What is platform leakage?

Sharing economy platforms facilitate people's sharing of underutilized resources by adding value to their users, reducing transaction costs, and building trust. However, the fact is that users might bypass or "disintermediate" the platforms to strike direct deals independently. This leakage is often invisible and can account for a significant revenue or-/and engagement loss.

We call this leakage when a platform's consumers and producers complete a monetary transaction outside of your platform. This is, of course, the essential leakage for most, but on a platform, we also have other currencies that are of value and can leak out. 

Think of freemium platforms, where building a network and ecosystem is the key goal. Then engagement on the platform represents a set of more critical currencies than money. So, bypassing not only results in revenue loss but also the vitality of the platform. This underscores an urgent need to understand bypassing behavior and how to stop this leak.

 If we first look at some definitions of leakage, I will have a different scope of leakage and how to prevent leakage of value transactions on the platform in all important currencies. 

From dictionaries, we find definitions like: "Leakage is an accidental admission or escape of liquid or gas through a hole or crack or the gradual escape of an electric charge or current, or magnetic flux."

If we translate this into a platform business context, leakage is an admission or leakage of values of different currencies. So, you get the picture if we change water or electricity into money, reviews, recommendations, comments, and likes.

To have a more nuanced picture of leakage, I first will unbundle the platform key functions that can experience leakage. Then I will highlight different core transactions' characteristics that affect the severeness and extend of the leakage problem.

Leakage - Unbundling the platform functions

I would argue that we can unbundle the platform business model into four essential functions. All these can be bypassed, and as mentioned, the bypassing does not necessarily only involve monetary loss; other key platform currencies can be lost when the transaction is moved outside the platform.

First of all, the platform Aggregates supply and demand, where the value propositions attract users to the platform where the consumers represent demand, and the producers represent supply. The network effects and externalities that add value for both parts increase and can potentially aggregate an exponential growth on the platform.

Secondly, one of the reasons why platforms succeed and has disrupted many industries is the ability to match consumers with producers. Where previously the cost of search was high, now the search is done for you, and you will be served with a match based on a low (cost) effort. The producers will also get access to a more extensive and segmented marked where an algorithm is used to target their customers, often at a much lower markup, than done through an agent or a retailer. The matching function is less valued in the B2B market than in the B2C market because firms may have collaborated before and had less need to seek new partners.

Thirdly, the platform aims to be the facilitator of the core transaction. The platform often consists of an ecosystem of complementors that ensure that the transaction is done with low friction and quality. This core transaction is the moment of truth, and one should build and design the platform around it. 

And fourth, the very foundation of the platform function is the need and presence of trust. The platform needs to serve as a trusted host for its users and create trust between the producers and consumers. This multi-layered function comes down to trust from using the platform, paying through it, privacy issues, to rating and scoring systems on both sides to build trust down to each user profile.

These four functions can be bypassed, and by this, the platform loses substantial revenues and vitality.

The characteristic of the core transaction is another way of flushing out the leakage.

Leakage - Transaction characteristics

Every platform is exposed to the risk of bypassing, but the extent of the leakage varies with the character of the core value transaction on the platform. The core transaction is between two external parties that choose your platform to host the transaction. As pointed out, functions, aggregation, matching, and creating trust are all part of the transaction context. Still, the actual transaction that will be done is the interaction that can have very different input variables and balances that affect the extent and severity of a bypassing.

If we first look at the monetary motivation for bypassing, chip size and frequency of transactions stand out. If the chip size is large, or there are many transactions, there is often a higher markup in sum that the producers and consumers can cut away by removing the middleman. Note that often they will use the aggregate, matching, and trust function on the platform but bypassing the transaction.

Secondly, we have bypassing if the interaction that led to the transaction is done in person or through the platform. If the transaction is through the platform, trust is founded in the platform, which will be a strong motivator to keep the transaction there. On the other hand, trust can be built if there is interaction in person, and it is easier to strike an agreement outside the platform. Note that this is a two-edged blade since we see a strong trend that people feel that meeting in person is uncomfortable (represents friction), so there are often motivations for not meeting in person. E.g., keyless handover when renting a car on Nabobil.no/en.

Thirdly, there may well be an asymmetry and friction in the transaction that motivates both to stay on the platform or bypass it. For example, suppose the producers already have a strong reputation. In that case, the consumer doesn't need to rely on the platform's trust and can contact the trusted producer after using the matching algorithm. E.g., hotels.com. If the producer doesn't have a reputation and trust, the platform can add value-adding features like rating, reviews, and even cover to "lend" trust to a producer. The consumer will honor this value add by staying on the platform. E.g., eBay or Airbnb.

Forth, the level of complexity of the transaction, the more likely the platform can have value-adding services and complementors to fulfill the transaction. This will create a more robust loyalty from users of both sides and is often the way to evolve transactions in networks to ecosystems. This is often the case; there is a need for coordination, different specification, qualifications, certifications. This relates, especially in the b2b space. E.g., Hire technicians, nurses, specialists.

Let us help stop the leakage

Platform b. is a specialist on their own and offer mitigation of leakage as a service. We bring our business model and platform technology acumen into an analytical and hands-on project, with use-cases, driver analysis, and deliver strategic and technical tasks and requirements to reduce leakage of all the relevant currencies related to the business model.