How Nesting Changes Platform Strategy

Webs of nesting relationships are increasingly common among software platforms. Trello is a visual collaboration and project management platform that serves as a host by offering additional features to its users through the integration of third-party platforms and apps (called Power-Ups). Trello itself can be nested into the Microsoft Teams platform, allowing users to manage tasks and workflows from within the Teams environment. In addition, Trello can both serve as a host for Slack and be nested into it, depending on which features a user needs and which platform they prefer to use as a primary interface.

One way to determine whether nesting is suitable for your platform is to consider how your customers use it and other platforms. In some scenarios, customers may already be using two or more platforms to accomplish their objectives. If so, nesting could make this experience more convenient and enjoyable, or more efficient and effective, by allowing users to remain in a single flow throughout their transaction. Similarly, by adding another platform to your platform structure, could you offer your customers a more comprehensive and enticing experience? Would nesting enable new functionality? Would it allow customers to interact with others with whom they currently aren’t transacting? If so, nesting is likely a good approach.

If you’re considering entering a nesting relationship with another platform, you must make numerous strategic decisions, including what position to take in a nested relationship, how many such relationships to engage in, and which markets to address. You must weigh potential risks and challenges and evaluate necessary capabilities. And once you’ve identified the potential to have nesting relationships, you must determine how close the relationship should be and how the parties will handle data access and data sharing. Below, we review the key questions you should ask and offer guidance for thinking through them.

1. Should we host, nest, or do both? Your business strategy and existing relationships with customers, competitors, and partners are the starting point for your decision about whether to participate in a nesting structure and, if so, which role to take. Hosting often supports expanding your company’s market presence and offering a broad range of services without building new platform capabilities. Nesting allows platforms to participate in markets that are beyond their current scope.

Which role you should play in a nesting structure might be more obvious in some cases than in others. If your platform would benefit by having another synergistic but distinct platform nested into it, you should be a host. If your platform is one part of a larger offering, such as an infotainment system in a car, and being a platform isn’t your organization’s strongest suit, then becoming a host and enabling other platforms to offer additional services to your customers might be a very good move.

A rationale for hosting is to become the focal one-stop shop for customers. By allowing Trello and other services to nest within its platform, for example, Microsoft Teams enables users to manage tasks and assignments without switching apps, thus reinforcing Teams’s position as a multifunctional productivity hub. Hosting can also strengthen a platform’s relevance by offering complementary services that extend beyond its original scope, as WeChat has done extensively in China.

If your platform could benefit from reaching a wider audience or addressing complementary markets, then becoming a nester might make the most sense. This is especially true for platforms operating in an industry closely aligned with another, such as restaurant reservations and transportation. Uber has announced a “dine out” feature in its UberEats app, available as of this writing in Australia, that allows diners to access reservations through Open­Table. Thus, OpenTable is nesting within UberEats.
Hard-to-access reservations are available for premium users, providing customers with an incentive to adopt the nested solution.

For some companies, the decision to be a host or to nest is not as clear, and the solution might be to do both. If your platform users access your service via various means, it may make sense to both host and nest and to provide many ways to engage with your platform.

2. How may nesting relationships affect our governance? As a platform’s ecosystem grows, curation and governance become more complex and more risky. These concerns are amplified in the nested platforms context, since nested platforms themselves have curation and governance structures managing their own ecosystems of complementors and users. These structures may be inconsistent with those of hosts, resulting in conflict.

Nested platforms’ policies may be more or less stringent, with some allowing very open access (with less concern about managing quality) and others having strict curation with tight quality requirements. As a host, what challenges might you encounter if your nested platforms allow complementors that offer low-quality products or services? To what extent might this affect your reputation? If you establish stricter curation policies, to what extent might that affect your ability to attract nesters? Is it problematic for you competitively if nested platforms allow complementors that have services that compete with yours? Might it cause issues as you compete in your own markets? In sum, if you are acting as a host, establish quality standards and vetting mechanisms to evaluate whether the governance policies of potential nesting platforms are consistent with your standards. As a nester, consider the consequences of modifying your approach to platform governance as you start joining hosts’ platforms and aligning with their policies.

3. How might our resource requirements and costs be affected by nesting? While hosting may be an efficient way to provide customers with new services, it is likely to add new resource requirements and costs. Do you need to acquire specific skills to manage a nesting structure (such as more business development people versed in ecosystem management)? Similarly, while becoming a nester may be an efficient way to access new markets, it also may require additional resources and add costs.

Whether your platform is a host or a nester, integration work is required. A relatively straightforward way to accomplish this is via an open API. Hosts can make APIs available and allow nesters to access them mostly independently. However, in some cases, an open API may not address hosting requirements either for technical or strategic reasons. For example, if you are hosting your competitors, you might want to negotiate each relationship individually to create tailored and mutually beneficial agreements. In these cases, given the wide range of nesting platform types and business needs, scaling is difficult. Adding more nesting platforms can require significant additional resources, including engineers, business development managers, marketing and branding experts, and others.

4. Does a nesting relationship expose us to competition or brand conflict? While nesting provides access to more customers, it can also expose platforms to direct competition. Amazon Music, Spotify, and other music services appear side by side on the Sonos app, allowing customers to easily compare competitors. A service may nest into a platform that, although it starts as a collaborator, could become a competitor over time through disintermediation or just by growing much larger.

Another strategic consideration for hosts is branding. All platforms worry that a complementor could tarnish their brand, so they employ explicit guidelines and community practices to address these concerns. The risk mushrooms with nested platforms because each one brings its own complementor ecosystem with accompanying brand risk exposure.

