There are many ‘do’s’ for building a platform and network effect is one of the core ideas behind this new age concept. MM International delves deeper in this subject and finds out more about the significance of data and value on these platforms.
Platform economics has redefined B2C markets but what are the principles on which platforms work on? There are many tick marks that one has to achieve for establishing a successful platform like Google or Airbnb. Industry experts unanimously agree that ‘network effect’ is one of the most crucial factors for a platform.
Network effect is a positive cycle wherein a new participant on the platform creates value for other existing participants as well. This means that the total value of the platform increases quadratically with the number of participants. One has to grow this network of people significantly for the success of the platform as a larger network will enable to create more data and will lead to better match results. The aim of all the platforms is to create a strong network effect and the KPIs (Key Performance Indicators) used to track the networks includes parameters such as engagement rates, match quality, interaction failure, etc.
How do platforms work?
Platforms are all about creating value. For instance, in the case of Airbnb, it created value for people who want to stay in budget hotels as well as for those people who own apartments. It is interesting to note that data generated from all these participants creates value for many other players in the market such as hotel chains who may find out from the data that the demand for a hotel within a certain price range in a particular location is high and hence, may invest on developing a budget hotel in the area.
Experts often claim that platform owners identify the kind of data generated and then detect organisations mostly advertisers for which this data can be beneficial or valuable. In return, they get paid by these organisations. However, platforms such as Google have denied this. In a CNBC report it was stated that Google has revealed that it doesn't sell data, but rather uses the information to ‘make ads relevant’ while one is browsing the web. It also goes on to mention that it does not hand over any of this information to advertisers.
Over a period of time, platforms can create positive or negative value. Platforms that cater to B2C markets such as Amazon and Alibaba have witnessed tremendous growth in recent years. From this, it is evident that the nature of business is changing in the digital age and markets that cannot adapt to these transformations will be left behind.