The challenge of starting and growing networked platforms is big. But they also pose one of the most interesting business models in the digital world by leveraging network effects and the possibility for expansion. So how to grow a network and how to successfully start a platform? Here is the complete guide.
Starting a platform is difficult. It’s not just about coming up with an idea and putting it out there. It would help if you had the right team, the right tools, the right business model, and the right strategy to make your platform successful. And even then, there’s no guarantee that you’ll be able to find an audience or make a profit. But why do so many businesses want to start a platform? – Because it is one of the most interesting digital business models of our time and done the right way.
That’s why so many platforms fail. Most platforms never even get off the ground. Of those that do, only a small handful become successful.
So, what makes starting a platform so difficult? What are the biggest challenges in building network platforms and how can you effectively tackle them?
1. The first growth phase – The hard work
When starting a new platform, especially social platforms, it’s important to understand the smallest critical network to sustain the product. This means starting small and focusing on the smallest network needed to make the product work. Depending on the kind of platform you want to start, the first minimal-needed network size is different.
For apps and services like Slack, Microsoft Teams or Google Workspace, a single company or a team within a company should be enough. But, when you want to launch a payment service or a payment network, then your minimum network might need to be bigger. An example might be the launch of the first credit card by Bank of America. The credit card needed to be accepted and rolled out first in Fresno, California where they can build a fist network within a city and make sure users and shops were all aligned.
Despite the size differences of several dozens and several thousands of first users, the principles of the critical network are the same. Try to figure out what the smallest group is to start your platform, try to make this process of the first networks repeatable and scale your product until it reaches the “tipping point” where network effects will help you scale further.
In this phase it is a lot of manual work and personal convincing of your first users to build and replicate the first critical networks. Making platforms for free or important parts for free can help remove entry barriers and make it easier for people to join and use the platform. Especially removing the entry barriers for the “hard side” is crucial, as they are generally the ones with the most to gain from being on the platform but also contribute the most. (e.g., Tinder used popular Friends and sent them to parties to promote the app)
2. Understanding and managing the “hard side”
One of the key things to understand when it comes to creating a platform is that you need to find a way to appeal to the “hard side” of your platform – in other words, those who are the ones bringing the most value to your platform. Depending on your platform it can be a seller of in a marketspace, it can be beautiful women on dating apps, content creators on video platforms or just power-users like with office tools.
These people are crucial for a platform’s success, as they are the backbone of your value proposition. This side of your platform, the value adding part, will be also the main battle ground when you are growing so keep in mind how to keep this side as happy as possible.
3. The tipping point of platforms – Organic growth
Tinder, LinkedIn, Uber, AirBnB, Dropbox and Reddit all reached their tipping points differently. Still, each example highlights the importance of engaging users and reaching a critical mass. Once a platform or network reaches this point, it becomes easier to grow and propagate. This can be due to organic user growth or tactics like an invite-only strategy or just referral mechanisms that help.
Engaging users is key to reaching the tipping point for platforms and networks. Tinder reached its tipping point after leveraging parties among popular college students. LinkedIn reached its tipping point after utilizing an invite-only strategy, which allowed users to invite others they knew would be interested in the platform. Dropbox successfully used a win-win referral strategy to get a lot of sign ups.
By understanding the tipping point, a company can create a product that will be successful and reach a large audience. Utilizing tactics like an invite-only strategy or viral content can help increase user activity and help a platform or network reach its tipping point so users automatically get attracted to the platform and it the network become replicable and self-sustaining.
4. Scaling and growing Platforms
After a platform survived the initial start and reached the tipping point a critical phase starts in the development: Scaling the platform
When scaling a platform it is important to distinguish three types of network effects:
The “Engagement Effect” helps when products gain traction within the network. Users use it more, they refer it to colleagues, they use it in other situations and they start extensively interacting with the platform. This extensive usage might also lead to closed loops where e.g. people start sharing photos only on Facebook and in order to see those you need to login and create an account. Another important aspect is that with increasing engagement also users start coming back which were first inactive or stopped using the product.
The “Acquisition Effect” could be described as viral growth due to the organic use within the network. This effect especially plays a big role when it has a built-in feature that encourages collaboration/invitation. The better the product is in spreading the word, the more efficient the viral acquisition effect will be.
The “Economic Effect” is a very difficult one as this could pose a challenge before the platform starts. Sometimes the business model or the network effect grows or only exists with increased networks. If you have ad-revenue then you only attract advertisers with a big network and if the value is growing then premium pricing can lead to more.
