How do Platform businesses win?
In today’s growing technology-based world, you would have observed that many companies are transforming their businesses from being a full-fledged product pipeline to platform or mix of both. Companies like Apple, Google, Uber, Airbnb, Twitter, Alibaba, PayPal, Facebook, LinkedIn, and many more are examples where you could see the company’s existence in the platform world. While the idea of platforms existed for years, most of the companies took some time to understand the importance and right strategy to utilize the concept. Ever wondered, why the platform-based business-models are more appealing and revenue generating for these companies than pipeline ones?
Let me first introduce you to the difference between the conventional pipeline-based and platforms-based business models. The former businesses create value by controlling a linear series of activities — the classic value-chain model. Inputs at one end of the chain (say, materials from suppliers) undergo a series of steps that transform them into an output that’s worth more: the finished product. Apple’s mobile set business is essentially a pipeline. But combine it with the App Store, the marketplace that connects app developers and app users who are iPhone owners, and you’ve got a platform.
As Apple demonstrates, firms needn’t be only a pipeline or a platform; they can be both. While plenty of pure pipeline businesses are still highly competitive, when platforms enter the same marketplace, the platforms virtually always win. That’s why pipeline giants such as Walmart, Nike, John Deere, and GE are all scrambling to incorporate platforms into their models.
On a platform, the elements of value exchange could be anything depending on the company’s business model. This is the main component along with the other two which are the participants and the filter. These three components together derive the equation to get the core interaction for a platform. The participants are two-sided parties — consumers and producers. For a core interaction to happen on a platform, the producers need to produce the value unit which is useful for the potential consumers. Of course, the efficiency of the filter helps both parties to find out the most valuable resources or make the most appropriate match with producer which are available on the platform. To summarize in one equation- Participants + Value Unit + Filter -> Core Interaction.
The important question, here, is “why would a producer be willing to create these valuable resources on a platform”? Well, let me try to explain that as well as to show how these companies manage and engage with their two-sided communities through different companies’ examples. First, you should understand that there are four main players in a platform business. The four players are- Platform owner, providers, producers, and consumers. The roles of four players are described in the image below.
The main players are producers and consumers, which have the potential to grow or shrink a platform-based company’s business. So, how these companies influence or maintain their community so that both parties are motivated to exchange a valuable unit from each other. I would introduce the concept of community management, which enables the owners of platform businesses to scale and enhance the technology and other components to provide smoother core interaction between the two parties. In order to be successful in managing the participants over their platform, the important metrics which managers of the platform required to keep a track of are:
Availability of Producers/Producers’ Value components: For example, if Uber/Lyft riders, while trying to book a cab, don’t find any rides available because of lack of drivers in the area, they might feel frustrated. If this happens continuously, they might stop using their ride-hailing services. Their feedback on social media might affect the overall brand value and the usage in other regions as well.
Proper matching between what consumers want and what producers provide: For example, If Airbnb shows the housing options which are too costly/cheap, very far, or other unlikeable results for its guests, they might feel stressed and unhappy to filter and scroll down to select the best housing among many options. The filtering option needs to be well-defined so that it can populate the most desirable outcomes and allow guests to filter smoothly and easily among a few options.
Maintain effective Feedback Loops: For example, Google’s Android and Apple’ IOS platforms have play store and app store which allows app developers to develop apps and share on these stores. Mobile users could download and use those apps on their devices. If the app store doesn’t allow the users to provide feedback on those apps, developers would not know much about users’ pain-points and how to improve their app.
Understand consumers’ changing preferences: For example, social media platforms like Twitter keep updating their features so that producers can create content which is liked and shared by consumers. Tweeter which was popular for its 140-characters based tweets updated and allowed tweeters to tweet images, graphics, small video clips, webpage links, etc. as they knew followers like to see visuals more than just words these days.
We understood how platform business run, and what are its main components. Now, I would again touch upon the question of making money for a platform owner. In order to understand why the producer produces the value elements to exchange on the platform, and how the platform owners (the companies) make revenue, I have created a table below. The table shows examples of popular platforms with columns- consumers, producers, why producers contribute, and how owners earn revenue primarily.
