To Manage a Platform,Think of It as a Micromarket

STRATEGY

To Manage a Platform, Think of It as a Micromarket by Umair Haque APRIL 13, 2016

Whether we like it or not, markets are reshaping our lives. This time they’re made not of trade agreements — but of bits. Some call them platforms; I’ll call them micromarkets. It’s a truer description of what they are.

As micromarkets reshape our lives, they’re also introducing new, or heightening very old , tensions. Here’s how leaders can manage these tensions and set up their micromarkets for long-term success.

2COPYRIGHT © 2016 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.

Make it a market, not just a marketplace. Marketplaces are platforms where buyers can display and list their offerings, much like a bazaar. True markets are different. Supply and demand dictates pricing, which is dynamic. Uber’s “surge pricing” is a simple example — and also an illuminating one. Uber isn’t quite a true market because algorithms are calculating prices based on predicted supply and demand. True markets create maximum efficiency; they offer buyers the lowest price and sellers the greatest demand , but they also slash search costs for everyone in the process. And that’s really the point of markets: efficiency gains for all.

Make it a network, not just a market. Markets aren’t always the right answer. They work best for interchangeable commodities — soybeans, bonds, car rides. When it comes to hiring an accountant, lawyer, or doctor, price competition probably isn’t the only factor, because high-value services aren’t commodities. So in these industries, don’t build markets. Build networks, ones where people can compare and contrast similar, but not the same , services along multiple dimensions of quality. Networks, too, can create search economies like markets — and they’re more efficient at it when things aren’t the same. Think friends on Facebook, or new hires on LinkedIn.

Put fairness over short-term profit. As micromarkets ignite and spark into sudden success, there’s a natural tendency to misuse their newfound power. Many of today’s micromarkets are already tomorrow’s monopolies. And in some cases they’re behaving like it: Witness Uber’s constant PR mishaps. One benefit of being fair to both sides of your micromarket is that people are more likely to love, respect, and adore you — not just see you as a necessary evil that they grudgingly do business with. In other words, “brand.” But the truer benefit is a more viable, thriving ecosystem. Platforms that starve their buyers and suppliers for this quarter’s profit are simply consuming tomorrow’s growth, begging for rivals, and thus ensuring their own downfall — or at least anger, mistrust, and stunted potential.

Manage risk. Creating a thriving micromarket isn’t just about connecting buyers and sellers; it’s about minimizing what I’ll call “social risk”: doing business with perfect strangers. When you buy a bond from an anonymous seller, it’s one thing , but when they’re coming over to your house or you’re getting in their car, it’s another. And so the great innovations of micromarkets aren’t just about relationships — they’re about risk. They must find ways to minimize the novel risks inherent in fragmented transactional commerce , in doing business with perfect strangers who just might turn out to be freaks (or worse). They can provide information, quality indicators, and so on to help offset stranger risk.

Create relationships. The best and most enduring way of minimizing risk is also the oldest and simplest one: Do business with people you’ve come to trust. I found a handyman on TaskRabbit — and while I could book someone else when my plumbing breaks, I’d rather choose Maz again because I already know I can trust him. So the most prosperous and viable micromarkets will probably be those that can leverage natural social dynamics to manage risk, lower search costs, and create a better deal for everyone. Relationships beat transactions every time; they’re simply more economical.

3COPYRIGHT © 2016 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.

Don’t let algorithms replace leadership. In the brave new world of micromarkets, the algorithm is the boss. It issues the orders, tracks performance, and guarantees delivery, quality, and reliability. But let’s admit it: Algorithms don’t make very good bosses. The tensions are visible, from Uber drivers trying to unionize, to constant horror stories about Airbnb, and so on. The point isn’t just that micromarkets need to learn from social media’s mistakes and invest in QA (though they do). It’s that algorithms, too, need to be managed — by humans (remember them?). Not because they make mistakes. Because they don’t.

When an algorithm’s been programmed for brutal efficiency, it’s the job of the wise leader to know when efficiency’s not the right goal. We often think that algorithms can replace leaders. But the truth is the opposite. Algorithms make leaders more necessary. Micromarkets need leaders who can make sure that the algorithm is not only a machine that grinds up human potential but also a ladder that offers people ways up.

And that’s exactly where micromarkets are most failing today. If you’re a TaskRabbit worker or an Uber driver, what are your chances of becoming a manager? Without ladders up, organizations never truly grow. They might profit today, sure. But the long-term prognosis? After all, there were short- term profits to be had with the workhouse, child labor, and the seven-day workweek. But we decided to get rid of those.

Humans choose to give our work meaning. We want leaders who inspire, elevate, and expand our potential. And if micromarkets fail to meet that standard, the simple truth is this: They’ll be seen more as the dull, digital equivalent of a big-box store and less as the exciting harbingers of a new, more flexible economy.

Umair Haque is Director of Havas Media Labs and author of Betterness: Economics for Humans and The New Capitalist Manifesto: Building a Disruptively Better Business. He is ranked one of the world’s most influential management thinkers by Thinkers50. Follow him on twitter @umairh.

4COPYRIGHT © 2016 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.

Copyright 2016 Harvard Business Publishing. All Rights Reserved. Additional restrictions may apply including the use of this content as assigned course material. Please consult your institution's librarian about any restrictions that might apply under the license with your institution. For more information and teaching resources from Harvard Business Publishing including Harvard Business School Cases, eLearning products, and business simulations please visit hbsp.harvard.edu.

