KEY QUESTIONS

1. How are concepts of business efficiency and scaling changing in a world of platforms?

2. What metrics should one plan for in a world of platforms?

Successful businesses are often not distracted by a hundred different metrics but laser focused on one metric that is the best predictor of scale. How does a business identify such a metric?

Most businesses are on a relentless pursuit of scale. Most of business education is built around creating and understanding patterns in business scale. There is, however, a shift in the concept of scale in business today and not all companies seem to embrace it appropriately.

PIPE SCALE: THE TRADITIONAL DEFINITION OF SCALE

Let's think about Pipes. The key inputs for business, traditionally, have been land, capital stock and labor. The business scales whenever one or more of these parameters scale. You hire more people, you get more resources and better machinery and the business scales. However, there is a cost associated with scaling each of these 3 variables. As a result, the primary focus while scaling is optimization. Optimization involves creating repeatable processes which can be cost-effectively repeated over and over again to grow the business. The two key aspects of scaling are:

A) Repeatability

B) Cost-effectiveness

A lot of business education is focused on strategies for optimization of these processes. An IT outsourcing shop, for example, optimizes processes surrounding the labor variable to create scale. A manufacturing business has to optimize processes involving all three variables (e.g. procurement, production, distribution).

PLATFORM SCALE: THE NEW DEFINITION OF SCALE

Let's look at Platforms now. This is where the internet comes in. The internet, by definition, brings with itself unlimited scale. Moreover, since networked businesses tend to deal more with bits than atoms, the inputs to business are no longer the 3 variables above. The new inputs to business are data and talent (intellectual capital, both internal and external).

Scale in a networked business is no longer dependent on processes within the business, it's driven by network processes.

By network processes, I mean interactions that users on the network have with the product. The business scales by scaling these interactions. Hence, the new counterpart of process optimization is actually interaction design and this is partly why designers are so important in networked businesses, because they directly contribute to scale much like MBAs did in traditional businesses.

Not every internet startup is all about Platform Scale. E.g. an commerce company like Zappos has Pipe Scale on the supply side and Platform Scale on the demand side. The same applies to any online media company which still has reporters sitting in a room and churning out stories. On the other hand, marketplaces and platforms like ebay, Facebook and AirBnB have Platform Scale on both sides.

Google was probably the first business that achieved Platform Scale on both the demand AND the supply side. The users are on self-serve and so are the advertisers. This is why it is, even today, one of the most successful internet businesses ever.

On the contrary, Groupon has Platform Scale on the demand side but Pipe Scale on the supply side. It maintains an ever growing sales force to manage the merchant side of the business.

Amazon is one of those rare internet companies that did a fabulous job of mastering both Pipe Scale (on the supply side) as well as Platform Scale (on the demand side).

SO WHAT METRICS SHOULD YOUR BUSINESS USE?

Here's the one line answer:

A business should focus on those metrics which help it create repetitive processes (Pipe Scale) or repetitive interactions (Platform Scale) that will ultimately build scale.

First, It's important that a business knows which forms of scale it has on which sides. Second, most metrics fall under three categories:

1. Per-unit economics of repeatable process OR interaction

2. Time between repeatable process OR interaction

3. % of inputs successfully being leveraged for repeatable process OR interaction

Pipe Scale: The metrics that determine scale are typically determinants of per-unit efficiency. These could be one or more of the following:

1.Per-unit efficiency (Cost per input, per-unit production cost, Cost of moving a unit through a channel)

2. Turnaround efficiency (time to source)

3. Utilization efficiency (Inventory turnover)

Platform Scale: The metrics that determine scale are typically determinants of engagement and repeat usage. These could be one or more of the following:

1. Per interaction engagement (Length of visit etc.)

2. Time between interactions (Time between contributions, time between visits)

3. % Interacting (% active users, % of users who produce etc.)

A business that has Pipe Scale on one side (e.g. supply) and Platform Scale on the other side (demand) has to look at both types of metrics. This is typically the case with an e-commerce company which looks at improving time to source on the supply side and time between purchases on the demand side. A social network like Facebook needs users to interact with each other as often as possible and hence focuses on %interacting, more specifically DAU/MAU.

The governing principle is to understand the processes and interactions which drive scale and focus on the metric that decides how those processes and interactions can be made repeatable.