This Insights article was contributed by Dr.Shaoling Katee Zhang, Assistant Professor of Marketing, Cameron School of Business.
In recent decades, we have seen numerous modern two-sided platforms emerging across a wide range of industries, such as transportation (Uber), hospitality (Airbnb), food delivery (GrubHub), recruiting (Monster), education (Coursera), financing (Kickstarter), healthcare (Cohealo), travel (TripAdvisor), professional service (Upwork), retailing (Alibaba), and local service (Angie’s List).
They are technology-based market intermediaries that enable interactions between two distinct groups of users — producers and consumers — to exchange ownership of goods or services. Due to asset free and nearly zero marginal costs of distribution, these platforms are considered as the most profitable business models, with a 17.5 percent compound annual growth rate and 24 percent profit margin, outperforming any other traditional linear business models (e.g., manufacturers).
However, innovation is a challenging task for these platforms to remain sustainable over time. The primary reason is because they rely on mobilized “assets” — network effects — to survive. In the case of Uber, network effects are manifested as: more drivers attract more riders, and more riders attract more drivers. Without getting a critical mass of users on board and engaging them, network effects would decline, making the two-sided platform defunct.
So, what should they do to innovate?
Recall that a two-sided platform is a market intermediary that enables interaction. To make such interaction occur repeatedly and efficiently on the platform, the platform needs to build and maintain its capability of managing users and its capability of managing exchange. Research finds that the platform conducts two forms of innovations with distinct strategic goals to build and enhance these capabilities:
- Same-side innovation, which refers to new offerings that affect either producers’ production behaviors or consumers’ consumption behaviors. These innovations are further classified as producer-to-producer (P-P) innovations and consumer-to-consumer (C-C) innovations. eBay’s “Shine Awards for Small Business” program was a P-P innovation as it encouraged more production behaviors by allowing rewarded sellers to obtain greater exposure to buyers. In contrast, eBay’s “eBay Bucks” program was a C-C innovation as it encouraged more consumption with cash back benefits. These innovations are aimed at building and enhancing capability in managing users.
- Cross-side innovation, which is termed P-C innovation, refers to new offerings that modify exchange functions of the platform, including filter, match, facilitate, and curate functions. eBay’s 3-day guaranteed delivery program was a P-C innovation that improved the facilitate function of the platform, providing faster delivery services to create satisfactory exchange. Uber’s bilateral review system was a P-C innovation that enhanced the curate function of the platform, encouraging good exchange while penalizing bad exchange. These innovations are aimed at building and strengthening the capability in managing exchange.
However, they are not all created equal in sustaining platform performance. A large-scale event study showed evidence of this. It revealed that both same-side P-P and C-C innovations cannot directly generate positive effects on platform performance, while cross-side P-C innovations can directly do so. Moreover, the performance of both forms of innovations are contingent on three platform-specific attributes, including a platform’s monetization type, growth pace, and user acquisition and retention costs. Specifically, same-side P-P (C-C) innovations can significantly increase platform performance on the consumer-monetized (producer-monetized) platforms but backfire on the producer-monetized (consumer-monetized) platforms; when platforms grow rapidly, cross-side P-C innovations become more effective; when a platform is subject to high costs in user acquisition and retention, same-side innovations (P-P and C-C) are more useful in sustaining platform performance.
In sum, the message is clear: modern two-sided platforms need to innovate same-side and cross-side. However, not all innovations can sufficiently lead to a positive impact on platform performance. Such performance uncertainty is contingent on platform-specific attributes, including platform monetization type, growth pace, and user acquisition and retention costs.
Robert T. Burrus, Jr., Ph.D., is the dean of the Cameron School of Business at the University of North Carolina Wilmington, named in June 2015. Burrus joined the UNCW faculty in 1998. Prior to his current position, Burrus was interim dean, associate dean of undergraduate studies and the chair of the department of economics and finance. Burrus earned a Ph.D. and a master’s degree in economics from the University of Virginia and a bachelor’s degree in mathematical economics from Wake Forest University. The Cameron School of Business has approximately 60 full-time faculty members and 20 administrative and staff members. The AACSB-accredited business school currently enrolls approximately 2,000 undergraduate students in three degree programs and 200 graduate students in four degree programs. The school also houses the prestigious Cameron Executive Network, a group of more than 200 retired and practicing executives that provide one-on-one mentoring for Cameron students. To learn more about the Cameron School of Business, please visit http://csb.uncw.edu/. Questions and comments can be sent to [email protected].