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:
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