Platform lesson #9: Be careful to open up to third parties

Image by Mohamed Hassan from Pixabay
Image by Mohamed Hassan from Pixabay

Every platform company I’ve worked with would love to open up their platform to third parties and get ‘free’ functionality extensions. Especially the idea of a multi-sided platform where different parties exchange value with each other and you collect a nice slice of each transaction comes across as a highly desirable state of being where free money is simply flowing into your coffers.

In my experience, if something sounds too good to be true, it typically is and this is no exception, for at least three reasons. First, there’s the mistaken belief of many that if you build it, they will come. Simply opening up your platform for third parties doesn’t at all mean that anyone will show up to the party. Also, external parties, or complementors, have a business to run, so they’ll only invest resources when there’s a viable business case. For complementors, that business case typically requires you to have a large customer base for which they have a sufficiently large addressable market slice.

Second, complementors often put constraints on the platform such as interface stability, requests for functionality that helps them rather than your customer, and so on. So, there’s a significant risk that your ability to innovate and extend your platform is restricted and that the simple fact of opening up causes you to slow down, reducing competitiveness.

Third, complementors have an inherent ambition to build differentiating functionality themselves as they need to monetize. As a consequence, they seek to push the platform into commodity as much as possible. From your side, you need to yield areas of functionality to complementors to allow them to have a business on your platform. Especially for companies evolving from products to platforms, this tends to be a difficult transition because instead of addressing customer requests that can be viewed as highly lucrative you need to give space to your complementors.  

If opening up the platform isn’t as easy as it seems, how should we move forward? To me, it helps to think in three phases: preparation, experimentation and scaling. In the first phase, you need to prepare the platform for opening up. This isn’t a technical challenge but a business challenge. You need to build a sufficiently large customer base to ensure that complementors have a business case to partner with you. So, in the preparation stage, you focus on one stakeholder group, the customers, and, for now, ignore others such as complementors.

In the experimentation phase, you experiment with opening up based on a carefully crafted strategy. Rather than blindly executing the strategy, the goal is to perform experiments to learn about the behaviors of customers and complementors so that you can open up in the way that leads to the ‘ignition point’ the fastest while ensuring that you have a control point in the ecosystem. This is to avoid having your complementors and customers take off on their own without you and your platform. Each experiment is intended for learning purposes and should allow you to shut down the initiative if the consequences aren’t as desired.

Once you have a sufficiently well-founded hypothesis of how to open up, it’s time to execute and to drive the scaling of the ecosystem around your platform. In this stage, you’ll still run experiments, but the goal is to accelerate growth and optimize conversion.

Although many platforms benefit from opening up, it’s important to be careful and strategic. The risks are that there’s no engagement, making you look weak, you get slowed down by the demands of complementors or you get pushed into commodity as the complementors demand space for their contributions. In my experience, grow your customer base to a sufficient size first before experimenting with different approaches to opening up and only then hitting the accelerator. Everyone wants a platform business, but there are so few real ones as it’s incredibly hard to get there. So, don’t get burned in the process.

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