Launching Platforms: Growth Hacking & Network Effects

A recap on the key ideas, approaches and things to keep in mind

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Stories of Platform Design

15 min readJan 6, 2018

It’s quite a while that we’re aiming at extending Platform Design Toolkit with some kind of platform-launch-&-growth-hacking playbook. With this objective in mind, I took the chance of this first post of 2018 to put together an initial recap of the most important ideas I’ve been able to spot regarding how to generate growth, and network effects in a platform/network/marketplace context. This will serve as a basis for the realization of some handy new tools that will accompany the users of Platform Design Toolkit in launching their ideas into markets, and organizations.

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What’s the role of growth in Platforms — in the way we understand them — and why does it matter? Those who follow our work with Platform Design Toolkit know that our understanding of “platforms” rotates around the following aspects:

a platform is a strategy to mobilize and empower an ecosystem, not merely a technology (e.g.: a website, app, etc…);
a platform strategy is always based on two pillars: a transaction engine (a peer to peer marketplace among entities) and a learning/improvement engine (made of services and contexts provided by the platform owners to the ecosystem, for continuous improvement);
platform design is applicable in any domain: substantially everything can be designed “as a platform” (not only wannabe world conquering digital marketplaces).

Why are we interested in growth, in general? Platformizing a market means tearing down barriers both on the consumer and producer side: it means opening the market to more/new consumers (normally lower spenders, niche players), and more producers (normally riskier ones, niche players).

One of the key ideas of adopting platform strategies is indeed to make new transactions — normally riskier and cheaper ones — possible: enabling economies of scope through platforms means allowing players in new niches to self organize exchanges, so to provide experiences that wouldn’t be possible within the constraints of an industrial strategy.

Platform Markets are bigger than industrial ones, as they can activate the “wings” (niches)

When I explain this during workshops I often refer to growth in platform strategies more as …saturation. Your market can be small or big but, no matter what, your objective with a platform strategy is to saturate it, bring everyone together in the same ecosystem.

There are several aspects to be kept in mind when looking after platform growth but they can essentially be grouped in two macro themes: design for growth and growth hacking.

How to design for Growth

Growth and attraction are often topics of discussion, when customers approach us asking for help. The typical question is:

“how should we design the platform to ensure a win-win perspective with the ecosystem? How can we get the ecosystem on board?”

Designing for growth is indeed a complex topic but there are a few essential things you need to keep in mind.

Design for attraction

First aspect that needs to be taken into account is to design for attraction. The first thing we normally do when doing platform design is:

map the players currently populating your target ecosystem (always remember that you design FOR an ecosystem that is trying to achieve its objectives already);
understand deeply the context of the players in the Ecosystem, including their goals, performance pressures, potential to be leveraged and gains sought.

Once you figure out this, you can try to achieve what we normally call Ecosystem-Platform fit: if the possibilities and promises of the platform resonate with the entities in the context, they will be attracted to join.

In this great chat between Dave McClure and JamesCurrier, the latter at some point explains that growth can be generated not by telling people how nice your platform is, but most importantly “how great they can be”. That’s essentially what we mean by designing for attraction: understanding what your ecosystem players are trying to achieve, and then explaining them that they can do awesomely by joining your platform.

Design to generate Trust

Another key aspect to consider when designing platform strategies is trust. When the market you want to grow is growing at the edges, inherently bringing in riskier, less conventional context for relationships, you’ll need to put an extra care in designing trust reinforcing tools.

In Lessons Learned Scaling Airbnb 100X, Jonathan Golden, explains how introducing Host Guarantee (the insurance covering host’s risk) was a decisive move to generate growth in the early stage of Airbnb development:

“When you lean into fostering trust, your users will in turn have trust in you. And that is the most important thing a marketplace can build”

Don’t self impose limitations by design

The last design aspect one needs to keep into account when designing for ecosystems, is to avoid to deliberately to harm growth by design, in other words, avoiding self imposed limitations.

