Platform technologies and network goods: insights on product launch and management

Abstract

Entrepreneurs of technology platforms and network goods face distinctive challenges in managing customer adoption, and in trading off growth and profitability. The firm has several levers of control including managing product design and the intensity of network effects, managing the timing of product announcement versus actual product release, selecting the target market for initial product launch, and whether to sell a single version or an expanded product line. Product line expansion is especially useful under network effects. A freemium approach can help the firm manage both growth (via the free product) and profitability (via the premium higher-priced version). However, expanding the product line carries substantial fixed costs (e.g., marketing cost, cost of additional plant, managing multiple sets of inventory, increased distribution cost). Firms are deterred from incurring these fixed costs when there is uncertainty about product success. Such uncertainty is particularly relevant for multi-sided networks—where the value from joining one network (e.g., users) depends on the size of the other side (e.g., developers)—because potential participants on each side may be uncertain about participation on the other side. Despite uncertainty, product line expansion can be attractive for both startups and established firms. Established firms face lower uncertainty about developer participation, and should expand when fixed costs of expansion are low (and do so early in the product’s life cycle). In contrast, startup firms face greater uncertainty in securing participation from third-party developers, and are more likely to benefit from a “wait and see” or deferred expansion strategy.