Platforms Primer

Introduction
In this primer, we’ll cover the core elements of platform businesses, answering the following questions:
• What is a “platform”, and how do they create value?
• What are the different types of platforms?
• How does a platform evolve over time?
• What capabilities do they require?
• How do platforms maximize profitability?
• What trends will impact platform businesses over the next 2 - 5 years?
Defining “Platforms”
Defining “Platforms”
A platform is a digital space that connects two or more users and facilitates some interaction between them
that creates value.
• For most platforms, this interaction involves an exchange between a producer and a consumer.
The network effect is what makes them so valuable: Each additional platform user exponentially increases the
number of potential interactions.
• This is most clear on social media platforms, where each new user is both a producer and consumer.
• Other platforms have 2-sided networks, with clear distinctions between these groups (e.g., buyers and
sellers on Amazon).
Platforms can see astronomical growth in a short amount of time, driven by the network effect as well as the
following factors:
• Platforms have few physical constraints so there is no need to build production plants or local branches to
acquire customers.
• Most of the “work” of the core interaction is outsourced to users themselves - allowing platforms to operate
with leaner, more efficient teams.
• Given their digital nature, there are very low marginal costs for each additional user.
Platform Archetypes
Platform Archetypes
Digital marketplaces
• Bring together buyers and sellers for the interaction of a sale; typically are 2-sided networks
• Examples: Amazon, Uber, AirBnB
Content platforms
• Users are either producers of digital content, or consumers of that content; producers can share a
single piece of content with thousands of consumers simultaneously
• Examples: YouTube, Udemy, Yelp, Zillow
Social media platforms
• All users are both consumers and producers of content, which is shared within their personal “social
network”
• Content can be 1-to-1 communication on messaging platforms (WeChat, WhatsApp), or 1-to-many
(Twitter, Instagram, or Facebook)
Payment platforms
• The interaction is the movement of money from one user to another; Often used in conjunction with
Digital Marketplaces
• Can be 2-sided (Square) or not (Paypal)
Platform Lifecycle
Platform Lifecycle
Platform companies typically progress through 4 stages as they evolve:
1. Startup
• In the beginning, it’s all about proving the value proposition - who are the users, what is the
interaction, and how much demand is there?
• Key priorities: establishing “product-market fit”, product development, prototyping the platform itself
2. Scaling
• The platform has proven their idea works and want to rapidly grow their platform while showing it can
make money
• Key priorities: activate the network effect, and capture the market before competitors move in
3. Mature
• By this point the platform has captured a large chunk of the market and now wants to be profitable
while holding onto market share
• Key priorities: reducing customer churn, optimizing pricing, and maximizing the lifetime value of each
customer
4. Expansion
• Platforms need to keep growing even after market saturation - this is done by creating new products or
expanding into new markets, often through acquisitions
• Key priorities: finding new ways to create value to continue growth
Platform Monetization
Platform Monetization
There are three main monetization models used by most platforms:

1. Monetize the transaction

• Charge one or both of the parties involved in the interaction some sort of transaction fee
• Most common monetization model for digital marketplaces and payment platforms
• Typically targeted at seller to minimize perceived friction for buyers

2. Charge for access

• Charge for access to specific features of the platform via subscriptions
• More common in content platforms
• Often done via “freemium” model - core product is available for free, but “premium” features that offer
additional value require users to pay

3. Advertising
• External parties pay to advertise on platform
• Most common for social media platforms, keeping the platform “free” for users to facilitate growth
• “Monetizing the network” (instead of “monetizing the interaction”)
• Often combined with charging for access to give option of ad-free experience to users
Platform Capabilities
Platform Capabilities
Success as a platform requires specific capabilities that go above and beyond a typical tech company:

Commercial (growth)
• Must focus on both demand side and supply side
• Demand: Sales, Branding & Marketing, Strategic Partnerships
• Supply: Business development, Partnerships
• Pricing: managed at multiple levels to balance Supply & Demand

Operations
• Platform governance: user ratings, supplier screenings, verification systems, dispute resolution
• Customer support: must exist for both Supply and Demand sides (with differing needs and challenges)

Product
• Product design, Product management, Product marketing, and User research

Technology
• Engineering, Infrastructure, Information security, and Data analytics
Key metrics
Key metrics
Platforms will different metrics according to their lifecycle stage:

Startup - to assess product-market fit, platform businesses will look to core interaction metrics
• Volume: Number of interactions/transactions, number of active users / total users
• Conversion: listing-to-interaction conversion rate (supply), search-to-interaction conversion rate (demand)

Scaling – emphasis shifts to platform growth and key drivers / barriers of growth
• Growth: volume growth / acceleration rates, viral coefficient (new users generated from each add’l user)
• Friction: how long it takes to onboard, search, match, process interactions, make payments
• Trust: user reviews, net promoter scores, fraud rates

Mature – focus shifts to monetization and profitability

• Monetization: customer lifetime value (LTV), customer acquisition costs (CAC), gross merchandise value
(GMV)
• Retention: customer churn, number of repeat transactions per customer
• Competition: market share, market penetration, share of wallet

Expansion – all above metrics retain critical importance, but now must also assess new market growth
• Geographic coverage, new market penetration, growth in new product categories
Regulatory Trends
Regulatory Trends
Platform business models have created massive value, but also massive disruption – which leads to big
regulatory questions around:
Data privacy: Platforms generate an immense amount of personal user data, and many depend on it for their
monetization models. Regulators want to make sure consumers know what data is being collected, and how it
is being used. Regulations like Europe’s GDPR is requiring significant adjustments from platform companies,
impacting multi-billion-dollar markets for companies like Facebook. Some platforms are using these
regulations to their competitive advantage (e.g., Apple).
Monopolization: Network effects inherently limit competition, resulting in “monopolistic outcomes”, even if
there were no explicitly “anti-competitive” practices. Platforms frequently become “the market”, as opposed
to just a market participant. The largest platform businesses are almost always under investigation in at least
one of the countries they operate in – e.g., China issued over $3.5B of fines for “monopolistic practices” in
2021 alone.
Moderation & Censorship: Regulators are increasingly concerned about platforms’ ability to manipulate
society as a whole - especially when platforms like Meta have nearly half the world’s population in their
network. This risk is greatest for social media platforms, where the core interaction between users is one of
“information flow”. Big questions are being raised about the “private” vs “public” nature of these networks,
and what level of moderation these platforms should or shouldn’t do regarding content being shared on them.
Glossary
• Platform - a digital space that connects two or more users and facilitates some interaction between them that creates
value
• Network effect – each additional platform user exponentially increases the number of potential interactions
• 2-sided networks - networks with clear distinctions between producers and consumers
• Digital marketplaces – platforms that bring together buyers and sellers for the interaction of a sale
• Content platforms - platforms in which users are either producers or consumers of digital content, and producers can
share a single piece of content with thousands of consumers simultaneously
• Social media platforms – unique in that all users are both consumers and producers of content
• Payment platforms – platforms where the interaction is the movement of money from one user to another
• Customer lifetime value (LTV) – the monetary value that each new user generates for the platform
• Customer acquisition costs (CAC) – the cost that a platform incurs to acquire a new customer
• Gross merchandise value - the total value of all merchandise or services sold on the platform