I recall once doing a workshop with a company that insisted in keeping the possibility to interact with other users limited to those who were your Facebook friends already. Despite it’s a good idea to piggyback on the user’s Facebook network to drive initial growth, it may be strongly impeding your users to interact with others that are not friends already. I found this example from Arthur Hirel “Hacking Metcalfe’s Law” quite clear:

“If they [paypal] had launched the service just like their competitors did, they would only have allowed transactions between their members and then would have bought ads. […] What they actually did is that they allowed members to send money to non-members only using their email address. […]They then just had to give positive incentives for non-members to sign up when a member wanted to interact with them. That is what they did offering $10 to each freshly invited customer.”

Whatever design boundary you chose, when designing a platform strategy (e.g. providing access on the basis of status, geography, belonging…), are all self-imposed design limitations that may hinder growth.

Growth Hacking for Platforms

What happens after you get your boundaryless platform design? Then the fun begins. There are several key metrics to keep in mind when trying to hack growth for platforms and marketplaces. One good approach might be to start from AARRR metrics from Dave McClure and try to decline them in your specific context.

It’s not to be given for granted that, in your platform strategy context the steps are in the same order as the original — initially created with web/digital products in mind.

A few words need to be spent in any case about Retention and Referral both critical aspects of growth in the platform context.

Retention

First of all, retention is probably the most critical metric you need to keep in mind when trying to achieve growth: as James Currier says often “Network effects — which should be the ultimate objective as we’ll see later when we speak briefly about defensibility — are all about retention, not growth”.

Often — in marketplaces — retention is about suppliers and not consumers: imagine a marketplace for buying houses, of course you cannot think of a buyer coming back (for a transaction that happens every 20 years), but the real estate on the supply side of the equation…should definitely be retained.

Referral

Referral can’t be overestimated as a driver of organic grow: watch the excellent youtube video of McClure and Currier, posted above, to understand why you don’t want to rely on paid acquisition, especially today that is so competitive.

As an indicator of referral you may want to focus on your platform NPS (Net Promoter Score). I won’t explain here what NPS is because is probably the most famous metric of the tech industry, so you should just dig a little bit. Your referral metric (being the NPS or others) should be probably measured on both sides of the equation, supply and demand.

Other essential Marketplace/Platform Metrics

Other key metrics that are contextual and specific of marketplace/platforms are liquidity and producer-consumer ratio.

Liquidity

In “Why Uber Won”, Greylock’s simon rothman said that, in markeplaces:

“Liquidity isn’t the most important thing. It’s the only thing.”

Liquidity can be defined in many different ways. Sangeet Paul Choudary defines liquidity “a state where there are a minimum number of producers and consumers on the marketplace and there is a high expectation of transactions taking place” but this parameter is notably a hard catch.

In the already linked post about the early growth of Airbnb, Jonathan Golden explains how, for Airbnb, liquidity was achieved in a specific market (city) when 300 listings (with 100 of them carrying a review) were present: at that point according to Golden,“guests had enough options to find a listing that matched their tastes and their travel dates.”

By looking at this last sentence one can easily understand how liquidity in a marketplace must be related to giving consumers the possibility to find great choices (choices they like) that fit in their contextual constraints.

Producer-Consumer ratio

When it comes to Producer to Consumer ratio, this number might be — again — a hard catch. Technically this is the ratio that will allow consumer to find the right solution for their personal expectations and providers to be sustainable in the long term (as to be forced to increase inventory — being able to serve more customers — might have a non negligible cost for producers, reducing sustainability).

It’s normally highly dependent on the platform type (it depends for example on the marginal cost of production of products and services, and on the very type of products and services provided) but it can be measured, in marketplaces that achieved liquidity. Liquidity and Producer to Consumer ratio are effectively linked: the P/C ratio can be measured only in a liquid markeplace: in reality we’re looking for the P/C ratio of our marketplace once it achieves liquidity.

[Side Note: For a comprehensive coverage of this topic I totally recommend “How to measure your success: Key marketplace metrics“ on Sharetribe’s Marketplace Academy.]

