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Platforms That Grow Are More Than Matchmakers

  • Posted by admin on July 11, 2018

In 2011, Airbnb, the vacation-rental website, learned it wasn’t just in the business of pairing up short-term renters with people who had a spare room or an empty apartment. It was also a risk manager — or would have to be if it wanted to continue to grow.

That lesson sprang from Airbnb’s hometown of San Francisco. A local woman — she identified herself in a blog post on her experience only as EJ — rented out her apartment via the site and came home to find it ransacked and her jewelry and electronics missing. Her first call, after the cops, was to Airbnb. She said she waited 14 hours to hear back. One of the early responses from the company, according to EJ, wasn’t pretty: An Airbnb executive asked her to take down her blog post because the bad publicity might hurt his company.

And that bad publicity did arrive. Within days, media outlets ranging from TechCrunch to Time and CNN had picked up EJ’s post. Soon, Airbnb’s CEO, Brian Chesky, was issuing a public apology. It said, in part: “In the last few days, we have had a crash course in crisis management. I hope this can be a valuable lesson to other businesses about what not to do in a time of crisis.” The vandal ended up being arrested, and Airbnb announced a raft of new protections for hosts, including providing $ 50,000 worth of property insurance. (In 2014, the insurance coverage rose to $ 1 million.)

Seven years after EJ’s misfortune, Airbnb is booming. It raised $ 1 billion in funding last year and is estimated to be worth $ 31 billion. I’d credit at least some of that success to the company’s realization that it had to think differently about risk and to manage it.

Platform businesses, like Airbnb, the transportation service Lyft, and even the dating site Tinder, often talk about themselves as if they’re merely matchmakers (and some of them certainly are that). That’s an appealing pitch — when a company is negotiating with a prospective investor. After all, bringing buyers and sellers together online and taking a small cut of their transaction is comparatively cheap and infinitely scalable. That’s exactly what investors love.

But any platform business that wants to thrive will have to learn what Airbnb did: Matchmaking isn’t everything. Your success also depends on identifying and mitigating risks for your buyers and sellers; you’re a matchmaker and a risk minimizer.

Risk in a Sharing Economy

Another name for the platform economy, the one preferred by many proponents, is the “sharing economy.” This sharing can be either physical, as with Airbnb or Turo, the car rental company, or informational, as with Yelp or TripAdvisor. Either way, it leads to business models based on the declining marginal cost of helping others provide and consume goods or services. Where we once had only economies of scale and scope, we now also have economies of sharing.

Outside the financial sector, businesspeople often conceive of risk too narrowly: They think of it as bad things that can happen to them — bankruptcy, unpaid debts, supply interruptions, or technical malfunctions. But risk is really uncertainty about outcomes. For a platform seller, that can mean uncertainty about future earnings or the resources needed to create those earnings. For a platform buyer, it can mean uncertainty about the quality of the product or service being offered or even about the reliability of its delivery. My daughter, more than once, has had an Uber driver abandon a promised pickup.

In traditional businesses, risks to buyers are often managed through social pressure, not corporate policies. I assume my local restaurateur won’t poison me and my local auto mechanic won’t rip me off, because they’re concerned about their reputations. If I have a bad experience, I’ll grouse to my neighbors and acquaintances, who are also their customers. Enough complaints, and the risk of bankruptcy becomes real.

But managing and protecting one’s reputation is more complicated in an online world, especially when the merchant is a high-profile platform like Airbnb or Uber. A disgruntled customer like EJ can broadcast her story and have it picked up by media outlets nationwide. Sure, platforms like Yelp can help local consumers air complaints, too. But the size and scale of a successful platform business — Airbnb operates globally — creates a multiplier effect: A local problem can morph into national news.

Many platforms encourage suppliers and buyers to review one another, thus creating online reputations. Airbnb has also created a feature called Social Connections, which lets users integrate their social networks into their transactions for extra verification and comfort. By helping hosts and guests manage risk, Airbnb has expanded its market. For a platform company, the quantity and value of goods or services bought and sold will be directly proportional to the amount of risk mitigated.

