How Do Platforms Create Value?

Platforms create value by facilitating interactions between consumers and producers. They do this primarily by reducing search and transaction costs and enabling externalized innovation by third-party producers.

Every platform has a few key functions that it needs to perform to deliver on this value proposition.

First is building an audience. In order for a platform to work, there needs to be enough active consumers and producers to facilitate frequent exchanges. If there aren’t enough of one user group on your platform, you’ll have a ‘ghost town’ that won’t contain enough participants to enable interactions. That’s why platforms work to grow both sides of their ecosystems to make sure they have enough liquidity so that exchanges can happen.

Second, the platform has to be able to match the right consumers with the right producers. Think of this as a needle in a haystack problem. You can have the world’s biggest producer ecosystem, but it won’t matter to your consumers if they can’t find what they’re looking for. Matchmaking and curation are essential to connecting the right consumers and producers so that they can exchange value.

Third is enabling externalized innovation by providing key functionality. This often includes things like providing open API’s, or an SDK that makes it easy for developers to build on top of your platform. But it also includes things like helping with marketing or providing management support for producers on your platform, just like Airbnb does. This kind of support empowers individuals to act as producers where previously you would have needed whole organizations to be successful.

Finally, platforms establish the rules and standards that govern the interactions they enable. This includes things like Twitter’s 140 character limit, as well as Uber’s driver rating system. The goal is to enable the specific behaviors that promote the exchange of value. This can include being able to enjoy a consistent user experience as well as being able to trust both the platform and the other users the you’re interacting with. Without these rules and standards, trust and quality will quickly deteriorate as the community grows. This will drive away users and cause your ecosystem to fall apart, just like it did with Myspace.

Taken together, these four core functions connect consumers and producers and help them exchange value. The ability to facilitate these transactions at scale and to unlock value through exchange is what makes platforms so powerful as a business model today.

Filed under: Platform Innovation | Topics: Ecosystems, enterprise hacks, platform economics, platforms, Q&A Videos, Twitter