The Platform Revolution Is Here

The Platform Revolution Is Here


Winston: So HubSpot. Yeah, the very same people who make this
show also make some other cool stuff like software that helps you run your
marketing, sales, and customer service later in the episode. We’ll hear from one of HubSpot’s customers
that’s on its way to being the king of kettlebells. Learn more about how HubSpot can help
you grow your business at HubSpot.com / customerlove. Meghan: Okay. These days everyone wants to be
a platform and it makes sense. Customers want to connect with other
people and the products they businesses are using more kinds of software not
less and all these things need to work together. The best platforms become a true center
of gravity in an application ecosystem. Is that too much jargon? How’s this a platform helps companies grow
better by putting their customers their experience their passion, first. Geoffrey Parker is a professor of
engineering at Dartmouth College and the author of Platform Revolution: How Network
Markets are Transforming the Economy and how to make them work for you. We talked about why the platform
market is wide open for B2B companies. And what company should keep a Keen
Eye on as they make that transition. I’m Meghan Keaney Anderson,
and this is The Grow Show. Jeff thank you so much for coming. I would love it. If you would just start us out easy at
its most basic form what is a platform? Geoffrey: If you think about the common
examples in the consumer space something like an Uber or Airbnb in that case,
the platform is designed to match the providers of a service with
the consumers of a service. And then allows them to transact with
one another to exchange some elements of value. And so that value element in could be a
ride could be an evening stay in the case of something like a tweet. It could literally be the Tweet itself
or in YouTube it might be a video. And so these are systems are all allowing
one type of the user to produce this element of value and another type of user
to consume it and then to exchange some form of payment whether that be your
attention or some monetary compensation or just fame if it’s some sort of a
leaderboard system where you might rise to prominence. Meghan: Now I think everywhere you
turn today you sort of stumble across a platform but I would imagine that most
people listening kind of their first exposure to platform concepts might
have even been like Apple’s App Store. Does that fit your mold? Geoffrey: Yes. So the App Store does indeed fit our mold. What’s interesting of course, is that if
you look at Apple they’re far more than just the app store because they’re also
making the majority of their revenues and profits from selling hardware. But if you just sort of drill down on the
App Store itself, they’re facilitating an exchange between the
consumers of these apps. And then the providers and then they’re
providing essentially the hardware and the software and the contracting environment. Yeah to allow for the exchange. Meghan: Now. I’ve heard you may have a few
gripes around apple as a platform. Geoffrey: Well, it’s so I think
that they’ve been very narrow. In their pursuit of platform and cloud
services and have been overly reliant on their hardware sales and as a result
have been relatively slower in kind of broadening their revenue
base and services offered. Yeah relative to the bigger cloud players. I don’t know that’s a gripe
so much as an observation. I mean, it’s it’s a marvelous
business model when it works. Yeah, but it leaves you on a relatively
narrow footing and so you keep having to execute again and again and again and when
you don’t you could kind of fall off that tightwire. Yeah, we Meghan: see that you know, every time they
have an earnings call or it seems like everybody’s waiting for
that next piece of hardware. They’re not that next thing when they
potentially could have leaned into this idea of platform a little bit more and not
necessarily had to come up with the next gadget every single year. Geoffrey: Yeah. That’s just a really
difficult act to pull off. Yeah, and especially in a mature
product space which to be honest. The smartphone has become. Meghan: Talk to me about when this shift
started to happen from sort of a closed mind set a close sort of approach to
building a business to more and more open platforms? Geoffrey: Well, I would argue that the
shift really began to happen in the 80s with kind of the rise of the Microsoft
system and the the kind of Windows and Wintel environment. Yeah, because they were pursuing sort
of a more modular and compatible set of technology layers and then that allowed
for a lot of innovation at the hardware level and a lot of innovation at the
software level and a lot of innovation at the service provision level. Meghan: Yeah. What about on the consumer side? A company’s don’t change just for the sake
of changing what changes have you seen at of consumer behavior or expectations that
customers have that have paved the way for more platforms? Geoffrey: Yes, I think you seen a lot of
behavioral changes and again this tends to be generational where people are just
used to A exposing their information or B paying for things with credit. You might remember that that was
controversial give a website your credit card 20 years ago. And today nobody thinks that
