The Core Transaction: How Platforms Facilitate Exchange

There are two major systems you need to account for in platform design.

The first comprises the four functions: audience-building, matchmaking, providing core tools and services, and setting rules and standards. These are the activities a platform controls in order to support its network and what sets it apart from its peers and competitors.

Every platform has a core transaction. It’s how producers and consumers create and consume value.

The other major system is the core transaction. The core transaction is the set of actions users must complete in order to exchange value on the platform, the cornerstone for any platform business.

No matter which way slice it, each and every platform has a core transaction. On Uber, drivers toggle their availability to drive and consumers submit requests for rides. On YouTube, producers upload videos and consumers find, watch, rate and share them. On Android, consumers download and use apps while developers create and publish them.

These simple examples highlight the core transaction’s main purpose: to construct a set of simple, repeatable actions that producers and consumers can take in order to create and consume value.

Every platform has a core transaction, which consists of four parts: create, connect, consume, and compensate.

The four steps of the core transaction

This is the key process to understand in platform design, as the core transaction will dictate your platform’s type and how you need to address the four functions. It’s also one of the earliest decisions to make in platform design.

At a high level, the core transaction in every platform contains the same basic set of four actions. These are:

  1. Create: A producer creates value and makes it available via the platform
  2. Connect: One user takes an action that connects them to that value
  3. Consumer: A user consumes the value created by the producer.
  4. Compensate: Consumers return value to the producer in exchange for what they consumed.

Facilitating the core transaction is the way that platforms create value. All four actions are necessary for a platform to facilitate transactions successfully. Combined, they provide a repeatable way for users to exchange value. In other words, they provide a simple process through which platforms “manufacture” transactions.

The Transaction Factory

If a platform is thought of as a transaction factory, these four steps are its assembly line. They are how a platform takes potential connections in its network and turns them into transactions. Platforms design is the process of turning these potential connections into transactions and then repeating this process over and over.

However, a platform’s “assembly line” doesn’t function quite like its linear counterpart. Platforms rely on humans to drive the exchange, so it is constantly changing and evolving, while an assembly line is a relatively static process that relies on exact inputs and outputs.

Also, the four steps of the core transaction don’t always occur one right after the other the way that the steps in an assembly line do— often the steps of the core transaction can occur asynchronously. For example, if I upload a YouTube video today, it still can be viewed a year from now.

Platforms are entirely dependent on external producers for their inventory.

Still, if any one of the steps in the core transaction is not functioning well, the flow of the transactions breaks down and hurts the platform’s value proposition — just as if one process in an assembly line stopped working, production would grind to a halt.

A factory is focused on how well it translates inputs into outputs. Its owners want to make this flow from raw material to product as efficient as possible. Any stoppages in this process will reduce the factory’s ability to create products. Similarly, a platform aims to maximize the efficiency of its core transaction.

This task isn’t quite as simple as optimization of a linear business, since a platform is fine-tuning the actions of external users rather than internal resources that are fully under its control. If a platform business wants to increase its output (total completed transactions), it can’t simply choose how much additional inventory it needs to create and specify the different types of products it will make. Platforms are entirely dependent on external producers for their inventory.

A platform can incentivize its producers to create more inventory, or specific kinds of inventory, but it can’t control these processes the way that a linear business can.

However, the ultimate goal is the same for both linear and platform businesses: to design a repeatable process that will create value.

This process also needs to encourage efficient, high-quality throughput at every step. For example, on a platform, if producers don’t create the right kind of inventory – that is, if the inventory is of low quality – then you waste potential connections on bad transactions and consumers will seek to value elsewhere.

On the other side, if you aren’t connecting consumers with the right inventory, some of the value created by your producers goes to waste, and they’ll move to offer their value in a more appropriate venue.

The same tenets apply to consuming and compensating. The better job that a platform does at facilitating each step of the core transaction, the more successful it will be. Without a functional core transaction, the platform is dead in the water and has probably wasted a lot of investment dollars (see Color).

Filed under: Platform Innovation | Topics: core transaction, enterprise hacks, platform innovation, platforms

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