Of the five members of the FAANG, the growth-hacking businesses comprising Facebook, Amazon, Apple, Netflix, and Google, three are online platforms, and four out of five benefit of what are called «network effects».
The famous businessman and investor Warren Buffett wrote many times about how important it is for companies to have a «moat», i.e. a competitive advantage that will shield the company’s business from attacks by its competitors.
In the past, a moat came in the form of a strong brand, an efficient production line, or high switching costs. Yet nowadays almost all of the most successful businesses on the planet derive their moat from network effects, i.e. people buy or use their products or services because a lot of other people do the same.
Since people tend to concentrate on just a few platforms, network effects create a sort of winner-takes-it-all situation, hence a strong moat.
There are two types of online platforms. The first type connects two different types of users: can be a buyer and a seller (Amazon), a provider of services and a customer (Uber), or even a landlord and a renter (Airbnb). These platforms are generally called marketplaces.
The second type of platforms connect users of the same kind: users can share topics and interact with each other. Nothing is really being bought or sold, what happens on the platform is just interaction. For this reason, they are called social media platforms. The most famous of this sort are Facebook, Instagram, Twitter, and LinkedIn.
The appeal of online platforms, especially of the second type, is twofold:
– There is no idea about any product or service to be developed and sold.
– It looks as easy as organizing a party: you just have to invite people which will engage with each other and everything will be fine.
If you are planning to launch an online platform with these ideas in mind, as many people tend to do, I am sorry to tell you that it is not going to work.
In the following paragraphs I am going to dispel the three biggest myths that surround online platforms: the point of my work is not to discourage you, but to make the many people that think of a platform as an easy shortcut to success open their eyes.
Plus, I would like to add that what I am going to write comes from years of direct experience in the business: if I can spare you some pain and make you prepare a sounder business plan, I will just be too happy.
Myth Number One: Platforms Are Easy Because You Do Not Need To Develop A Physical Product And Are Technology-Light Compared To SaaS
Making a Tesla is hard. Sending a starship to Mars even more. Creating an online platform is a child’s play.
Nobody argues of course that you must have an Elon Musk’s mind to start an online platform. But thinking that you do not need a strong idea and strong tech capabilities in this business is actually wrong.
An innovative idea is the essence of any business: it is true for any business that execution is key, but it is also true that the more innovative your idea is, the easier it will be for you to implement it.
Just ask yourself: why should people use my platform? Make a research about competitors (there will be for sure, you just need to find them), or platforms that offer similar services. How does your idea differentiate from them?
And, most importantly: is there a market for my service? Or is it just a beautiful thing that people will treat as a nice-to-have? (Trust me, you do not want that).
Essentially, you should go through the good old Porter’s analysis as any entrepreneur should: your platform will have to satisfy a need people have, as it is with any other product or service, whether physical or digital.
As per technology, online platforms are far from being technology-light: the IT infrastructure for running an online platform will be more complicated compared to a SaaS.
In fact, an online platform is a web application, hosted in cloud, and with a huge database as per any SaaS. Unfortunately, you will have more issues with security. If your platform is open, hackers and bots will try to attack it. Since users can and will write things inside the platform, you need to prevent that hackers masked as users activate something bad from the inside. Moreover, if your platform is successful, you must be very careful not to lose the tons of personal data, that your users have provided you.
So, I would not say that building an online platform is a child’s play. It is more like building a skyscraper, and it is better not to make mistakes at any floor.
Myth Number Two: Business Development Is Not A Problem, I Will Just Start With My Close Network And Word Of Mouth Will Do The Job
This myth stems from how we conceive quantity in real life versus the digital world. If you think that a thousand people in a conference hall are a lot, then they are nothing on an online platform.
You will need tens, better hundreds of thousand of people visiting your platform every month if you want to be relevant.
That is because people on the internet tend to be selective, and to act fast: the result is that very few visitors will stay.
If you plan to launch your platform with your own network, whether friends or business mates, it is a good start, but it will not be enough. In order to reach the virtuous cycle that we all dream of, you will need a clear strategy of adding users.
From my experience, you can use a combination of:
– Offline partnerships: restaurants, schools, business associations, any club that can bring you users. While you will need a strong proposition to make them do the job, it is not impossible if you target the right niche and make them feel that they are gaining something valuable in exchange, such as exclusive access conditions for their members.
– Social media platforms: standing on the shoulders of giants has never been truer in the platform business. Especially if you cover a niche, you can use the main social media to reach your target audience. If you decide to pay, be careful to have set a clear path to monetization. At the start it will be so nice to see users on your platform, but as soon as possible you should try to focus on the ones that are truly interested and avoid to pay for users that will leave your platform the day after.
– Search engine optimization: if your platform is open, your website will have a lot of keywords. You just need to convince Google and Bing to spend some time to read them. That will not be easy, but if your platform really focuses on a market vacuum, search engines will bring your website to the attention of their own users. The multitude of keywords your platform will have is definitely going to be an advantage you can capitalize on.
I will be honest with you: adding users is the most difficult part of building an online platform. And when you do add them, you have to make them stay.
I can give two pieces of advice that would have been so valuable to me when I started. First, start posting content from day one, even when you are only conceiving your platform. Marketers call it content marketing, but it is nothing more than writing articles, posting news, shooting videos, anything that can create value for your target audience and build awareness and trust between you and them.
Second, try to engage with your users (or prospective users), understand what they want, and your job will be a lot easier.
Myth Number Three: I Do Not Need A Well-Planned Revenue Model, I Will Just Add Users And Money Will Come
Unfortunately, many of us are drawn to this myth by the weird examples that we see sometimes in the public markets, where loss-making companies are worth billions of US dollars and nobody seems to care.
As a result, most people pay only attention at maximizing the number of users instead of thinking also at how to make profits.
The problem that you will face is that, since you are not selling a physical product or SaaS, generating revenue will not be easy. Your users will need to feel confident that, if they pay you, they will receive valuable interactions, because at the end of the day this is all they are going to get.
If you do not have solid contacts with the best venture capital firms, the ones capable of giving you millions of dollars to focus on growth comfortably, thinking about generating revenue should be priority number one.
Second, not all listed platforms are loss-making: Facebook, arguably the most successful platform, became profitable within one year since its IPO and has generated tens of billions of dollars of free cash flow every year since then. If you look at their 2004 pitch deck, you will notice that they already had a clear path to profitability and how they would have achieved it.
Apart from advertising, there are three main ways in which marketplaces can make money:
– Subscription: you need a lot of bargaining power to do that, but it is by far the best monetization strategy. Essentially, you are assured a nice stream of income every year. Examples include LinkedIn, Amazon, and YouTube.
– Percentage of the transaction: if you have ever tried Airbnb or Uber, you know what I am talking about. It is great because you earn money along with the customer, but unfortunately you have to be in the position to control the transaction, which is not always feasible especially for social media platforms.
– Pay per use: buying credits, pay for messages, and the like. It is the easiest way to make some money at the beginning. Just avoid making it too complicated: some gamification is fine, but too much of it will look like a scam.
Three years ago, along with two partners, we founded Globartis, an online platform connecting small and medium enterprises worldwide. We went through all the issues that I have mentioned, but let me tell you something: the beauty of helping people do things that would have been much more difficult to achieve without us is just awesome. And yes, making money without having to sell anything does feel great.