that’s remarkable at all. So that’s a change in consumer behavior. And I think this idea that you can kind of
reach out using technology to get physical goods delivered to you
where as a generation ago. You might have insisted upon kind
of testing the look and feel. In person, and now I think people are more
comfortable with being able to do things online that they weren’t in the past. So I think those are a couple of really
important behavioral changes that have paved the way for this bigger
consumer platforms to emerge. Meghan: Now can any business just start
out today and say I think I’m going to start out as a platform? Geoffrey: So great question and one that
we of course spend quite a bit of time with companies talking over and it
really depends upon who’s already there. And so for example if you woke up tomorrow
and said hey, I want to get into the video distribution platform business. You would have to confront the existence
of YouTube and then you might say well I’m going to get into the high-end video
system and I’ll provide lots of tools to sort of pro videographers. Well, then you would have to
confront the existence of Vimeo. And so the issue is if you’re going to go
into a space where there is an existing platform that’s a much tougher proposition
than if you could start small in a relatively untouched space and then work
out the economics and the strategy and build a customer base, you know in an
area that’s not going to attract much attention. That’s a much better bet than just trying
to go head-to-head with an existing now giant. Meghan: Yeah, how saturated are we? Geoffrey: I would say that in things like
the kind of business-to-consumer space we’re pretty saturated, especially in
the retail environment if you think about streaming media that’s starting to be a
really tough environment to imagine coming in as an entrant but on the other hand, I
would argue that in some of the business to business platform
space were it’s wide open. We have yet to really work out because
you’ve got a lot of a lot of firms that are used to this kinda Enterprise per seat
revenue model where those are likely to open up and create whole new businesses
that we haven’t even thought of yet. Meghan: Yeah. All right. Well, let’s hit network effects because
that is a pretty key piece of all of this. Can you give us your 101 primer into
understanding the concept of network effects first and then perhaps a company
that you see do this really well? Geoffrey: Okay. So network effects is the idea that
users create value for other users. So it has these spillover benefits and
they can be felt in the number of ways. So if we stick with YouTube, it’s just
a thicker market so I can go to YouTube confident that I’ll be able to
find a video of interest to me. Whereas if I go to some small startup that
has a relatively thin library then it’s hit or miss. So the the platforms that have stronger
Network effects are actually going to create. More value per transaction and part of
that is felt on the matching side where because they have more information
they can create better matches. And then the other part is felt on the
content side where they just have a wider variety of content or items of
value sort of the value units. So that each time you consume it’s going
to create more value for you on the consumer side. And then the way to get those producers to
show up is to have a bigger thicker market of consumers. And so you get this cross
sided network effect. Where the more type of one user. Attracts the more type of another user and
then you get into a virtuous circle and that’s the sort of
indirect network effects. Okay, which are the types of things
that markets operate on where you have producers and consumers. You can also get the same
side Network effects. So for example early on in the email
standards or simple messaging services or even just the telephone the
first telephone was a tough sell. You didn’t have anyone to talk to. Yeah, right. The first decade of telephones was a
pretty tough sell or same thing with fax machines because it’s not have that many
people to to communicate with but as you had a larger number of users then the
value of the system became higher per user. And so that has even on the same
side this positive network effect. And those those can be really tough to
compete against because you’ve got this installed base of users that you need
to somehow mobilize to move from their platform to yours and that has proven
in some environments to be incredibly difficult witness Craigslist, which has
been chugging along for a couple decades with minimal Innovation and yet it’s
still an active and vibrant marketplace. Meghan: Yeah. So how you know, where does
monetization come in and all of this? How do you how do you
make money on a platform? Geoffrey: So it comes in a few ways and
this is an area just as a sidebar where I think traditional what we call pipeline or
supply chain firms can get into trouble. Because they tend to think of monetizing
in the traditional way where they might say well, the end user is consuming a
service or product and so that’s where you charge. Yeah and often in platforms. That’s exactly wrong. And the reason is because of network
effects, you might not want to charge the end consumer and instead you might want to
charge the producer upon completion of an exchange. And then that way you allow for the