Launching and solving the Chicken-Egg problem

The introduction of the concepts of liquidity and P/C ratio helps me connect with the next essential aspect a marketplace/platform designer needs to keep in mind when launching and hacking growth. Of course, being platforms “relational” products (based on the relationship between entities), their attractiveness is heavily related to the presence of both sides of the relationship: supply and demand.

A first strategy that can be used to guarantee an easier reach of liquidity is called bowling pin. With this approach one addresses a market niche by niche: these niches can be geographical (e.g.: city by city) but also thematic (launching a marketplace for indoor sports starting from… say martial arts).

From “Network Effects” — a16z slideshare

“One tactic is to grow niche market by niche market. It’s easier to build a densely active tiny market than to try boiling an ocean. Before taking on Etsy, consider bringing artisanal knitted Star Wars buyers/sellers together. And follow Lyft’s and Uber’s examples by making a market city by city.” Phil Wolff
from Growthackers.com > How would you jumpstart growth for a marketplace startup? (thread)

Even once having defined your starting niche, is still remains hard to generate strong network effects: two (or multi) sided markeplace are subject to what Sangeet Paul Choudary calls the mutual baiting problem (“no producer equals no consumer equals…”).

So what side of your markeplace platform should you seed first? Sangeet suggests to focus on attracting the harder side of the marketplace. Famous is the example of a dating system: focusing on attracting women would probably be a good choice.

No one can tell you for sure where to start: as an example, Airbnb apparently used guarantee demand to bootstrap supply in the early days, actively pushing employees to travel to unreviewed listings.

However, the most common understanding is that you’ll need to seed the supply side to eventually generate attraction towards the demand. A low P/C ratio is a good indicator that focusing on supply first might the good choice:

“The more customers one provider can serve, the more you should focus on supply in the beginning. The math behind the reasoning is quite simple: when you are acquiring users by hand, acquiring a provider is more valuable than acquiring a customer since the provider will likely participate in more transactions.”
from Juho Makkonen “How to measure your success: Key marketplace metrics”

Single User Utility to lure one side in

There are a few strategies you can pursue to attract the side you’re targeting, but one of the most important — with several different incarnations — is what we normally call Single User Utility.

If your platform offers value to a single user — a value that is independent from the availability of possible transactions actually happening in the marketplace — it will attract them in any case.

OpenTable notoriously offered a booking management system to restaurants to self manage traditional booking calls, to later open the platform to customers for direct booking. Apple, followed a similar strategy with the launch of the iPhone, but the other way around: they offered a bulk of preinstalled quality apps to early iPhone customers — a set that essentially made the iPhone the best smartphone at the time of launch — to later on open to developers, lured by millions of hi spenders, iPhone owners.

Curating and subsidizing supply

Another winning approach has been that of curating, cherry-picking supply to attract demand: with this strategy you don’t attract supply by offering them some specific user value, but you actually go and convince them of the buyer potential. This approach normally works quite well for platform shapers that already have access to large potential pools of customers: large incumbents developing new platform strategies (say a telco operator, a bank or a utility for example), may easily distribute new platforms to millions of customers making it appealing for providers to get in from the start. For those players that don’t sit on a large existing potential consumer base a good idea might be to explore distribution partnerships:

“[a good] example is a marketplace for tutors. In this case, you could try to partner with universities. Telling your potential tutor candidates that their offerings will be sent to the mailing lists of the five biggest universities of the country is a major selling point.”
from Juho Makkonen “How to build supply for your marketplace”

Three types of supply aggregation

In the longer term you’ll want to have a relationship with supply that — ideally — doesn’t hinder your growth potential. A very good recent post on Stratechery, “Defining Aggregators”, makes a good job of describing the three essential type of supply an aggregator (platform) might have.

Some aggregators acquire supply: Netflix, for example, is buying content: often exclusive movies and series. Some aggregators attract supply but still have a non negligible transaction cost in onboarding it: that’s the case of Uber (the background checks) or Airbnb in some legislations (where zoning regulations are particularly stringent and Airbnb needs to check permits). Utimately some aggregators, are lucky enough to attract supply, and having a substantially zero transaction cost in onboarding it: that’s the case of Google, where webpage owners actually make their best to be “visible” to the search engine.

