Product-to-platform (Part III)

Reaching out to customers’ customers

The third method for transforming products into platforms involves a firm reaching out to its customers’ customers, as shown in the figure below. This typically involves the firm creating some sort of marketplace between its customers and its customers’ customers. By definition, this method applies to B2B products/services.

A classic example of successfully executing this strategy is Open Table, which started off in 1998 as a supplier of software tools and point of sale systems to restaurants (its customers). Among other things, these tools helped restaurants manage their reservations with their own customers. After Open Table had built a sizeable customer base (of restaurants), it launched the reservation website to consumers (its customers’ customers), where consumers could discover and book tables at any of the restaurants that were using Open Table’s software product. The reservation website transformed Open Table from a product supplier to restaurants into a two-sided platform (marketplace) with strong network effects.

Indigo Agriculture began in 2014 by selling farmers seed treatments that improved crop performance. In 2018 the company launched Indigo marketplace to help their farmers (its customers) sell their crops to end-buyers (its customers’ customers). The marketplace allows farmers to reach specialized buyers willing to pay more for particular varieties, while buyers can directly source crops having a lot more information than they would when buying through regular channels.

A more recent convert to this product-to-platform transformation is Teachable. Also founded in 2014, it originally just provided software tools which enabled instructors to launch online courses (over 100,000 of them!). These instructors (its customers), in turn, service millions of students (its customers’ customers). When discussing this example in previous years with our students, we would talk about the obvious potential of being able to discover online courses from among the many powered by Teachable. The company started doing this in October 2019. Initially, this was limited to a small number of instructors, but today any instructor can pay more to have their courses appear and be discovered on Teachable’s Discover page.

As suggested by this example, this strategy could – in principle – be employed by any successful B2B provider of software tools. There is, however, a significant issue here, which we can discuss most productively in the context of Shopify. As the leading provider of e-commerce tools to online merchants (it has over one million such customers), it would be very tempting for Shopify to do something to enhance the connection between its customers and their customers. It could start offering a common log-in (similar to Facebook Login) or loyalty program to users of its merchants’ sites. It could obviously go further, and like Teachable, add a discovery feature, turning itself into a marketplace between its merchant customers and their customers, thus competing directly with Amazon’s marketplace.

The problem is that these initiatives would raise concerns among its merchant customers that Shopify is attempting to take control over their customer relationships. In fact, part of the reason that Shopify is so appealing to merchants today is precisely the fact that, unlike Amazon, it is not a marketplace, and therefore does not commoditize them. On the other hand, by remaining a software product supplier and not becoming a two-sided platform, Shopify is not helping its customers with the most important part of their business – finding new customers (this is why marketplaces like Amazon’s are irresistible, even though they inherently commoditize third-party sellers).

Interestingly, Shopify has recently taken steps to strike a middle ground, i.e. helping its customers better connect with their existing customers as well as reach new ones, but without becoming a fully-fledged marketplace. In April 2020, it created a shopping app to improve consumers’ online shopping experience at Shopify merchants. The app remembers the consumers’ delivery and payment details to make it faster to complete forms at Shopify stores, creates a record of all their transactions, provides a way to bookmark their favorite brands, and a “shop local” feature where users can browse nearby stores. Importantly, for now the app only connects consumers with merchants they already have a connection with (e.g. by having purchased from them), which should assuage merchants’ fears of being commoditized by making it easier for consumers to discover competitors. Furthermore, in May 2020 Shopify announced a partnership with Facebook to allow Shopify customers to create storefronts on Facebook and Instagram, and in June 2020 it announced a partnership with Walmart to allow Shopify customers to become 3rd party sellers on Walmart’s ecommerce marketplace.

Thus, the key balancing act for Shopify when attempting to become a platform by reaching out to its customers’ customers is to do so in a way that creates enough value for its customers and does not appear to commoditize them or weaken their customer relationships. Similarly, Teachable seems to have moved carefully towards opening up a marketplace with these concerns in mind. The company pledged to instructors that “you will always be in control of your branding, students, course content, and pricing strategy. We won’t lock members in to using Discover or limit your other marketing and sales channels—in fact, we want you to treat it as an additional sales channel!” And to date, Teachable does not offer any way for users to search for instructors based on price or feedback, so it seems to have deliberately avoided adding tools that might commoditize instructors.

As usual, the greatest upside of this product-to-platform transformation is creating network effects around the original product/service, which can boost its growth and make it a lot more defensible. More specifically, the key benefits to a firm from reaching out to its customers’ customers are:

  • Increased stickiness of the firm’s customers to its original product. Indeed, if customers switched to a competing product, they would now also give up the ability to be discovered on the firm’s marketplace or discovery channels (e.g. on Open Table’s booking website or app, Indigo’s Marketplace, or Teachable’s Discovery page).

  • Gaining a new set of customers that it can sell other things to.

And the key pitfalls to be mindful of:

  • As always, there are costs involved (e.g. creating the marketplace or tools connecting the firm’s customers with their customers).

  • Most importantly, the firm’s customers may become unhappy with the firm’s marketplace or discovery tools getting in-between them and their customers, potentially cannibalizing their sales channels and commoditizing them. That may make them look to switch to competing providers who just provide the original product that they wanted, without meddling in their customer relationships.

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