markets to develop and you don’t drive people away by either charging
membership fees or fixed costs. But only sort of taking a cut of the
transaction once the value has been realized so they can come in different
ways you could have for example, we talked earlier about the Apple App exchange where
I got takes a fee were many developers. By the way think the 30% is is too high. Just a wee bit high and yeah starting to
see that get negotiated and you see it on the developer side or you have something
like open table which matches restaurants with diners and upon a completed
transaction the numbers you’ll have to go and check on their website that can
change but it’s just a couple of percent. So it’s a relatively small transaction
cost that the platform extreme high volume from the producer for a
pretty high value exchange. And so the the principal is you try to
monetize where you don’t destroy network effects, right and you
don’t create friction. Meghan: Right because if you’re adding a
payment place, they’ve got the whole value is in making these connections and making
these transactions and anything you do to throw a wall up in there is going
to slow down the entire platform. Geoffrey: Exactly and you know, one of our
earliest examples of that came from Adobe Acrobat, huh, when Adobe first established
the portable document format, they kind of cleaved their acrobat product in to a full
featured writer version and then a limited feature reader version and then they
charged fifty dollars for the reader and something like three hundred
dollars for the writer. Reasoning that this was pretty neat
technology and it was generating value. Unfortunately, the sales were virtually
zero for both products because for somebody to invest in the writer that had
to have somebody who would actually have the product and be able to read it. Right exactly somebody to
want to buy the reader. There’d have to be some content to consume
and so they ended up seeding the market by getting a lot of IRS documents. So that was one way so that they actually
had some content but more importantly they ended up just giving
away the reader for free. Yeah, and then they extracted all of the
the kind of monetization of the platform on the writer side and worked brilliantly
then as soon as the reader was free, there was significant demand for the writer. So what they did was stumbled around a bit
had the luxury of some time to work out which side of the market made
the most sense to charge. Meghan: More coming up
after this quick break. Winston: Jay Perkins knows the secret to
good heavy metal what makes a high-quality kettlebell can be the finish. So it needs to be cast and then when
it comes out, it’s going to be rough naturally. We make sure that all of ours are smooth
down so that it doesn’t tear up people’s hands while working out lets going to
create a better workout you can go longer along with two of his friends
jay founded kettlebell Kings. Selling the dumbbell like exercise
equipment made famous by Russian Special Forces. Jay saw the early surge in kettlebell
training here in the US and was itching to jump into the fray. All three of us tend to be pretty
innovative and creative and when you start a business you have to be
those things to succeed. We also were dumb enough to think that we
could do it better than everyone else we work for. So Jay got to work we
had to do everything. Thing so we were packing
boxes out of the storage unit. You know, we were replying
to customer inquiries. We had to take steps to be dropped off
unload shipping containers, but that’s not even the stuff that was
going to grow the business. Putting in the sweat necessary to keep the
lights on was a must but Jay new growing the company really meant growing the
community and it all starts with creating great content for your customers. Why was that again Jay? It’s virtually infinite amount of people
that it can reach through the web. Ah, that’s right, so we knew we needed to
create content we knew we needed to build a community but we had no
infrastructure to do so. Community is what sets
kettlebell Kings apart. And if Jay wanted to turn his customers
into promoters, he needed a software that could scale along with
a company’s ambitions. I want to build a company that
is going to grow stronger. From new challenges that arise we’re
excited about Service Hub because it’s going to allow what’s helped us grow
as a brand be consistent as we grow exponentially. So we always thought what if
we couldn’t sell kettlebells. How would we continue to
exist or even grow stronger? And that’s through the community that we
fostered Service Hub allows Jay to connect with his customers. On their terms, we would attribute all of
our success to being a customer-focused business. If we didn’t have the community that we’ve
built and utilizing the tool HubSpot. It’s helped us create this momentum now
where we can start finally feeling like that we are having time to focus on other
things as opposed to all of us running around doing a little bit of everything. If you’re looking the goblin squat your
way to Fitness, I’ll leave you with this bit of advice for Richard Simmons, like
yourself eat healthy and always remember always squeeze your buns check out
more stories from HubSpot customers at HubSpot.com/customerlove. HubSpot Grow Better. Meghan: So let’s talk about the customers
