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Platform company dilemma: Attaining critical mass

Thumbtack, an online marketplace for home and other professional services, faces down a major conundrum of a fledgling platform company: how to build a customer base -- fast.

The founders of Thumbtack Inc. had a simple vision: Make hiring a plumber as easy as buying a book from Amazon....

They envisioned a better way to match customers with professionals based on a host of factors -- from price to availability to experience.

It's a straightforward idea that might seem easy enough to achieve, but co-founder Marco Zappacosta knew otherwise: "That required scale. A lot of the convenience and choice can only be delivered with a large network of professionals," he explained.

Entrepreneurs through the ages have always faced challenges, but, as Zappacosta articulated, launching a platform company requires a bigger base right from the start. Moreover, the company must build that base without having much new to offer -- at least at first.

Marco ZappacostaMarco Zappacosta

Think about it: What did Facebook, LinkedIn or Twitter have to offer when they first hit the Internet? It's only after they achieved enough users that each of these platform companies could deliver new ways of building connections and thus offer new value.

The issue here is the network effect: the concept that systems become more valuable when more people use them. Hence, there's the need to attract lots of users really quickly in order to deliver value. There can't be value without users, and there can't be lots of users without offering value.

These types of platform businesses depend upon network effects for a lot of the value they offer their users. That makes launch harder and different than a traditional business.
Geoff Parkerprofessor, research fellow, MIT Initiative on the Digital Economy, Tulane University

As a result, the need to build up a network of users quickly while initially offering little in return presents something of conundrum for platform company startups operating in this networked marketplace: How to achieve critical mass when your company's biggest selling point, its biggest asset, is its critical mass?

"In a traditional business, you launch a product or service that has some value to an end customer and if you can do that at the right price and you make a profit then you're off and running. But these types of platform businesses depend upon network effects for a lot of the value they offer their users. That makes launch harder and different than a traditional business," said Geoff Parker, a Tulane University professor and a research fellow at the MIT Initiative on the Digital Economy. He is also co-author of the forthcoming Platform Revolution: How Networked Markets Are Transforming the Economy -- And How to Make Them Work for You (W.W. Norton; March 28, 2016).

Platform company strategies for building critical mass

In Platform Revolution, Parker and co-authors Marshall Van Alstyne and Sangeet Choudary outline eight strategies a platform company can use as it tries to build critical mass.

Geoff ParkerGeoff Parker

An emerging platform company can piggyback onto an existing platform, such as Craigslist. It can make a bunch of noise and garner attention through demonstrations. (Twitter famously took this route when in 2007, at less than a year old, it showcased its functions on flat-panel screens at SXSW.) Or it can opt for seeding, that is, finding ways to draw in users on either the supply or demand side until they get enough to draw in customers on the other side.

Thumbtack used a seeding strategy to gain traction. According to Zappacosta, Thumbtack first targeted professionals. The company built its own list of small businesses and targeted them with email and old-fashioned mailings to attract their attention and offered them free tools that enabled them to build stronger online profiles to appear on sites like Craigslist.

"You have to offer something valuable from day one," Zappacosta said, and it has to be more valuable than the promise of potential customers down the road.

That helped attract thousands, and then tens of thousands, of professionals to Thumbtack. (Professionals pay Thumbtack to make introductions to potential customers.) Would-be customers found Thumbtack through online searches and word of mouth, Zappacosta said; the company did not market to them.

Data-generated matching

Still, Zappacosta said it took a few years to deliver something novel. In the first years after its 2009 launch, Thumbtack only matched users with a list of the qualified professionals. But as more and more people got onto the site, he said Thumbtack was able to create matching services based on the data being generated. And the more data that was generated, the more matching criteria Thumbtack could create. So individuals looking for a plumper could opt for a list of professionals with high ratings, experience performing the specific job they need done, a track record in their neighborhood and availability within a set timeframe.

"Scale has the benefit of data and leverage," he said, adding that volume not only allows for better matching between professionals and customers it brings in revenue that Thumbtack can re-invest to build up its systems incrementally."And that makes our system better and better, in a way you couldn't do if you were much smaller."

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