What are platforms?
A platform is a business model that enables the creation of value through interactions between external producers and consumers. The platform is responsible for providing an open and participatory structure to enable these interactions by establishing the governance conditions for them. Its purpose is to consummate matches between users to facilitate the exchange of goods, services or social currency, resulting in the creation of value for all participants (Parker, Van Alsyine, Choudary. 2016).
They are online environments that take advantage of the economy of free, seamless and instantaneous, characterised by near-zero marginal cost of access, reproduction and distribution. Platforms succeed in capturing and creating value in part because they reduce information asymmetries that previously prevented certain types of transactions from taking place. They are the engine of many of the world’s most successful companies in existence today considering that they are major creators of supply and demand (McAfee, Brynjolfsson. 2017).
According to Moazed and Johnson (2016) platforms create large communities and marketplaces that allow users to interact and transact, facilitating the exchange of value.
Interactions
In a platform business, one does not compete for who has the best features, functionalities and user bases, but rather they become sustainable when those users regularly engage in interactions. In a connected world, businesses will increasingly focus on enabling interactions between users. An interaction involves an exchange of value for some form of social or economic currency. A producer can create and deliver value to a consumer who is willing to offer that social or economic currency in exchange. Each of the interactions involves two roles of participation. On the one hand, the producer creates supply or responds to demand. On the other hand, the consumer generates the demand or consumes the supply. It should be noted that the above terms refer to roles and not to user segments, since the same user can play the role of buyer or seller in different interactions. The concepts of value and currency apply to all social and economic interactions. Producers create value in the form of goods and/or services. Value exchange may involve the exchange of physical goods, standardised or non-standardised services or data. Consumers offer, depending on the type of platform and its rules, economic currencies, some other tradable item, or social currencies such as attention, reputation or influence (Parker, Van Alsyine, Choudary. 2016).
Types of Platforms
Reillier, L and Reillier, B (2017) express that platform models can be tailored to meet a wide range of needs:
- Marketplaces (marketplaces) that attract, match and connect those producers seeking to provide a product or service with those buyers seeking to purchase that product or service.
- Social and connection networks that allow users to communicate with each other by sharing information, comments, messages, content, etc., and connect these users with third parties, such as advertisers, developers and content providers.
- Credit and payment cards that attract consumers on the one hand to pay for goods and/or services and on the other hand producers to collect payment for their goods and/or services.
- Operating systems for computers, smartphones, game consoles, virtual reality equipment and associated application shops, in order to match buying users with software applications produced by developers (producing users).
It is important to note that platforms can combine these different needs mentioned above.
Differences between platforms and traditional business models
Evans and Schmalensee (2016) state that economists know that many of the formulas that have been derived over the last century (and that most economics textbooks define) for traditional businesses cannot be applied to platform businesses. The old formulas do not give the right answers for this type of multi-sector business, the mathematics are simply wrong.
The differences between traditional businesses and platform businesses are stark. The traditional view is that it is never profitable to sell products at less than cost. The new multi-industry economy shows that sometimes it is even necessary to pay some customers instead of charging them in order to be profitable. Traditional businesses focus primarily on attracting customers and selling to them on profitable terms, while platforms need to attract two or more types of customers to achieve interactions, making their most important inputs their users.
Traditional businesses follow the classic linear value chain model. The linear value chain is an analysis tool for strategic business planning that facilitates the identification of an organisation’s competitive advantages. Any organisation can be analysed in terms of the value contribution generated by each of its primary activities and the interrelationships between them. Each activity is a potential source of competitive advantage. A step-by-step arrangement is used to create and transfer value, with producers at one end and consumers at the other. The company first designs a product or service, then the product is manufactured or a system is put in place to deliver the service. Finally the customer buys the product or service (Porter, M. 1985). Then, these organisations organise their workforce and internal resources to create value by optimising the chain with different activities, from the sourcing of raw materials to the sale of the product or service. In addition, they seek to maximise the lifetime value of their customers, who are at the end of the linear process. Another aspect that characterises these businesses is that they have a resource-based view of competition, and gain advantage over others by controlling the scarcest, most ideal and inimitable assets.
In contrast, platform businesses create value by facilitating interactions between producers and external consumers, seeking to maximise the total value of an ever-expanding, feedback-driven ecosystem. For platforms, then, the assets considered ideal and inimitable are the community and the resources that its members own and contribute to it, i.e. the network of producers and consumers are the main asset. Unlike the linear value chain, there is a complex relationship in which consumers, producers and the platform enter into a variable set of interactions.
Another major difference between the business models studied arises in that linear businesses require large factories and investments in human capital, coupled with elaborate distribution channels to bring products to market. In platform businesses, networks connect companies and individuals who interact with each other (distribution takes place in the network itself). Unlike a traditional value chain, the exchange of value arises from both right to left and left to right.
Recommendations when launching a platform
The opportunity to launch a platform often arises when there are frictions that prevent participants in a given market from connecting with each other easily and directly. Entrepreneurs can identify these opportunities by looking for significant transaction costs that keep buyers and sellers apart and that a well-designed platform can reduce. Platforms have to ensure a critical mass in order to launch successfully. They have to solve the “chicken and egg” problem by having both sides on board, in adequate numbers, to create value; if they do, network effects will fuel sustainable growth. This problem is so difficult to solve that entrepreneurs must ensure that the frictions they are trying to solve are substantial enough to persuade participants to join and allow the platform to fund “subsidies” to its participants (Evans and Schmalensee .2016).
Van Alstyne, Parker and Choudary mentioned in 2016 that for a platform to be successful, certain metrics need to be taken into account. Monitoring and increasing the performance of interactions becomes critical. A platform can have interaction failures, for example, if a user on a car app reads the message “no cars available” many times, leading to a decrease in network effects. It is of utmost importance to track which actions of members within the ecosystem enhance and increase network effects, i.e. engagement. The mismatch between what the user searches for and what the platform shows them is another key metric mentioned by the authors cited above. As an example, Google constantly tracks users’ clicks to refine their future search results. Finally, poorly managed platforms often have negative network effects that generate negative feedback and reduce value, it is important to identify the users and actions that generate such effects.
Conclusion
Platforms leverage large, scalable networks of users and resources, creating communities and new markets that allow producers and consumers to connect and interact with each other.
Today, the most valuable companies are those that can build and orchestrate large networks, not those that can aggregate and centralise large amounts of resources under one roof. In the old model, scale was the result of investing and growing a company’s internal resources, but in an interconnected world, scale comes from cultivating an external network built on top of your business.
Before launching a platform, you have to make sure that the platform is actually solving a problem and facilitating interactions between users, generating value for all participants.
