No community marketplace is immune to the threat of disintermediation. No matter what the service, if it costs money to use a platform, there is always going to be people looking for ways to cut it out of the loop.
Platforms employ several methods to deter disintermediation, such as creating terms of service that prohibit users from transacting off the platform. They may provide insurance, assume the role of dispute solver or monitor activities to maintain transparency. But those services become less valuable once trust develops among platform users—and the strategies can backfire as the need for the platform decreases.
Uber cleverly provides temporary phone numbers to its drivers and clients to prevent them from connecting with each other off the platform after the ride has been completed. Airbnb refrains from disclosing phone numbers and exact location of property until the booking has been confirmed. However, this doesn’t seem to be a long term solution to secure revenue streams. Any platform that withholds services and is cumbersome to use is vulnerable to competitors offering a more streamlined experience. Alibaba’s Taobao is a case in point.
Taobao debuted at a time when eBay’s EachNet held captive 85% of china’s consumer-to-consumer market. To offer a more wholesome customer experience, Taobao didn’t charge listing or transaction fee. It even set up an instant messaging service that allowed buyers to connect with sellers in real time. In contrast, EachNet charged sellers transaction fees and, because it was concerned about disintermediation, didn’t allow direct interactions between buyers and sellers until a sale had been confirmed. Not surprisingly, Taobao quickly took over leadership of the market, and at the end of 2006, eBay shut down its Chinese site.
In a nutshell, if the fee charged to users exceeds the perceived value of the service offered on the platform, they will drop out and find it more attractive to take their business off the platform. To bind users, platforms need to employ smart, not restrictive tactics.
Threatening Innovation – how to make sure that revenues are not negatively affected by technological innovation?
Subscription based dating sites face a similar strategic conundrum. Early dating websites operated as simple platforms where users could freely browse and contact members. The newer sites today offer “matchmaking technology” as an important value proposition and differentiator. The site eharmony asserts using a “scientific approach to matching highly compatible singles”, based on “29 dimensions of compatibility”. OKCupid claims to “do a lot of crazy math stuff to help people connect faster.”
But a technology that facilitates faster matchmaking wreaks havoc with a company’s cash flows and revenue. Users typically terminate their subscription of the site once they find a suitable partner. Consequently, highly sophisticated match-making technology results in a high churn rate for the company.
Another factor deterring innovation is is the fact that users have a better chance of finding a good match in a larger community. When a firm reduces its matchmaking effectiveness, more users are left unmatched as time goes by. While these users may be disappointed, their continued presence on the platform benefits new users. As the pool of prospects grows (due to lower churn), it improves the experience for all successive users. In sum, while earlier consumers suffer from suboptimal matchmaking algorithms, inferior technology can mean positive (direct) network effects for a firm.
Fortunately though, the end doesn’t have to be so grim for all the loveless people out there. Sufficiently intense competition will still provide an impetus to innovation. A competitive market would lower subscription prices across all markets. As the worth of each user falls, companies grow less skeptical of driving away their source of moolah. And technology becomes a serious differentiator. A commission based model might also be able to tackle the problem in some cases.
Hopefully, consumers committing to matchmakers will get their sincere love and best technology in return. The key to achieve this mutually beneficial outcome is to resolve the matchmakers’ strategy dilemma, making sure their revenue is not negatively affected by technology innovations.
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