STRATEGY

To Manage a Platform, Think of It as a Micromarket by Umair Haque APRIL 13, 2016

Whether we like it or not, markets are reshaping our lives. This time they’re made not of trade agreements — but of bits. Some call them platforms; I’ll call them micromarkets. It’s a truer description of what they are.

As micromarkets reshape our lives, they’re also introducing new, or heightening very old , tensions. Here’s how leaders can manage these tensions and set up their micromarkets for long-term success.

2COPYRIGHT © 2016 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.

Make it a market, not just a marketplace. Marketplaces are platforms where buyers can display and list their offerings, much like a bazaar. True markets are different. Supply and demand dictates pricing, which is dynamic. Uber’s “surge pricing” is a simple example — and also an illuminating one. Uber isn’t quite a true market because algorithms are calculating prices based on predicted supply and demand. True markets create maximum efficiency; they offer buyers the lowest price and sellers the greatest demand , but they also slash search costs for everyone in the process. And that’s really the point of markets: efficiency gains for all.

Make it a network, not just a market. Markets aren’t always the right answer. They work best for interchangeable commodities — soybeans, bonds, car rides. When it comes to hiring an accountant, lawyer, or doctor, price competition probably isn’t the only factor, because high-value services aren’t commodities. So in these industries, don’t build markets. Build networks, ones where people can compare and contrast similar, but not the same , services along multiple dimensions of quality. Networks, too, can create search economies like markets — and they’re more efficient at it when things aren’t the same. Think friends on Facebook, or new hires on LinkedIn.

Put fairness over short-term profit. As micromarkets ignite and spark into sudden success, there’s a natural tendency to misuse their newfound power. Many of today’s micromarkets are already tomorrow’s monopolies. And in some cases they’re behaving like it: Witness Uber’s constant PR mishaps. One benefit of being fair to both sides of your micromarket is that people are more likely to love, respect, and adore you — not just see you as a necessary evil that they grudgingly do business with. In other words, “brand.” But the truer benefit is a more viable, thriving ecosystem. Platforms that starve their buyers and suppliers for this quarter’s profit are simply consuming tomorrow’s growth, begging for rivals, and thus ensuring their own downfall — or at least anger, mistrust, and stunted potential.

Manage risk. Creating a thriving micromarket isn’t just about connecting buyers and sellers; it’s about minimizing what I’ll call “social risk”: doing business with perfect strangers. When you buy a bond from an anonymous seller, it’s one thing , but when they’re coming over to your house or you’re getting in their car, it’s another. And so the great innovations of micromarkets aren’t just about relationships — they’re about risk. They must find ways to minimize the novel risks inherent in fragmented transactional commerce , in doing business with perfect strangers who just might turn out to be freaks (or worse). They can provide information, quality indicators, and so on to help offset stranger risk.

Create relationships. The best and most enduring way of minimizing risk is also the oldest and simplest one: Do business with people you’ve come to trust. I found a handyman on TaskRabbit — and while I could book someone else when my plumbing breaks, I’d rather choose Maz again because I already know I can trust him. So the most prosperous and viable micromarkets will probably be those that can leverage natural social dynamics to manage risk, lower search costs, and create a better deal for everyone. Relationships beat transactions every time; they’re simply more economical.

3COPYRIGHT © 2016 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.

Don’t let algorithms replace leadership. In the brave new world of micromarkets, the algorithm is the boss. It issues the orders, tracks performance, and guarantees delivery, quality, and reliability. But let’s admit it: Algorithms don’t make very good bosses. The tensions are visible, from Uber drivers trying to unionize, to constant horror stories about Airbnb, and so on. The point isn’t just that micromarkets need to learn from social media’s mistakes and invest in QA (though they do). It’s that algorithms, too, need to be managed — by humans (remember them?). Not because they make mistakes. Because they don’t.

When an algorithm’s been programmed for brutal efficiency, it’s the job of the wise leader to know when efficiency’s not the right goal. We often think that algorithms can replace leaders. But the truth is the opposite. Algorithms make leaders more necessary. Micromarkets need leaders who can make sure that the algorithm is not only a machine that grinds up human potential but also a ladder that offers people ways up.

And that’s exactly where micromarkets are most failing today. If you’re a TaskRabbit worker or an Uber driver, what are your chances of becoming a manager? Without ladders up, organizations never truly grow. They might profit today, sure. But the long-term prognosis? After all, there were short- term profits to be had with the workhouse, child labor, and the seven-day workweek. But we decided to get rid of those.

Humans choose to give our work meaning. We want leaders who inspire, elevate, and expand our potential. And if micromarkets fail to meet that standard, the simple truth is this: They’ll be seen more as the dull, digital equivalent of a big-box store and less as the exciting harbingers of a new, more flexible economy.

Umair Haque is Director of Havas Media Labs and author of Betterness: Economics for Humans and The New Capitalist Manifesto: Building a Disruptively Better Business. He is ranked one of the world’s most influential management thinkers by Thinkers50. Follow him on twitter @umairh.

4COPYRIGHT © 2016 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.

Copyright 2016 Harvard Business Publishing. All Rights Reserved. Additional restrictions may apply including the use of this content as assigned course material. Please consult your institution's librarian about any restrictions that might apply under the license with your institution. For more information and teaching resources from Harvard Business Publishing including Harvard Business School Cases, eLearning products, and business simulations please visit hbsp.harvard.edu.