When your service sits alongside others with stronger branding, your distinctiveness may be at risk. Whether you’re considering hosting or nesting, clarify what makes your platform uniquely recognizable and attractive to users and complementors. What policies, including those that are technological, contractual, or marketing-related, will preserve your brand and your ability to differentiate and maintain customer loyalty in a nested structure?

5. Do we gain new technological capabilities by nesting? Nesting can be a shortcut to accessing new technological capabilities. Instead of building a feature, a platform can nest within another platform that already offers that feature. Canva nested its design platform into the ChatGPT platform so that Canva can take advantage of the user-friendly large language model interface and AI suggestions without having to develop its own. Nesting also benefits ChatGPT, because offering advanced design generation via Canva extends its utility.

Consider what technological capabilities you need in order to accomplish your mission but lack the resources to develop or acquire. Is there a nesting relationship that could add these to your platform?

6. How tightly should we integrate, and how much functionality should we offer? Another key strategic consideration is the extent to which nesting and host platforms are integrated — that is, how do consumers access nested services? And how much functionality should a nested platform offer? How much functionality should a host even allow? These decisions affect business outcomes and customer experiences. They result in interactions ranging from light-touch engagements to deep and thorough integrations, reflecting the notion of nesting intensity.

In contrast, in cases of very tight and comprehensive integration, a user stays within the host platform and experiences the nested platform within the host environment. This is the case with Trello nested within Microsoft Teams, or food ordering and delivery platforms nested into Google Search and Maps. Here, the customer never has to leave the Google page where they’ve located the restaurant they want to order from, and they can directly access their delivery app of choice.

While close integration has the benefit of a single integrated user experience, it does come with risks. The nester loses some control of the quality of the user experience and may even cede ownership of the customer to the host platform. To address these concerns, some nesters take a hybrid approach. Spotify, for instance, provides users with the option to either go directly to Spotify through a redirect link from Sonos or use the embedded version of Spotify within Sonos. Spotify managers recognized that having customers remain within the Sonos app reduced their level of control and customer engagement. Sonos agreed to include the redirect link because of the value of having Spotify as a nested platform. Market power matters in these relationships.

How much functionality to allow or provide may be a more nuanced question. In some instances, a nesting platform may offer full functionality within the host’s interface. In others, a nesting platform may end up with a lower level of functionality, either by choice or to accommodate a host’s requirements. In most cases, there is some reduced functionality when a platform nests into another platform. For hosts, keeping nesters as lesser services with more constrained functionality reduces risk, including the risk of user experiences becoming too complicated.

As previously noted, an automotive system may need to limit the functionality of nesting platforms to ensure that people drive safely. A nester may also limit functionality so that the host does not disintermediate it by taking over customer relationships. This setup provides users with reasons to still access the nester’s stand-alone service even though there is also a nested instantiation. For instance, when listeners use Spotify embedded within Sonos, they can’t modify playlists; to do that, they must use Spotify’s stand-alone platform. Similarly, a former Sonos manager explained that when Spotify acts as a host through its Spotify Connect interface, Sonos users cannot group or ungroup rooms or independently control room volumes. To access full Sonos functionality, users need to return to the Sonos app. Limiting functionality in this way, however, risks frustrating or confusing users, since they may need to access apps via multiple routes to gain the full product and service benefits.

As you consider what the appropriate level of nesting intensity might be for your strategy, there are a few factors to consider. How concerned are you about losing direct control of customer relationships? If this is a major concern, then you may want to strategically limit functionality to preserve your stand-alone value proposition and protect customer relationships. Navigating nested structures can be confusing to customers; continue to review user experiences, noting potential frustration points. Where there is friction, consider which nesting decisions to revisit. Would allowing more functionality or simplifying the user experience address the issues?

7. What data can be collected, accessed, and shared? To what extent will hosts and nesters allow each other to collect, see, and share data? Data is essential to operational effectiveness of all platforms, including how platforms match participants such as buyers and sellers. It is critical for monetization; platforms sell advertisements and attract complementors with data access and analysis. Further, with the increasing prevalence and importance of AI systems, proprietary training data is an important source of competitive advantage. Nesting platforms bring their own transactional, behavioral, and outcome data that could be extremely valuable to hosts, especially if they are both operating in the same or complementary industries. But nesters may be hesitant to share data for fear of being disintermediated or creating a strong competitor. What to share and in which form are key strategic decisions for nesting platforms. For hosts, determining what to require of nesters is the flip side of the same question, and it carries similar opportunities and challenges.

When hosts aggregate data across nested platforms, they may also strengthen network effects. For example, they can improve discovery, personalization, and recommendations by integrating individualized data across platforms. This can make the host more central to user experiences, which can attract more users and complementors.

You must define your data access policies because of the trade-offs involved. Based on power dynamics, risk, and strategic value, proactively determine what data you need to collect and use and what you are willing to share. For example, a navigation platform may choose not to share destination data with its nested platforms, since this data may be considered sensitive by users and sharing it could erode trust.

You must also specify which data is collected, who collects it, who accesses it, and how it flows across nested relationships. This forces both host and nesting platforms to provide transparency and accountability to each other and participants on their platforms. This, in turn, helps to ensure that host and nesting platforms comply with data policies and regulations, especially around data privacy and security.

Nested platform structures offer hosts and nesters the opportunity to enrich their value propositions, reduce the risk of being outpaced by more dynamic or specialized competitors, and maintain their positions as central gateways in their users’ digital lives. As these structures increasingly become the norm, and as interconnected platforms dominate more and more industries, leaders managing platform strategy must consider nesting as a core part of their agendas.

References