Why platforms fail – 8 Reasons that lead to failure
Here are the 8 most common reasons why platforms fail
Platforms are a preferable business models due to their scalability and potential profitability. But most platforms fail, and there are many reasons why this happens. Here you have a list of the 8 biggest mistakes that will potentially lead to failure of platforms.
Platforms are all the rage these days. Everyone wants one. But what is a platform, exactly? And why are they so popular?
A platform is a type of business that provides a base for other businesses to build on. It offers a wide range of products and services to its users, who in turn can use these products and services to create their own businesses. Platforms offer enormous potential for growth, as they provide a way for startups to get their feet off the ground and build a customer base quickly.
However, there are also many difficulties associated with launching a platform. Platforms require a lot of hard work and dedication in order to be successful. They are not easy businesses to run, and there is no guarantee that they will be successful. However, the upside potential is huge, making them well worth the effort involved in launching them.
According to a study from D. B. Yoffie, A. Gawer and M. A. Cusomano failed platforms have a life of about 4.9 years. Especially gig economy platforms failed within the first 2-3 years as they didn’t have enough users or funding. An especially interesting find from the study was that standalone firms only survived 3.7 years while acquired platforms were able to fight longer for an average of 7.4 years.
But why what leads to failure and what different aspects need to match in order to make a platform fail or succeed. Read yourself the most important aspects that a platform needs to tackle and avoid these mistakes when building your own.
8 most common reasons platforms fail
1. Not adopting fast enough
In order to succeed in the platform economy space, it’s essential to learn from failures and adopt new strategies quickly. Platforms and networks are incredibly complex systems with many moving parts, so it’s inevitable that things will go wrong. But if you can learn from your mistakes quickly and pivot when necessary, you’ll be in a much better position to succeed.
2. Not understanding the “hard side”
One of the main reasons why most platforms fail is because they do not understand their “hard side” of the Chicken&Egg-Problem. The hard side of platforms is the challenge that is required to gain a critical user base that delivers content, interaction, trust, or anything else that is at the center of the platform.
For example, on Tinder it is important to have attractive young women in order to drive the interest from a broader public, attract the attention of many male users, driving the growth of the platform.
In order to be successful, platforms need to have a clear understanding of the hard side and how to leverage it. Platforms that don’t understand this often times end up failing.
3. Monetizing too fast and too aggressive
Monetizing Platforms can be a difficult task. While it is important to bring in revenue, it is also crucial to grow the user base in order to attract investors and achieve a critical mass. Often, Platforms become too aggressive in monetizing too soon, which can drive away users and lead to the Platform failing. Additionally, attracting investors can be difficult if a Platform does not have a large user base. Without a significant number of users, it can be hard to show that there is potential for growth and profitability. Lastly, running out of money before reaching a critical mass is another common reason why Platforms fail. It can be difficult to sustain the costs of developing and marketing a Platform without steady revenue coming in. In order to avoid these common pitfalls, it is important for Platforms to have a clear monetization strategy (or even postpone the monetization) and especially focus on growing their user base as well as gaining their trust.
4. Setting prices right and incentivizing the “hard side”
Platforms are ultimately driven by network effects, so getting the prices right and identifying which sides to subsidize remain the biggest challenges. For example, Uber’s great insight (and Sidecar’s great failure) was recognizing the power of network effects to drive volume by dramatically lowering prices and costs on both sides of the market. While Uber is still struggling to make the economics work (and it may yet fail as a business), Google, Facebook, eBay, Amazon, Alibaba, Tencent, and many other platforms started by aggressively subsidizing at least one side of the market (the “hard side”) and made the transition to high profits.
One of the key reasons why most platforms fail is due to their inability to set prices correctly and subsidize the correct side of the market. Platforms need to be aware of the power of network effects in order to drive volume, and in order to do this they need to lower prices and costs on both sides of the market. However, not all platforms are able to make this transition successfully – Uber being a prime example.
5. Trust at the center of everything
When building a platform, trust is one of the most important and misunderstood aspects. Platforms rely on trust between buyers and sellers, or customers and suppliers, in order to be successful. Without it, it is very difficult to establish a new market. eBay’s failed attempt to building trust in China is a prime example of this problem. Alibaba was successful in Taobao because they put trust front and center, which made it easier for buyers and sellers to connect. Platform managers can avoid this mistake by emphasizing trust from the start.
6. Timing, Timing, Timing
Timing is very important when it comes to building platforms and especially leveraging networks and communities. Nobody wants to be the first one, but also nobody wants to be the last one. Being early is great, but no guarantee of success: Remember, Nokia was the first one with a Smartphone. But being too late like Microsoft’s attempt to go into the smartphone OS market was way too late and Android and iOS already dominated in the market.
7. Lack of Scalability
Platforms are built on the idea of expanding and growing their user base, but if they are not able to do this, they will eventually fail. This was a problem for many of the gig economy platforms, which failed within a few years because they could not keep up with the growth as their digital business models imploded, or they couldn’t keep up with service, hiring, quality or other aspects.
Platforms also need to be able to handle increased traffic and demand, and if they cannot do this, they will eventually crash. Even Uber struggled with the server capacities, as in early days the Service had outages and non-responsive apps due to overload on peak times.
8. Underestimating the competition
Many platforms have failed because they underestimated the competition and became too arrogant in their lead. Platforms need to be constantly aware of the competition and be prepared to face them head-on or if the competition is reaching for their “hard side” (e.g. creators, important users). Arrogance can lead to a platform’s downfall if it cannot stay competitive. Microsoft’s terrible execution with Internet Explorer is a prime example of this.
Conclusion: Why platforms fail
Platforms are built on a variety of factors, but often fail because of a lack of understanding of the competition, not addressing the trust-issue or simply overestimating their potential. Being able to really scale is another challenge where a lot of start-ups fail, as it is hard to predict demand and even find scalable solutions to support it. Ultimately, platforms can be successful if they are able to get the prices right, identify and support the correct side of the market (their “hard side”) and monetize at the right time without sacrificing financing or scalability. It also needs to be said that being lucky is another factor that might play a big role in determining success for platforms.