For some platform companies, the most worrying thing is that users leave the platform to trade, that is, disintermediation, so that the platform will lose its existence value. Disintermediation is a signal that what really conveys is that the platform is not providing enough value and taking too much, more than its fair share. Conversely, if the value created by the platform is greater than the value captured, it will attract more transactions rather than be excluded.
Platform companies — businesses that make transactions between two parties possible — have struggled to prevent their users from moving transactions off the platform. The technical term for this phenomenon is called "disintermediation."
For example, readers buy books directly online instead of in bookstores; Programmers at Upwork (the world's largest freelance platform) and ZBJ (China's ZBJ.com, an enterprise services platform) sign contracts directly with customers; And Airbnb, the global platform for short-term apartment rentals, is not only facing the problem of guests signing contracts directly with hosts, but some of its biggest professional hosts are also reportedly competing with it on the new platform. Disintermediation — a failure to adequately understand and address it — has stifled once-thriving businesses such as Borders (the second-largest bookseller in the United States), Blockbuster movie and Tower records (Japan's largest record label). It's easy to see why platform companies are so worried about being left out.
But the reality is that true disintermediation is rare. Instead of getting rid of the middleman entirely, most buyers and sellers find a new supplier to reduce transaction costs or add more value, making switching middlemen a natural choice. Readers do not buy books directly from the author, but from Amazon; Moviegoers and song listeners don't buy from Hollywood studios or musicians, but from Netflix and Spotify. The new Attraction Center has replaced the old Attraction Center.
The problem is that companies often misunderstand this problem: disintermediation is actually a signal that users don't think you're providing as much added value as they think. The good news is that companies that are battling disintermediation can take simple steps to make amends before it's too late — if they actually figure out what's going on.
Predictive disintermediation
How can platforms know when a user will go somewhere else? There are at least 6 factors that can cause a user to cancel a transaction from the platform.
First, urgency reflects the need for immediate problem solving. A large platform that can quickly address requirements is more valuable than a high-quality but inconvenient off-platform resource. For example, the delivery app Drizzly can serve drinks on demand for a party. A trip to the store may cost less, but it requires advance planning.
Rake is a fee charged by the platform to facilitate an exchange. The higher this fee, the more users will want to leave it. Groupon's nearly 50 percent cut is one of the reasons its share price has plummeted and stagnated.
Risk refers to the danger that a transaction does not go well. If a project is risky, buyers and suppliers alike prefer to enjoy the credibility, insurance and intermediary services offered by the platform. For example, Uber pays drivers; And if a passenger vomits in the car, Uber will also hold the passenger accountable.
Skill refers to the level of expertise required for task delivery. For low-skilled jobs, the main issue is usually price, and contacting a large number of suppliers can help customers get the best deals. This means that the platform is able to provide the best value for the first and subsequent transactions. However, when a job requires higher skills, the platform can often only add value to the first transaction. After that, buyers no longer need the platform once they find a reliable supplier. Rocket Lawyer, for example, connects people with professional lawyers to help solve legal problems. But once people find reliable lawyers, the platform is often no longer needed. Moreover, they do not want to explain their situation and problems to the platform again.
Subsequent transactions highlight the importance of interaction frequency, or how often users must communicate to complete tasks, and the degree to which a project modularity, or the extent to which tasks can be divided into smaller, independent components. If a task requires repeated communication, or it can be easily broken down into different parts, there are plenty of opportunities for buyers and sellers to build platform-independent relationships. On Upwork, for example, through the various stages of a website deployment — specification, design, coding, backend, testing, etc. — gives all parties the opportunity to reduce costs at each stage. The subsequent stages can take place outside the platform.
Broadly speaking, these six factors point companies to how to reduce the cost of search, negotiation, risk, or delivery to facilitate the closing of the deal. In economic terms, these costs are called "transaction costs." The role of platforms is to reduce these costs and make them lower than other alternatives. Understanding this principle, executives can control the outcome even if there are some changes in superficial characteristics. The platform helps coordinate transactions, but it is actually the supplier that influences the outcome. If buyers and suppliers can handle transaction costs more efficiently without a platform, then they will choose to go to intermediaries. Interestingly, Alibaba's chief strategy officer even defined the criteria for a successful platform as achieving "the connection with the lowest transaction costs." Understand disintermediation in this way so that you can find ways to deal with it.
