. It also creates value for its diverse stakeholders by providing access to collected information.
It opens an opportunity to improve the value stakeholders provide to other stakeholders within the network.
Airbnb helps its users find relevant information related to their trip. It stands as an end-to-end travel platform. Knowledge unification is guaranteed by a knowledge graph. (See post in Medium.)
Figure 1 shows the 4 main mechanisms involved. It’s a visual framework showing platform stickiness and stakeholder profitability factors.
Platforms have long been depicted as businesses with a low degree of management. Nowadays, experts consider that new platforms are in fact highly managed. Managers orchestrate stakeholder interactions.
Next, we’ll discuss whether network effects are important to retain users on the platform.
Do network effects really matter?
The opposite of platform stickiness is leakage. It’s “what happens when a buyer and seller agree to circumvent the marketplace and continue transacting outside the platform. (See post in Medium.) The transaction still happens but the marketplace loses a revenue stream.”
Leakage is the consequence of the platform’s incapacity to evolve. Accordingly, the key to solving this problem lies in user experience and satisfaction.
To keep the user on the platform, the following expectations are shared by all stakeholders:
- Trust and transparency.
- Moderated ads and user reviews.
- Clarity in the user journey.
- Communicative efficiency.
- Transactional security.
- Personalized and renewed offers.
What are network effects?
In Platform Revolution, platforms are two-sided markets matching providers and consumers. Network effects are especially important, as they create or destroy the platform’s value. Network effects aren’t the same as virality. Sangeet Paul Choudary explains how they differ:
A product with network effects gets more valuable as more users use it. Network effects are achieved only after certain critical mass is reached but can prove to be a very strong source of value and competitive advantage beyond that point.
A viral product is one whose rate of adoption increases with adoption. Within a certain limit, the product grows faster as more users adopt it.
There are two types of network effects:
- Same-side effects are network effects created by the impact of users from one side of the market on other users from the same side of the market.
- Cross side effects are network effects created by the impact of users from one side of the market on users from the other side of the market.
Network effects can be either positive or negative and can affect providers and/or consumers:
- Positive same-side effects include the positive benefits received by users when the number of users of the same kind increases. Both sides of the market can receive positive same-side effects.
- Negative same-side effects. If one side of the market grows too great, it becomes more difficult for appropriate providers and customers to find one another.
- Positive cross side effects occur when users benefit from an increase in the number of participants on the other side of the market.
- Negative cross side effects arise when one side of the platform is overwhelmingly present, driving leading consumers to abandon the platform or at least reduce their usage.
And do they really matter?
To secure critical mass (aka the chicken-and-egg problem), the role of the digital platform is to orchestrate end-user interactions. This is quite a recent shift in the comprehension of marketplace competitiveness. Usually, platforms are depicted as digital matchmaking infrastructures connecting stakeholders. Critical mass is reached using network effects: “the more users you got, the larger your user base was, and the more compelling your proposition became for attracting new users.”
It’s no accident MIT’s Catherine Tucker uses the past tense. Network effects, she claims, aren’t as important as they used to be. Customers no longer depend on one support to hail a ride or book a room, nor are providers tied to one sole platform, as these effects can be purely digital:
“Think about Lyft and Uber. Ride-hailing is characterized by fierce competition and firms burning through obscene amounts of venture capital in an effort to reach scale. However, users can easily install both Lyft and Uber apps on their phone and judge in the moment which is cheaper. Likewise, on the driver side, many drivers have both Lyft and Uber installed, and choose to operate on whichever platform is offering them the more profitable ride.”
An older form of user retention for digital platforms consisted of owning the user’s data. It forced the user’s loyalty towards the platform and worked against finding more suitable offerings. Music platforms illustrate how coercing user loyalty isn’t a viable strategy on the longer term. iTunes is a good example of “a sticky digital platform exhibiting network effects”, “knocked over” by an online streaming competitor, Spotify:
“Data stored in one place can lead to lock-in which in turn will power up network effects. […] However, history belies this. […] Spotify entered and showed us just how short-term [iTunes’] advantage was. What does a music library matter when you can stream any song at all at any time?”
In the end, users always choose what best serves their interests. In the digital world, platforms are the living beings that must adapt to the ever-changing human world to survive. To retain all sides of a market, platforms must keep inventing strategies to increase stickiness. The value of a platform lies in the community and ecosystems it attracts. The stickier, the better.
By analogy, network orchestration evokes the role of the conductor shaping the sound of the orchestra, and so recreating the music. As “central actors”, platforms nowadays tend to be highly managed since they create value by bringing together stakeholders. In such ecosystems, platforms –like the orchestra conductor– play a central role.
Platforms must reach critical mass. User retention is crucial to their long-term viability. Two concepts operate in that context: “stickiness” and “leakage”. Stickiness is to the platform what harmony is to a musical performance. Leakage is the “dark side” of network effects, as it consists of stakeholder defection.
Leak or stick, leave or keep. Network effects, however, shouldn’t be overestimated, as devices make an infinite range of platforms available to end-users, ever seeking personal satisfaction.
Acquier, Aurélien. Uberization Meets Organizational Theory: Platform Capitalism and the Rebirth of the Putting-out System. May 2018.
Birudavolu, Sriram, and Biswajit Nag. “Winning the Competition.” Business Innovation and ICT Strategies. Edited by Sriram Birudavolu and Biswajit Nag, Springer Singapore, 2019.
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Sangeet, Paul Choudary. “Virality vs. Network Effects.” Pipes to platform. Online post.
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Cocolabs, “Money talks. How do services marketplaces make money?.” January 2019.
Laczko, Pavel, et al. “The Role of a Central Actor in Increasing Platform Stickiness and Stakeholder Profitability: Bridging the Gap between Value Creation and Value Capture in the Sharing Economy.” Industrial Marketing Management, vol. 76, Jan. 2019.
Nielsen García, Kevin Kai. “Towards a (Better) Practice of Stakeholder Mapping in Crypto Networks.” Medium, November 2018.
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Parker, Geoffrey G., et al. Platform Revolution. How Networked Markets Are Transforming the Economy and How to Make Them Work for You. W. W. Norton, 2016.
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Sathapathy, Abhijeet. “How to ensure your customers don’t go behind your back – Preventing platform leakage”. March 22, 2017.
Tucker, Catherine. “Why Network Effects Matter Less Than They Used To.” Harvard Business Review, June 2018.
At Cocolabs we’re working on the standardization of services. We build custom service marketplaces. Each new project is an opportunity to further our reflection and refine our understanding of what is at stake: human interactions, set in a given time and space dimension.