the people who are actually consuming what’s delivered on the platform? How do you convey to them
the value of a platform? I imagine you’re not going to a customer
and saying hey, here’s a platform to try. What’s the actual appeal for consumers? Geoffrey: I’m going to channel Ming Chang
who wrote a nice piece on some of the paradoxes of building platforms. He was a chief strategy
officer for Alibaba. And the quote is that people don’t buy
platforms and furthermore they don’t necessarily know or care they
buy products and services. And so the value proposition is that when
you affiliate with a platform you get an excellent product or service? Yeah, sort of full stop. It’s that you get a better experience
a better product a better service or a better price or all of the above. Then you do from the previous supplier of
those products and services which is what allows for platforms to enter
new markets so successful. Meghan: And I imagine from my own
experience you sort of get known for being that convenient kind of least friction
filled way to find that thing. So for example, a colleague of mine Kieran
Flanagan mentioned the other day that he noticed that searches for New York hotels
where on the decline in Google and his theory was that you don’t go to Google
to search for hotels in New York anymore. You go to Airbnb. Are you go to TripAdvisor you go to one
of these platforms that’s known for hotels rather than a blanket search. Do you place any weight in that? Geoffrey: Yeah, I do and it’s beyond just
hotels it’s starting to happen in retail who were a significant amount of retail
search is starting to originate in Amazon relative to Google and that’s a that’s a
big threat because it about 50% of search had commercial intent. And that’s at the hear of you know your
ability to do effective ad placement in a search environment and if that commercial
intent search starts to divert away for as you suggest in hotels to potentially
TripAdvisor, Expedia, Orbitz things like that, then that will change
that fraction of search. And that’s the revenue model for a company
like Google is that they can sponsor and subsidize the part of search that has no
sort of commercial intent by placing ads for the parts of search that do have
commercial intent because you don’t mind the ads if it helps create a better match. You do mind them if they’re sort
of in your face and not relevant. Yeah to what you’re doing which is why
advertising and social media environments is a lower kind of Revenue per user
proposition than it is in search environments. Meghan: That’s fascinating to me because
that feels like a pretty major shift in the way that we shop and buy and the
really the structure of the internet. Even how do you you know,
looking ahead to the future. How do you think that the prominence of
the growth of platforms over the last few years will impact the internet
and reshape our experience online? Geoffrey: There’s always a danger
and making predictions earliest. So I very grandiose question. This mantra is the forecast
is always wrong there. You know, we should we should have a
little bit of humility in what we propose. So the fact that these internet giants
have enormous user basis allows them a lot of flexibility in experimenting with other
ways to generate revenue, so I wouldn’t count them out and say oh because in this
one specific sector we’re starting to see a bleed out of user activity
into something else. Well, you know, these games are kind
of cat-and-mouse or or Tit for Tat. So I would expect to see adaptation across
the board as firms work to retain their user bases and and those firms
that can’t do that adaptation. They’re going to be the ones that end
up losing their user bases and sort of leaking customers away. And those that that do have that
adaptability are going to thrive. And just as a pivot to why an open
ecosystem or platform can be beneficial is that allows for your ecosystem to do the
experimentation and to do the innovation of things that you didn’t even know
your users wanted but as long as they’re transacting across your system, then you
can be pretty much agnostic as to what it is within the realm of reasonable
that goes across the network. So that’s I think one of the reasons why a
closed system runs a bigger risk than one that can decentralize an
open up its innovation. Meghan: It’s really about your
adaptability that determines your success in this. Geoffrey: I think so because you know
change is going to be a constant. Yeah, you know and I was asked to make a
forecast for what’s going to happen in 20 years and I laughed and I said well maybe
quantum computing will become feasible. Yeah, maybe organic computing will become
feasible and will have sort of organic computers that operate at several orders
of magnitude higher speed or lower cost than what we see today. Or maybe the things that we’re doing with
respect to climate change will prove to be absolutely the central sort of focus of
everyone’s effort because it’s existential so it’s really tough to say that far out. But I think the adaptability is critical. Meghan: Yeah, so what are some mistakes
you do see companies making when they are trying to evolve into a platform. Maybe they found that that space and they