5. Hitting the ceiling of growth
After a period of rapid scaling and gaining marketshares even the best platforms hit the ceiling of growth. Escaping this “flattening” of sales and users is hard and many say it is a never-ending journey. E.g. Facebook already reached most users in the western world – there isn’t much more to reach and therefore they have to reinvent their business and services every day to keep those users engaged and monetize more.
But there are many reasons why platforms hit the ceiling and the hockey-stick like growth will look more like a plateau – here are some of the reasons:
One of the main problems startups face when they hit the ceiling is saturation. When a product becomes very successful and reaches a large audience, it isn’t easy to keep growing at the same rate. This is because there are no more new customers to reach, and the marketing channels that were once effective have become less so. As a result, growth starts to taper off and returns to a more manageable level.
Revolt in the network
Every platform has a minority of users who have a big value to the network and therefore the platform. When this minority realises the value and influence they have, it can lead to a revolt in the network. Especially when platforms grow larger, it can have big consequences for companies, like we have seen for Uber where the uber drivers pressured Uber for higher prices and better benefits.
Changes in the dynamics
As a product’s initial community grows, it can reach a mainstream audience. However, as it becomes more popular, the dynamics of the network change, and it becomes less appealing to users. As the network grows, it becomes more difficult to maintain the uniqueness of the product that initially drew users in.
Overcrowding can lead to a ceiling of platforms and limit their growth. When too many people are using a platform, it becomes difficult to find the relevant people and content. This can cause users to leave, limiting the platform’s growth. Solutions to this problem include search functionality, algorithmic feeds, or curation tools. Startups focusing on bottom-up distribution (i.e., targeting other small customers first) are more likely to hit this ceiling in any way.
6. Economic moat – Maintain competitive advantage
Warren Buffet popularized the concept of the competitive moat – A strategic value that is defensible.
truth about most platforms is that they can be fairly easily replicated and reproduced. The only real difficult part is replicating the network and the trust. Both are factors that can help defend the platform and lead to a long term strategic value of large platforms.
Upsides and downsides of big networks
All companies compete for the same network. It is true that small companies have some advantages – speed and a lack of “sacred cows”. But for bigger platforms it is easier to defend their position through already established relationships, experienced workforce, and a product that is already proven on the market. Frequently we see that this difference can also lead to market shifts where a smaller company takes an important part of the community and outpaces the once bigger rival (E.g. Facebook vs. Myspace, AirBnB vs. Craigslist, etc.). This also means that the strategy for them have different implications and carefully managing the community and the ”hard side” is necessary.
Cherry-Picking & Defending networks
This cherry-picking is quite common in the platform field. Most of the time the “hard side” is visible to everyone and can be directly addressed. Especially for smaller platforms it is important to focus on scraping the important parts for their own networks and built their own. Especially bigger networks have harder times defending all of the network and therefore it is easier for a smaller startup to attract the “cherries” of the big network.
Big platforms have the advantage that they are well known and launching new products is easier than for an unknown company. But this can also lead to an implosion as the expectation from users might be high but the value of the new platform might not be as big as anticipated. Google+ was a great example of users with high expectations but no real performance of the network. 90 million sign ups were recorded in record time but the engagement was so poor that the users didn’t spend any time on the network and therefore the platform Google+ failed.
Bundling products to leverage the network
Established platforms have usually an advantage when they launch new services or products by simply bundling them together. This overcomes the “How to start a new platform” problem easily by combining it with the current network.
A good example was Microsoft, which bundled Word and Excel to make Microsoft Office. It is also important that they made a big effort to enable interoperability between Office apps. The rest is history.
Conclusion on building network platforms
Building a network platform is challenging because it entails establishing trust and building an ecosystem of users, developers, and partners. It cannot be easy to achieve the tipping point where the platform becomes indispensable for users and developers. Once achieved, scaling becomes essential to maintain market share. However, there are limits to how large a platform can grow before hitting the ceiling. The most successful platforms defend their position by continuously innovating and leveraging “the moat.”
These are just some reasons why building platforms and starting network products are hard. Nevertheless, it is possible to overcome these challenges by taking the following steps:
- Define the problem and why your solution is better than the existing ones.
- Build a great product that solves the problem simply and elegantly.
- Focus on acquiring users and developers instead of worrying about monetization.
- Create a virtuous cycle between users, developers, and partners to keep them engaged and coming back for more.
- Keep innovating to stay ahead and build a sustainable competitive advantage.