\At a brief glance, businesses with a platform model might be judged to be wildly successful. Indeed, a recent Harvard Business Review article notes that the platform model is one of the most significant business types of the 21st century. Success stories include Amazon and both iPhones and Android phones, a category called innovation platforms, and Uber and Airbnb, a category known as transaction platforms.
Smartphones are an example of innovation platforms…
Not only are these businesses household names in technology news, but they have generated significant value. Platform companies comprise five of the six most highly valued companies on the planet. It’s not hard to see why. Analyses of 43 public platform companies shows that, with roughly the same amount of revenue as non-platform companies, they use 50% of the employees but make double the operating profits, with far higher growth rates than non-platform companies.
But as successful as leading platform companies are, the fact is, most platform companies aren’t successful. The HBR authors surveyed 252 platform companies, and found 43 successful and a whopping 209 unsuccessful. Not only that, but failure came relatively soon, at 3.7 years.
Why is there such a high failure rate? There are several reasons.
…while Airbnb is an example of a transaction platform.
1. Not pricing products or access correctly
Pricing is a huge challenge for platform companies. The most well-known example is likely Uber, which undercut its competition and moved into markets with relatively low pricing. The relatively low pricing helped Uber gain a first mover advantage in its markets, as well as important access to funding. But the relatively low pricing also hurt Uber, because even though it is now a public company, it still has not attained profitability.
But cautionary tales on the other side of the pricing equation also exist. Sidecar was an early peer-to-peer ridesharing platform that preceded both Uber and Lyft. It, unlike Uber, pursued a slow-growth strategy. But it never attracted enough riders or sharers to be successful.
2. Lack of trust
Platforms have to attract trust from both sides, providers and users. There are many steps business leadership needs to get right to instill and build trust, including ease of use, reliable and convenient payment mechanisms, and insurance. eBay failed in China, for example, because it used PayPal as a payment mechanism, and Chinese consumers were not familiar with e-commerce payments that release money at time of purchase. Alibaba’s Alipay, on the other hand, was successful, because it didn’t release payments until the customer indicated satisfaction with the product, a system that won the trust of China’s consumers.
Platform businesses have also failed because they didn’t see the competition as a threat until it was too late. The example here is the introduction of web browsers. Initially, Microsoft won the game with Explorer; 95% of browsers users were on Explorer in 2004. But Firefox and then Google Chrome won an increasingly large portion of the market because of Microsoft’s poor performance with their product.
4. Mistiming the market
To be successful, platform businesses have to time the market correctly, just like any business does. Microsoft, for example, tried to launch a Windows phone half a decade after the iPhone and three years after Google’s Android. The market was saturated, and the Windows phone, despite the formidable cash behind it, failed.
In summary, platforms that are successful, whatever their category, are the ones that price services correctly, build trust with customers, understand the competitive landscape, and know how to time market entry right. When businesses get those things right, they’re likelier to see long-term success.