From Product to Platform - when and why to make the switch

By Angela Lopes

From Product to Platform - when and why to make the switch

Throughout the course we have seen a few examples where transitioning from a product to a platform strategy was a turning point for the growth of a company, namely Twitter and OPower.  But is the shift a silver bullet for any start-up?  Last week I met the founder of a start-up that recently pivoted from selling a standalone service product to developing an API and promoting the service as an interactive platform.  I found myself asking the question, when is it the right move to make?

What makes a platform?
Digital platforms come in many forms.  Some platforms connect fragmented supply with demand, like multi-sided platforms eBay and AirBnB.  Many other platforms create symbiotic relationships with third-party developers.  The platform may offer broad distribution while the developers’ additions improve the base product and increase user adoption and engagement, such as with Apple’s iOS and the App Store.  Or the platform may provide data or a service which developers build upon in novel and innovative ways, designing new products that attract more end users, à la Twitter or OPower.  Ultimately, all platforms must offer a distinct and differentiated technology or function, have clearly understood and standardized elements, and be open and available for others to build upon.

When to switch your product to a platform? 
The advantages to a start-up of making the transition are clear.  When resource constrained it makes sense to attract third-parties to innovate on your product and extending its functionality for free (provided there’s value in it for them).  Or third parties can integrate your platform into their own products so you reach more end users for free.  If you’ve found product-market fit and you’re trying to scale this could be the answer, but it won’t work every time.  Here are some signs that it might:

1.    Your customers want your product, but treat you like a custom dev shop.  As Fred Wilson said in class, “Partners can kill you.”  OPower saw this threat and developed an API so PUCs could build their own customized products using OPower data.

2.    Developers are already coming to you.  Twitter announced its API in September 2006, only a few months after launch.  Although it had a small but growing user base at the time, third-party websites were already using twitter data in novel ways, prompting the release of the API.  Third-party developers contributed substantially to Twitter’s viral growth and were usually first to implement product innovations such as topic hashtags.

3.    You have a user base and want to make the most of it.  In an obvious example, when Facebook for Websites was launched in 2008 they had roughly 125 million users.  The large user base attracted many third-party developers to integrate the API into their websites, leading to further growth and increased user engagement.

What are the risks?
With any shift to a platform strategy you have to make sure what you offer is differentiated and defensible.  With OPower, for example, their scale is a source of competitive advantage as every PUC that signs on contributes learnings that improve their data and make it difficult for a new entrant to replicate.  Another source of differentiation is brand.  When shifting from a product to a pure platform strategy you may lose the benefit of having a consumer-facing brand if third-parties completely integrate your service into their product (as is the case with the start-up I met last week).  If your offering is easily copied, you are even more likely to fail.

Other risks arise if competing with your third-party developers by playing both vertically and horizontally (i.e. competing at right angles).  Twitter is a classic example.  Utilizing third-parties can adversely impact your brand through inconsistency of the user experience and can pose a threat if more users access your service through them than through you.  At that point, is your user base a defensible asset?  As we’ve seen Twitter has sought to regain control by acquiring Twitter-clients and placing restrictions on them over time.  Twilio, in contrast, is a pure platform play that only released products as a way to demo to third-party developers what the platform could do.

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For a start-up that has reached product-market fit, transitioning to a platform can be a cheap and fast way to scale.  But ask yourself, is your product sufficiently differentiated to risk opening up to developers, and are you willing to compete with your developers or does a pure platform play make sense?



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