STR Final Guide 2 Word.pdf

Advanced Platform Strat (Lec.) *remember: network effects & value propositions” Fact: for platforms, WTP is a function of scale there are diminishing returns as # of customers/affiliators increases When will platform industry be more concentrated? when Minimum Efficient Scale is high relative to (ma...

Advanced Platform Strat (Lec.) *remember: network effects & value propositions” Fact: for platforms, WTP is a function of scale there are diminishing returns as # of customers/affiliators increases When will platform industry be more concentrated? when Minimum Efficient Scale is high relative to (mature) market size other barriers to entry are high OR network effects are positive and strong, AND consumer preferences are homogenous or platform can offer features to users who are willing to pay, AND multi-homing costs are high What are heterogenous consumer preferences? STRAT FINAL STUDY GUIDE 1 consumers want different things What are the four quadrants of customer preferences? Open vs. Curated and Category Specific vs. Broad What is multi-homing? the practice of simultaneously affiliating with multiple platforms multi-homing can weaken network effects What is mono-homing? the practice of only affiliating with a single platform at a time True or False: Each side of the market homes similarly? False: each “side” of the market may home differently What are multi-homing costs? costs/investments incurred by user due to platform affiliation If multi-homing costs are high, users are more likely to mono-home If multi-homing costs are low, users are more likely to multi-home What are the components of Platform Affiliation? Setup, Ongoing, and Termination Component costs of platform affiliation STRAT FINAL STUDY GUIDE 2 What costs mater the most in multi-homing? ongoing costs What costs matter the most in switching? setup and termination costs matter the most Costs can be broken down by low, medium, and high What is the Chicken and the Egg problem? If both sides depend on one another, how do you get a platform started when you have neither side yet? What are the solutions to the chicken and Egg Problem 1. Subsidize: give away or discount affiliation on one side → Examples: Yellow pages free to residents eBay, Facebook giving away products to users AirBnB providing professional photographers to (early adopter) homeowners 2. Exclusivity: pay high-value, marque users to only affiliate with your platform → Example: Joe Rogan & Spotify 3. Develop or buy complements Apple started app store with its own “remote” app This is referred to as “seeding” 4. Provide cheap/free tools to ease complement development Apple provides software development kits to ease app development 5. Offer standalone value to one side start as “normal” merchant/vendor, then become a platform later Example: OpenTable STRAT FINAL STUDY GUIDE 3 What is the problem with solutions to chicken and egg problems Both subsidizing and exclusivity can be expensive!!! How many sides to bring on board? Pros and Cons of More Sides Pros of More Sides Cons of More Sides potentially stronger network effects increased complexity access to more sources of creativity, value, and revenue conflicts of interest less control & integration How should platforms price each side? Platforms should profit from the side that: with the more inelastic demand or higher WTP that adds least value (or diminishes value) for others Platforms should subsidize (or give away) to side that: creates the most value for (most positive network effects) other users STRAT FINAL STUDY GUIDE 4 Sidecar vs. Uber: What did Uber do differently? 1. Lowered switching costs offered cash bonuses to drivers who switched from other platforms ($500-$1000) 2. Prioritized growth/network effects gave bonuses (subsidies) to riders who referred other riders kept prices and profits low/negative Question: When starting a platform, firms should always begin with as many sides as possible to maximize the network effects. Answer: False Cases Netflix eHarmony Wii Encore STRAT FINAL STUDY GUIDE 5 STRAT FINAL STUDY GUIDE 6