A research-based model of social network platform development

Citation

Davidson, A. (2014), "A research-based model of social network platform development", Strategy & Leadership, Vol. 42 No. 4. https://doi.org/10.1108/SL-06-2014-0044

A research-based model of social network platform development

Article Type: The strategist's bookshelf From: Strategy & Leadership, Volume 42, Issue 4

A Social Strategy: How We Profit from Social Media

Mikolaj Jan Piskorski (Princeton University Press, 2014), 275 pp.

Amid the recent avalanche of books on social business, it's rare to find one that introduces a new and important perspective on how to think about social networking strategy and business model development. In A Social Strategy, Mikolaj Jan Piskorki, a professor at Harvard Business School, has developed an intriguing hypothesis based on his analysis of usage patterns in some of the successful social networks he has researched at LinkedIn, Friendster, OKCupid, eHarmony, Nike, Twitter, Zynga, Yelp, American Express, Xcard and Harvard Business Review (HBR.org).

Professor Piskorski begins the book by revisiting a number of the challenging questions about business model choice that the developers of sites such as LinkedIn likely faced at startup. These included:

• What business model would allow them to monetize their network and not degrade the value of their offering?

• Should they charge for permitting inter-member communication?

• To what extent should they constrain networking with strangers?

Piskorski argues that, as these LinkedIn business-model choices indicate, rather than thinking of social networking only as a device for enhancing existing product offerings, there is an opportunity to charge customers for helping them create better relationships. As an example of this in an established company, he describes the case of Nike's social network, which enables participants to find other runners in their local area with similar levels of fitness.

Social failures, social solutions and social strategy

These social network platforms offer to prevent social failure. A social failure occurs when potential interactions are not occurring or are difficult to make happen. This may include "meet failures," when it is hard to meet new people with certain characteristics or "friend failures," when it is hard to share information with friends.

What makes the development of a social solution – that is, a viable business model – difficult is that there are trade-offs that a social network must make between openness and privacy, or the ease of finding and connecting with strangers. For example, Facebook's business model is predicated upon limited interaction with strangers but easy contact with many friends. LinkedIn is based upon many contacts with colleagues and private interactions with few strangers. Friendster was based upon private interactions with many strangers and MySpace upon public interactions with many strangers.

As Piskorski explains succinctly, … companies can successfully leverage social platforms for competitive advantage. To do so, they simply need to help people do what they naturally do on social platforms: engage in interactions with other people that they could not undertake in the offline world. … I will refer the confluence of social benefits and greater competitive advantage as a successful social strategy (p. 5)

The underlying economics of social networks

What makes his book particularly useful is that its underlying analysis of social networks takes advantage of the transaction economics literature – for example, the theories of economists Ronald Coase[#fn1] and Oliver E. Williamson[#fn2], who introduced the ideas of evaluating transactions, why they occur, where they make sense to bring inside a company, and where market failures occur. Piskorski argues that social failures addressable by social networks fall into four common categories: breadth; display; search; and communication costs. For a given social exchange, each of these four categories has both social and economic parameters. A business opportunity is created when companies devise a safe, easy and cost-efficient way to surmount social failures, a process that can be interpreted through transaction economics.

Breadth failures. For example, economic breadth failures occur if a person wishes to engage with someone who lives so far away that other methods of communicating or travel are too time consuming or expensive. A prohibitive social-breadth cost may exist if the proposed interaction is impeded by social norms.

Display failures. Such failures occur when displays are too costly, or incur social disapproval. Social platforms provide a low cost and socially acceptable method of displaying information and creations that might otherwise not be possible.

Search failures. Social failures can occur due to expensive or prohibitively lengthy searches. A social network such as a Match.com or eHarmony dating site reduces the search costs and the length of time to find a potential partner. eHarmony, for example, provides a structured method of disclosing information to potential partners that substitutes for "flirting" with strangers. eHarmony prevents unrestricted and mass communication between strangers until a required exchange of information has created some basis for a more unstructured exchange.

Cost failures. Effective social platforms prevent transaction failures by lowering the transaction and opportunity cost, thus promoting greater usage. The overall cost of communicating with someone about a desired interaction depends on the breadth of the social resource, the ability provided by the social network to search among friends and strangers and the type of information users are required to provide or are permitted to display.

Market and social failure

Transaction economists have suggested that markets fail when transactions that would make people better off do not occur. Such failures also happen when the cost of a transaction exceeds the value of the transaction. With social networks, the same failure may occur or, if solved, can become the basis of an opportunity for development of an app or a new business model. But Piskorski believes that the social causes of interactions costs also need to be addressed. As his research indicates, social networks that "combine, breadth, display, search and communications functionality outperform those that provide only some of the functionalities" (p. 21). Importantly, he maintains that there is no "perfect" solution, rather there are trade-offs in how such functionality is provided. For example, what someone is prepared to display or communicate will vary depending upon whether the transaction is public (viewable by anyone), restricted (to a private network), or private (addressed to an exclusive group or to an individual).

As an example, Facebook grew very quickly, making it an attractive social information marketplace. As each new subscriber encouraged many friends to join, viral marketing created exponential growth. But those users who had many user friends that posted many articles soon were daunted by the overwhelming number of postings to view. For some Facebook customers, the opportunity cost of keeping up with their network grew disproportionately and soon exceeded the display benefits of sharing information. For Facebook customers seeking employment or employed in jobs that required continual background checks, privacy issues suddenly loomed large as increasingly employers chose to routinely seek out applicants' postings to view their social activities, and sometimes those of their friends.

What makes Piskorski's book significant is that it offers a method for evaluating social platforms in terms of how they build competitive advantage or generate revenues. Most prior work on social networks has tended to be (1) "horse race" journalism about which Internet business site is growing and which is failing, (2) segmentation and usage oriented, describing different degrees of adoption and usage of social networks and the Internet, and (3) describing best practices in creating social, rating and commentary sites without considering how to develop a business strategy for a social network platform that could evolve over time.

Piskorski ends his book by commenting: "All too often I hear executives complain that they do not see much return on their investment in ‘social media' and relegate it to the ‘nice-to-have-but-not-really-important' category. A quick inquiry … reveals that most of these executives have pursued a digital strategy on social platforms and have not really explored the possibilities afforded by connecting people to each other and getting them to do tasks for free in return."

Alistair Davidson

(alistair@eclicktick.com), Principal, Eclicktick Consulting, is a strategic and marketing consultant in Silicon Valley and a Strategy & Leadership contributing editor. His two recent books include: Innovation Zeitgeist: Digital Transformation in a World of Too Many Competitors (2013) and Digital Virtues and Memes: How to Regain Control of Your Digital and Financial Life (2014).

Notes

Coase, Ronald: "The nature of the firm", Economica, 4:386-405, 1937.

Williamson, Oliver: The Economic Institutions of Capitalism, Free Press, New York, 1985.