How do you measure your business’s performance? What are the three key indicators of platform performance?
Geoffrey G. Parker, Marshall W. Van Alstyne, and Sangeet Paul Choudary say that many traditional performance measurement tools can’t account for network effects. They won’t be useful for evaluating the financial health of your platform.
Here’s how to measure business performance accurately.
Tailored Performance Measurements
To learn how to measure business performance, the authors recommend using metrics that capture one of three key indicators of platform performance, depending on which stage of life your platform is in.
(Shortform note: Although traditional performance measurement tools may not work for your platform business, some traditional performance measurement strategies may still apply. For example, in Traction, business consultant Gino Wickman recommends that you compile relevant financial information in a weekly scorecard instead of waiting for monthly or quarterly profit and loss statements. This strategy could keep your finger on the pulse of your platform’s performance, enabling you to respond quickly to surfacing challenges and more proactively strategize for the future.)
For new platforms, measure the value you offer to users. Quantifying this value helps you prove that your platform will grow and succeed. There are many ways to measure value to users. For example, Parker, Van Alstyne, and Choudary recommend evaluating user satisfaction by tracking users’ activity and measuring their trust that the benefits of participating in your platform outweigh the risks.
(Shortform note: Measuring value to users informs managers about your platform’s performance, and it can also be used in communications with users to help them see the value you provide. For example, this is the strategy behind Spotify Wrapped, a personalized summary of users’ yearly activity. Spotify Wrapped reminds users of the value they derive from the platform, and since it’s designed to be shared across social media, it can inform prospective users of the platform’s value, too, which may prompt them to join. Since it’s a great marketing tool, sharing value measurements has become widespread among a variety of platforms.)
For scaling platforms, determine the equilibrium between producers and consumers and the value each user type offers. Parker, Van Alstyne, and Choudary explain that if there’s a mismatch in the number or quality of producers and consumers, you must implement strategies to ensure users are still getting value from the platform. To illustrate, imagine there’s been an influx of producer bots on your platform, resulting in unfulfillable sales listings. You’d need to remove the bots to keep consumers happy.
(Shortform note: Economists have long recognized the need for equilibrium between producers and consumers, but historically, in pipeline contexts, equilibrium has been measured by evaluating the price of a product. In this context, we’re more interested in the number and quality of each user type because the value of the platform—the product in question—is determined by the engagement between producers and consumers, not the price of their services or the price of the platform.)
For well-established platforms, study users’ activity to determine opportunities to improve your value to users. For example, this is why Facebook began Facebook Marketplace—it noticed its users were using the platform to buy, sell, and trade. The authors explain that determining opportunities to improve value helps you remain competitive—a necessity we’ll talk about in the next section.
(Shortform note: In Start With Why, Simon Sinek illustrates the importance of focusing on existing users. There are two kinds of consumers: early adopters, who latch onto new products immediately, and latecomers, who require more convincing. Many innovators believe that they should prioritize reeling in latecomers because they tend to outnumber early adopters, but Sinek says this is a trap: You probably won’t persuade latecomers, but early adopters can serve as brand ambassadors who will reel in convertible latecomers for you. This explains why studying existing users’ activity to determine opportunities to offer them more value helps you remain competitive—it’s more effective and resource-efficient than converting new users to your platform.)