think they can occupy it but then they stumble along the way? Geoffrey: So I think firms underestimate
the internal kind of channel conflict that they’re going to encounter. Oh, yeah, and that’s happened in most
firms that I’ve interacted with in this space. Because if you go to the traditional way
of firm runs, it tends to address vertical markets. So for example, if you’re a services firm
like a Cisco or an SAP, you’ll have an automotive unit. You’ll have an oil and gas unit will have
a medical unit or Division and you’ll have organized your business to serve those
markets and that will have led to growth and success. And so then all of a sudden these more
open platforms are coming along and they’ve got unified data models that
allow them to learn across the different verticals. Yeah, and then that increases the network
effects that they’ll experience because they’re able to leverage user
bases from different Industries. Whereas the incumbent firms are often
either growing up with unique technology and business models to address our market
or they’ll have grown up by acquisition where those just buy a business that
addresses our market and that pretty much guarantees incompaility across their
system and so they’re competing in effect with one hand tied behind their back. And so the challenge has a two-fold one. It’s just sort of base infrastructure. What kinds of it Investments are they
going to be able to make the helps to unify a data layer across the organization
and then the others org structure where how are they going to fill in the gaps to
interacting with these external ecosystem partners? And then a third and really major
challenges, how are they going to deal with the revenue implications? Because if you’re going to start to serve
your existing user base with a cheaper Cloud offering that automatically means a
bleed out of revenue and business from the incumbent. That’s right. YeahcChannel and that’s automatic conflict
and you know sort of as a leader of an organization. It’s really important to reason ahead and
say I know these are going to come and so I’ve got to make it in
everyone’s interest to play ball. Even if you’re managing the division that
you know is going to be reducing revenue over to the new sort of
cheaper Cloud offering. Yeah, and yet the future of the business
depends upon that cannibalization. That’s not a trick. I’ve seen that many firms pull
off successfully truth be told ya. Meghan: That’s really interesting. I won’t ask you the 10-year the 20-year
question, what are the indicators that you look to to get a sense of where this thing
is is headed and also, you know where cracks may start to form? What do you think are key indicators
of the health of platform strategy? Geoffrey: I think it would go back
to some of the metrics that we use. To measure platforms. So one of them is the growth of the user
base, but it’s not just any user it’s actively engaged users sort of people
who are either daily active weekly active monthly active is a
really critical metric. Another one is the degree to which when
people come and use a system they get something of value. And that’s really the failed match
fraction relative to the complete match fraction because if people fail to match
frequently enough, then they’ll go away. And then the other part is it’s not just
the growth of the user base, but it’s really the churn rate. Yeah, so to what degree
do people stay with you? Once they come to your system and so that
I think with those metrics you can really start to see where cracks are forming. So if you take the the examples that you
gave earlier of New York hotel searches well, so that’s an area of activity. That you would start to see fade away
and in effect, the the the user base is bleeding out at least with
respect to that type of activity. And so I guess we should add a an activity
specific metric but I think those are the types of things that as as the manager
of one of these network platforms. You’ve really got to be
keeping a pretty close eye on. And then figuring out
your replacement strategy. I mean if you have some churn that’s not
great, but it’s pretty much inevitable right question is sort of are you able
to either A replace the user base or B provide such an increase in value to the
users that remain with you that you more than replace the revenue base. Yeah, and those sorts of metrics I think
are really important for senior managers to keep an eye on. Meghan: Well Geoff Parker author
teacher business strategist. Thank you so much. Geoffrey: Well, thank you so much. It’s been a great pleasure. Meghan: Today’s episode was written and
produced by Matthew Brown with additional help from Isis Madrid. You can grab a copy of Geoffrey book
Platform Revolution wherever books are sold. It’s the best looking to ecosystem
marketing and I have to say it’s fascinating if you like the show and hey,
even if you don’t like the show, we’d love to hear from you. You can find me on Twitter
@Meghkeaney or send us an email to [email protected] As always I’m Meghan Keaney
Anderson and thanks for listening.

You May Also Like

About the Author: Oren Garnes

1 Comment

  1. Thanks for the useful insights about the platform business model. It was a great recap after having read the book Platform Revolution, which I can highly recommend.

Leave a Reply

Your email address will not be published. Required fields are marked *