When designing a platform strategy — that is designed for growth — is essential to be aware of the transaction cost of on-boarding supply, and try to reduce it as much as possible. Furthermore, choosing to acquire supply is probably not the best and most-scalable strategy to pursue as it’s “susceptible to competitors with deeper pockets” as Ben Thompson correctly highlights.

Is defensibility the ultimate goal?

James Currier, that no doubts is one of the absolute authorities in this field, thinks that defensibility is the ultimate goal of growth and network effects.

“Though many founders are easily misled to focus only on growth, the actual value of a business largely rests on defensibility.”
from James Currier — “Defensibility creates the most value for founders”

In an amazing — lately released — post & video Currier explains that, at least, three types of network effects exist and how these contribute differently to defensibility.

Without going much into details — that you can explore thanks to the video above — depending on the characteristics of the service (e.g.: on the P/C ratio, the differences among the service/product provided by each provider, the geographic scope of the liquidity clusters, etc…), there might be an “asymptotic” behaviour in your network effect. This makes the impact of new providers added to the system essentially impossible to perceive for customers: it doesn’t make much difference to wait 3 or 4 minutes for a car on Uber, similarly to how it doesn’t make much difference to be able to chose among 100 or 50 different hairdressers in your neighborood.

The blockchain driven disruption to theories of defensibility

The defensibility related to network effects might be also ripe for another wave of substantial disruption: the advent of blockchain technology and distributed applications can, indeed, change the rule quite profoundly.

In a truly amazing recent post called “Thoughts On Governance and Network Effects” — Aragon’s Luke Duncan explains how the possibility to fork not only code, but also history and data, that Dapps/blockchain are making possible, might forever change the very concept of a “business” defensibility:

“In the context of networks built on blockchains the individual may exit by either selling their tokens, or by forking and creating a competitive product.[…]
Someone who is considering quitting Facebook not only has to quit, they have to start a new service from scratch without any user accounts or data. Blockchain networks are different, a fork can replicate not just the applications software, but also the state […] there is significantly less friction for exit in the context of blockchain-based networks.”

That’s the essential motivation why we’re still debating Bitcoin futureproofness — despite it kinda demonstrate antifragility, and despite being it the de-facto dominating network in the crypto currency space.

The core idea that Duncan presents in the post is that — to really improve defensibility — blockchain based networks will need to increase user “voice”: meaning the involvement of the nodes and the end users of the network in the governance process.

On the other hand tokens and Dapps represent an exciting new set of possibilities to drive interest in the early days of the launch of a platform-network-marketplace. As we explained briefly in “Blockchain Powered Platforms: Tokens” :

“…one can effectively “bootstrap” the ecosystem by essentially complementing two aspects: use value and financial value, the former being usually low before achieving network effects. By getting tokens, early users can bet on — and actively participate into — the growth of the network: after bootstrap, the financial attractiveness of tokens will leave room to application utility (use value) and users will be attracted by the latter. In few words, those that will be happy to take some risk in the bootstrap phase will be rewarded later.”

From “Crypto Tokens: A Breakthrough in Open Network Design.”

There’s still a lot of work to do in making it easier for Platform Design Toolkit adopters to explore the potential strategies to launch, solve chicken-egg problem and hacking the growth of their platform strategies: stay tuned as we release more tools, playbooks and cheat sheets. We’ll be always on a mission to make the amazing knowledge provided by all the experts worldwide available to you all in an easy and usable framework.

The reality is, in any case, that you’ll need to put a lot of creativity, hustle and energy in hacking the growth of your platform strategy: be sure that this approach is part of your team culture.

“There’s no single technique to credit with Airbnb’s early market growth; the sum of all of these strategies was greater than the parts. And your early course will rarely be linear […]
Marketplaces demand creative and scrappy efforts from the start. Make it part of your culture from the get-go.”
Jonathan Golden