The platform business model enables companies to build sustainable ecosystems with infrastructures inherently designed to drive growth. Thanks to new streams of value-creation, platform businesses are attracting astounding levels of capital investment: the top 15 public platform companies represent over USD2.6 trillion in global market capitalization. The market capitalization for private unicorn companies – largely driven by the platform business model – surpasses $500 billion: corporate valuations will increasingly look at digital ecosystems as a core component.
In this article, we’ll examine some of the characteristics enabling rapid and sustainable value-creation from platforms’ own digital ecosystems.
Relationships are at the heart of the platform business model
A platform is a business based on enabling value-creating interactions between third-party producers and consumers. These interactions take place within the framework of rules set by the platform, with the objective of enabling value creation by facilitating the exchange of goods or services for a form of currency.
A platform’s goal is to bring together consumers and producers and allow them to exchange information, the goods or service, and currency. The ‘why’ of the platform should be driven by the core interaction that enables the exchange between producers and consumers: its raison d’être.
Platforms create value in a different way to traditional business models. With the latter, value is transferred along a linear pipeline with producers at one end and consumers on the other. With the former, value creation arises from interconnected relationships between consumers, producers, and the platform itself.
Where do platform businesses get their competitive edge?
Their business model inherently unlocks new sources of supply for value creation. In platform markets, the nature of supply changes so that the business harnesses contributions from communities that were previously just sources of demand. For example, compare the ease with which Air BnB can provide more accommodation in contrast to the extensive resources required for a hotel chain owner to create more rooms for guests.
Platforms also can leverage the power of data-based tools to create community feedback loops. As platforms mature, they become better apt at ‘matchmaking’, that is, connecting consumers to the most relevant value units, for example popularity of YouTube videos or reliability of Air BnB homeowners. Community feedback loops are more efficient and allow easier scalability than traditional approaches to regulating content.
Both characteristics are conducive to rapid, sustainable growth and positive network effects.
Network effects can be either positive (producing significant value for each user of the platform) or negative (poorly managed platforms which decrease the value for each user). Let’s take Uber as an example. The more drivers join the network and tell their friends, the more drivers there are. This reduces waiting time for riders, and then downtime for drivers. Reducing downtime allows Uber to drop fares as drivers can earn an equivalent amount of revenue in the same time period, and this in turn attracts more riders to the platform. The same idea can be applied to Upwork’s freelancers and job posters, Air BnB’s guests and hosts, Etsy’s merchants and buyers, etc.
What makes a successful platform strategy?
The rise of the platform model has demanded a shift in strategy from business leaders. Platform leaders must focus on orchestrating external resources and building actively engaged communities, rather than managing internal resources and eradicating competitive barriers. Ecosystem governance, rather than product optimization, is the key driver for success.
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Identification of your raison d’être: defining the core interaction between producers and consumers
Without understanding your core interaction, you will not be able to construct an ecosystem that facilitates the relationships necessary for value exchange. Once it is understood what your core interaction will be, you can then move on with defining who the participants are, what value units will be created, and which filters can be applied to facilitate this core interaction.
Value units are created by producers, for example, a service listing for a home on Air BnB
The platform provides the infrastructure to make the exchange of value units for currency rewarding and easy
An algorithmic tool ensures that users access the appropriate value units. A simple example is a search query
The value unit is a crucial part of the platform. While early phases may see the platform producing value units, platform maturity usually sees value comes from producers, to enable rapid scalability. This means that the platform often winds up with no direct control over its inventory. It therefore needs a system which allows it to monitor content quality and ensures that consumers can easily access those value units that are most relevant and useful to them. Platform business leaders must therefore reflect carefully on a strategy that considers how value units are created, incorporated into the platform, and controlled for quality.
As platforms evolve, more layers of interaction between producers and consumers may be added. This can either be from needs identified by the platform administrators or through the innovation of the platform users themselves. For example, LinkedIn’s initial core interaction was users creating a profile page. Once it was identified that more was needed to encourage active usage, discussion groups were added, followed by recruitment and advertising functions, and finally the ability for thought leaders – and then any user – to publish content, effectively turning LinkedIn into a publishing platform.
2
Driving user acquisition and active usage: two key ingredients in rapid growth
The first enablement of platform success is attracting users to the platform. Common to all businesses which rely on bringing two sides together is the chicken or the egg problem: which side do you focus on first?
One approach is the single-side strategy, which involves creating a solution that benefits one set of users and later sets out to attract a second set of users to engage with the first. This was the approach taken by OpenTable, the restaurant reservation business, whose strategy was to first distribute booking management software to participating restaurants. Once they had enough restaurants signed up to their service, they could turn their focus to attracting customers.
Nonetheless, creating awareness alone is insufficient to driving long-term adoption and usage. The platform’s core interaction must be designed to be attractive enough to naturally entice customers to join. While focusing on free services or very low prices may initially bring some success, it has the potential to backfire as customers find themselves unwilling to pay for services they are accustomed to getting for very little. They may simply opt to switch providers should another opportunity arise. That’s not to say it can’t work. PayPal, for instance, successfully attracted mass registration to its services by offering free credit for every new user or referral.
Additionally, platform businesses should ensure frictionless entry to the greatest extent possible, removing any frustrations or barriers to sign-up. Taking the example of PayPal again, registration was made as simple as possible with two simple steps to complete the process. The more rapidly users are able to join a platform, the more rapidly they are able to start participating in value creation.
Platform businesses must also concern themselves with encouraging active usage of its services. Client acquisition is desirable, but does not contribute sufficiently to the growth of the platform. Desired growth can only be sustained if users engage in ways which allow value exchange.
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A well-thought-out curation mechanism is an effective way to scale growth and encourage further interactions
An effective curation mechanism based on data garnered from social feedback loops is critical to sustainable platform growth. Unless you can provide relevant, personalised content to consumers, they will fast become tired or frustrated with your service. As the number of network users grows, the volume of data that can be used to infer insights increases: the larger your network, the better the curation.
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Designing scalable architecture for a technology-driven business model
Platform businesses inherently face numerous challenges. How should platform business leaders structure and manage the economies they have created?
Uber’s rigidly structured platform, for example, raises several issues that need addressing. What happens when demand peaks during events, or heavy rainfall, or taxi strikes? What about recruiting new drivers in the face of ever-decreasing ride costs? Uber’s surge pricing strategies and the introduction of short-term loan services and vehicle-financing programmes are examples of outside-the-box policies that continue to drive and shape the Uber economy.
A smart technological strategy is key to unleashing unprecedented growth and for securing a robust company valuation. The right technology is also crucial in enabling the desired exchanges between participants and laying down the governance framework for their interactions, and also helps generate new revenues such as from data services and analytics, digital tools for partners and third-party communities, and leveraging the resources provided by the platform.
About the Author
After completing his training in M&A at Skadden Arps, Anastasios Papadopoulos founded Integrated Management Systems (IMS) in 2016 and played a key strategic role in positioning the company as one of the leading Digital Transformation Agencies in Hong Kong.
He brings with him his experience in M&A and Tech, and also founded IMS Digital Ventures: the innovation, incubation, and investment arm of IMS and Hong Kong’s first corporate venturing firm that launches and invests in disruptive businesses with Asia’s largest corporations.
Anastasios Papadopoulos read Law in France and in the UK and holds a Management degree from HEC Paris.
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