Platform strategy, explained
By Zach Church Jun 16, 2017
Why It Matters
Your platform pitch sounds great in the boardroom, but the reality is so much harder. A good
platform strategy will help you dodge the traps, and may even send you in a more prosperous
direction.
Share
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?
Work smart with our Thinking Forward newsletterInsights from MIT experts,
delivered every Tuesday morning.
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.
Trust 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.
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.
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.
