BY TODD LUTWAK AND YUJIN CHUNG
In March 2012, I left the suburban enclaves of San Jose and went on safari to Kenya. Early in the trip I toured the Ngorongoro crater, filled with African lions, rhinos, hippos and giraffes.
But my favorites were the monkeys. I loved Curious George as a boy. Seeing George’s real cousins, I asked our tour guide, “Can I give a banana to the monkey?” I had become the real-life Man with the Yellow Hat.
The tour guide responded with an immediate and stern refusal, “Absolutely not.”
He explained with a calm voice, “If you give a banana to a monkey you will destroy our ecosystem. You will teach monkeys to beg, and not forage, for food. You will pose danger to your fellow safari goers who might not have bananas to offer. And your action will cause other actions, for the plants, the wolves, the trees and everything else. You must not give a banana to the monkey.”
He was right, and I knew it. Prior to visiting Kenya, I had managed the seller platform at eBay for over eleven years. I trained several executives who thought eBay was just an online store and did not appreciate its nuances as a sophisticated ecosystem. Too often, I was the tour guide lecturing on how their ideas were like giving bananas to monkeys, simple in intent but harmful in outcome. They failed to understand the principles of platform management.
In this wild and beautiful place untouched by modern marvels, this tour guide understood that basic principles govern the survival or death of ecosystems. And in Silicon Valley, most entrepreneurs and executives think platforms are about features, hacking and data. This is wrong. Managing platforms is a human art.
First, let us define what a platform is. As Marc Andreessen defined in a past blog post, a platform is “a system that can be programmed and therefore customized by outside developers — users — and in that way, adapted to countless needs and niches that the platform’s original developers could not have possibly contemplated, much less had time to accommodate.”
Apple opened up iOS, Google opened up Android, and a million apps bloomed. Facebook opened its platform and created a social gaming jungle (and subsequent desert). Platforms also enable non-programmers to thrive and flourish — these variations are marketplaces. EBay was the original marketplace, but many more have blossomed, including Airbnb, Lyft and others.
Thanks to platforms and marketplaces, our world inches forward to a more predictable, orderly and efficient society — or so we think. These same technologies, while created and cultivated by programmers, are neither as predictable nor as orderly as the code which comprises them. Instead, they are chaotic, emotional, and even rebellious. The largest platforms in the history of software have a storied history of upsetting and even angering users and developers to near revolt.
During my tenure at eBay, I was cried to, yelled at, and threatened more times than you can imagine. EBay merchants cursed me with the most vulgar of terms, often in multiple languages and even in the middle of the night, where angry sellers would call my cellphone as I put my children to bed. If you work at Apple, Google, Facebook, Twitter, Airbnb or any platform company, I know your struggles and know them well.
Why is managing a platform so hard, when we have advanced technologies, real-time data, when we have literal control of the code running the platform? Because you cannot manage a platform like you manage a company. Ideas like command-and-control hierarchies, functional or matrix organizational structures, and other business school frameworks fail miserably.
The first challenge is size. An org chart and a hierarchy work when you have a hundred employees, a thousand employees, even a hundred thousand employees. But the scale of platforms is beyond anything like a company. The iOS and Android app stores each have over one million apps in their stores. EBay has hundreds of millions of listings. Facebook has over one billion users. The sheer size of these platforms allows for opportunities to confuse and upset millions of people with the wrong policy, even the wrong terminology.
This leads us to a larger point: Complexity. With platforms, you are not managing software; you are managing people. They may be the software developers writing a garage opener app; they may be your Aunt Becky clearing out the garage; or they may be brand advertisers who wants to reach the software developer and Aunt Becky. Each segment has vastly different motivations and needs to succeed on a platform.
This diversity produces challenges of managing a business with massive network effects. The advantages of marketplace liquidity and viral growth are soon matched by the disadvantages of unintended consequences and second-order effects. Another challenge is implementing change which would be universally beneficially only if universally adopted, but where each individual affected has little reason to change.
For marketplaces in the last several years, this change has been free shipping. E-commerce buyers have made it clear: They want it and they love it. Amazon started this precedent in 2005 with the launch of Amazon Prime, and created this expectation for anyone buying online. At eBay, we knew our customers wanted free shipping, and as an addicted online customer, I wanted it, too.
The problem with free shipping? Someone has to pay for it, and eBay merchants didn’t want to pay. Even as late as 2009, only a small number of items sold (less than nine percent) were shipped for free. As a powerseller on eBay, I didn’t want to pay either — who wants higher fees, even for a good cause? Everyone knew that free shipping would be better for the ecosystem, but no one knew how to actually make it happen. Unlike a traditional company, we could not order our sellers to provide free shipping through an ultimatum. A top-down mandate would be met not with anger or resentment, but worse — indifference.
So how could eBay keep from losing buyers to Amazon?
I can answer this question through a lesson learned on my trip to Kenya. In the middle of the same tour, we spent many days with the Maasai, a semi-nomadic people who inhabit Kenya and North Tanzania. The Maasai determine wealth by how many cows they own. Cows are literally traded for wives with an exchange rate of between five to fifteen cows per wife.
Lions also inhabit the same lands as the Maasai, and kill these cows. Maasai warriors hunt and spear lions in response.
But the lions, which are rare, attract tourists — and their dollars. Tourism alone generates fifteen percent of the Kenyan GDP, and the Kenyan government has outlawed the killing of lions with severe penalties.
These dueling interests seem irreconcilable, but the Kenyan government understands ecosystems and the importance of incentives. In its great wisdom, the Kenyan government created a simple policy not just to stop the killing of lions, but also to encourage the Maasai to protect them.
The policy: When a lion kills a cow, the Maasai don’t retaliate. Instead, they report and document the attack and the government replaces the cow. Additionally, the government shares tourism revenue with the Maasai by finding them jobs as drivers and tour guides, further incentivizing them. Maasai lion killings have declined, and tourists visit Kenya in droves for its beautiful lions.
The insight of Kenya reveals the solution for eBay. You encourage free shipping the same way you save lions: By understanding incentives.
Sellers have two main goals on eBay. First, they want more sales and higher sales velocity — all merchants want to sell more, and sell more frequently. Second, they want better margins. Merchants can either sell their goods for higher prices, or their fees for selling on eBay needed to be lower. The former was not going to work, because buyers don’t want higher prices, so we worked on accomplishing the latter and finding a way for the platform to change.
With this understanding, we “created” free shipping by providing a set of well-thought-through incentives to achieve the goals of our sellers. The first incentive was to increase the search ranking of items which offered free shipping. This shift would generate increased sales velocity for those merchants, resulting in a 500 percent increase in sold items with free shipping. The second incentive was to offer fee discounts to sellers who offered free shipping, as well as increasing prices to merchants charging excessive shipping fees. Thanks to these measures, the number of sold items with free shipping is now well over fifty percent on eBay.
The key to understanding and managing platforms lies not in new codecs or product concepts, or in advanced management classes at Ivy League business schools. Rather, the best teacher might be the Kenyan wilderness, the original Valley which birthed the first human societies, the earliest adopters of technology. Managing a platform, even one which is cutting-edge, real-time and robust, is like managing an African ecosystem, one which is ancient, messy and thriving with life.
Todd Lutwak is a partner at Andreessen Horowitz, where he helps portfolio companies design, build and implement go-to-market programs. Prior to Andreessen Horowitz, Todd was a 12-year executive veteran of eBay, most recently as Vice President of Seller Experience. Previously, Todd worked in management consulting at Arthur D. Little in the United States and Portugal, and held various sales and sales management positions at AT&T and Lucent Technologies.