Trouble With Trust

In any transaction with customers, a company’s brand is a surrogate for trust — its reputation writ large. When selecting a hotel, customers typically opt for a brand with which they’ve had good experiences: comfortable beds, for instance, or tasty breakfasts. Creating those good experiences is largely about controlling quality — promptly replacing worn mattresses and serving up fresh Danishes and doughnuts. But, beyond reviews, how does a platform business create trust when it doesn’t control the quality of the asset or experience that’s supposed to produce the earnings?

Let’s consider how HopSkipDrive, a ride provider for kids from 7 to 17, tackles this challenge. Making parents feel safe about the service — reducing risk — is essential to its brand promise. HopSkipDrive takes many steps to ensure this trust. Visit its website, and a safety tab is prominently displayed. Click there, and you’ll find the company’s 15-point driver certification process. Among the requirements are that drivers have at least five years of childcare experience. Click again, this time on the CareDriver link, and you’ll find pictures and biographies of drivers — a nurse and a nanny among them.

The safety assurances continue once a kid is in a car, with HopSkipDrive providing smartphone updates to parents on the route taken and the speed driven. Once the child is dropped off, a text message summarizes the ride. Without assurances like these, parents would naturally assume the worst about potential drivers.

Our tendency to assume the worst doesn’t just apply to people who want to cart around our kids. It’s a problem in any transaction where there’s information asymmetry between the buyer and the seller, where one party knows more than the other.

Nobel laureate and economist George Akerlof famously described this as the lemons problem that inhibited the used car market. In an article published in the August 1970 issue of the Quarterly Journal of Economics, Akerlof pointed out that when considering a used car, a buyer can’t really know its underlying condition. Was it in a wreck? Has the seller regularly changed the oil? Because buyers can’t know, they assume the worst. They’re then willing to offer only low prices, and that, in turn, drives all the sellers with good cars out of the market, exacerbating the lemons problem. Akerlof has written that once he began pondering used cars, he realized that“ asymmetric information was potentially an issue in any market where the quality of goods would be difficult to see by anything other than casual inspection.”

One can have a successful platform business and not worry about the lemons problem or mitigating buyer risk, but that market will necessarily be limited. Think about how Craigslist operates. It unites buyers and sellers of goods that are mainly easy to inspect and impractical to ship long distances, like used furniture. Though it operates internationally, it has separate sites for each major city. If I’m a student living in Houston and searching for a used bookcase, I’m unlikely to care about listings from Los Angeles or even Dallas. Craigslist has succeeded by staying simple: It offers up bare-bones listings and doesn’t do much to mitigate risk. You won’t find someone selling costly collectible art there.

Still, Uber’s recent difficulties show the peril of defining a platform provider’s role too narrowly. The company appears to have focused on growth to the exclusion, for a long time, of the safety concerns of passengers and regulators and the equity concerns of drivers. In the wake of physical assaults on passengers by drivers, hacks of its computer systems, and even a pedestrian death caused by a driverless car it was testing in Arizona, Uber has a major trust problem, and its momentum has slowed as a result.

As Uber is discovering, sustainable growth in the sharing economy can be achieved only if risk is shared in ways that all parties to a transaction feel are safe and equitable.

Three Mandates for Growth

Old-fashioned matchmakers — whether the kind who kindled romances or those who brokered paintings by van Gogh and Vermeer — understood that their reputations were only as good as their last match. So, they also appreciated that their real work occurred before the first date or auction.

Companies hoping to grow platforms must approach their markets the same way. No one expects a platform provider to anticipate every form of risk, but as a market develops, a company must identify and mitigate the new forms of risk as they emerge. It must also act as a regulator, establishing rules of engagement, and an arbitrator, resolving disputes. All three tasks — matchmaking, regulating, and arbitrating — are key to opening new markets.

Again, witness Airbnb, which began by offering spare beds in urban apartments. Its rental listings now include mansions and yachts. Someone who owns a mansion doesn’t want to end up like EJ.


MIT Sloan Management Review

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