Prevent disintermediation
The solution to disintermediation is simple: create more value than you take. Platforms should stop playing the role of toll collectors and instead play the role of value-added partners. Either reduce transaction costs, increase the value of buyers or suppliers, or both.
Every platform has producer and consumer sides. This is true whether the goods offered are rides, accommodation, products, services, or a piece of art. The trick is to design appropriate "carrots" and "sticks" for both parties, with an emphasis on carrots. Why are carrots better than sticks? Because carrots increase the value of interactions on the platform, while sticks increase the cost of interactions outside the platform.
Many platforms choose sticks because they are easier to execute or because they feel entitled to a certain level of profit. However, the stick does not generate favor among users, service providers, freelancers, or developers. They include:
Hide supplier contact information to prevent direct communication. For years, the Angies List (now Angi) hid contact information for home service providers, which limited interaction and growth. Pay bonuses to buyers or suppliers who report offline transactions. Test partner loyalty by using hidden consumers or hidden sellers to suggest offline transactions. When freelancers are reluctant to share large commissions with the platform, ZBJ.com will use both bounties and users who hide their identities.
Expulsion from the platform, public shaming, and eventual legal recourse to justice was the way Apple did when Fortnite tried to use its own system to facilitate payments instead of using Apple's system to pay taxes of up to 30%.
Carrots are much better because they show a commitment to creating value that is the only real basis for capturing it. They include:
Provide users with software tools to improve the production, delivery, quality, or consumption value of a product or service. Instagram and Vimeo offer filters and image editing tools that not only reduce costs for producers, but also help them create value for consumers. A variation of this strategy is to provide value-added services. 99Designs is a design competition platform that helps designers automate billing, track progress, and pay taxes. Reward buyers or sellers who trade frequently. For example, OpenTable offers buyers dining credits that they can use to dine at restaurants, while CoachUp offers volume discounts for professional coaches. Etsy rewards their loyalty by showcasing artists' work. Move the monetization model to where the platform can create the most value. ZBJ.com has introduced an alternative pricing model that shifts from transaction fees to subscription fees. Once the fee for the first transaction is paid, the supplier has zero cost for each new transaction. Further use of the platform is completely free, and sellers prefer the benefits of automated tracking and billing on the platform. Providing insurance is one of the most successful benefits for sellers and buyers. On the seller side, Airbnb insures hosts against fire, theft and property damage. On the buyer's side, Amazon offers a free returns and money-back guarantee. Basic security. Uber introduced a passenger emergency help button that most taxis don't offer. If freelancer contracts are billed on an hourly basis, Upwork offers time-monitoring software to let customers know that programmers are writing code, not browsing Facebook.
Introduction of a buyer and seller rating system. Now, almost every major platform uses some form of censorship.
Ironically, these strategies do come with a challenge – the "disintermediation dilemma." Strategies designed to add value can inadvertently lead to "value leakage." This can happen if certain strategies do add value, but only in the first trade, not in the second or subsequent trade. For example, consider giving a home cleaner or garden designer a five-star rating. Once a connection and trust (between the buyer and seller) is established, a platform that cannot add further value will be disintermediated. Groupon adds value to the first sale by offering buyers group buying discounts and merchants with exposure. But then, the merchant completes the transaction under the platform, which acts as a "leaky bucket" and has little value for subsequent transactions. Buyers simply visit the merchant directly. By contrast, Meituan, Groupon's Chinese successor, handles delivery through its own platform, often offering rewards to buyers and helping merchants design new products and locate new stores, increasing volume and revenue.
Disintermediation is a signal. What it really tells you is that after the initial match, you're not providing enough value. You take too much, more than your fair share. Disintermediation simply means that other people (or platforms) offer more value than you. Conversely, if you create more value than you gain, you attract deals rather than be excluded.
Keyword: platform economy
Marshall Van Alstyne, Grace Gu, David Finger | wen
Marshall van Alstin is a distinguished professor at Boston University's Questrom School of Business. His work has been cited more than 25,000 times, and he has also won the Global Top 50 Award for Best Digital Thinkers. He co-authored the book The Platform Revolution (Norton, 2016) and published an article in Harvard Business Review in April 2016, "New Rules of Strategy in the Platform Age." Grace Gu is an assistant professor of data science and operations at the University of Southern California's Marshall School of Business. Her research interests include competitive strategy and innovation in the high-tech industry, with a focus on platform-based markets. David Finger is the founder of Leadfacta, a leading customer service company.
Zhang Zhentao | Translated by Zhou Qiang | Redaction
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