Digital platforms have become one of most powerful forces in global business.
They support entire ecosystems, enabling rapid growth and huge profits for multiple participants. The opportunities are significant. How might platform business models drive value for you and your customers?
The five most valuable publicly-traded companies in the world — Apple, Google, Microsoft, Amazon and Facebook — are all platforms. However, almost any business can take on elements of a platform and / or marketplace if it determines which parts of its business can be shared, resold, repurposed or built onto.
“Don’t buy this jacket!” Outdoor clothing company Patagonia released this ad on Black Friday in 2011 to promote a new business line, Common Threads, selling repurposed and restored clothing that support conscious consumption. Patagonia’s Common Threads success, which is still providing a strong revenue stream a decade later, illustrates not only the power of strategic business model innovation but also the power of two digital business models – online marketplaces and platforms.
These two digital models use new technologies to create businesses that grow more lucrative over time by serving as a basis for other businesses.
Online marketplaces (think eBay, Amazon, Etsy) are more profitable and more powerful than their real-world equivalents. They aren’t constrained by physical real estate or capital investment, and ubiquitous connectivity makes them easy to establish. Platforms enable marketplaces. They come in various flavours – transaction platforms or innovation platforms, or a combination of the two.
- Transaction platforms (such as Amazon, eBay and Airbnb) bring buyers and sellers together, providing tools for both to use the platform more efficiently. Apple’s app store, for example, allows developers to sell software products and publishers to sell content. It also provides software frameworks to help third parties to build applications on the Apple platform.
- Innovation platforms provide a common technology framework that businesses can use to build upon. These platforms benefit both their makers and those who build on or use them. Platforms can be built on software-controlled physical devices (Android, iPhone and Tesla) and on successful applications (Uber is expanding its ride-hailing application to food delivery and transportation logistics, for example).
- Combined platforms – transaction and innovation platforms – are the most powerful platforms. Facebook is an example: it’s both a marketplace and a place where developers can create and sell games and monetise content, using Facebook’s technology.
The advantages of platform businesses can be enormous.
Platform businesses share three key characteristics:
- Network effects: For every additional user of a platform, the network effect grows, making the platform more interesting to sellers and more valuable to both
- Distribution power: Platform business models expand rapidly by enabling other businesses to profit from them. They also work equally well for large- and small-volume sellers
- Asymmetric growth and competition: Large platform businesses commonly attract customers by giving away a significant subset of some service, monetising the service indirectly with ads or by selling user data. Google and Facebook famously pioneered this approach using search and social networks respectively, but many platform businesses do it.
Marketplaces and platforms are at the centre of many innovation breakthroughs but the smartest businesses embrace platforms as a key to their success.
Legacy organisations such as farm equipment maker John Deere and industrial conglomerate General Electric are dabbling in marketplace and platform business models with a view to unlocking extra revenue. However, Amazon was built, from the ground up, to be a platform-making company. This is, in part, why Amazon has famously enforced its API manifesto: all internal businesses shall build software routines, protocols and tools that all users can use to build their own businesses on top of or alongside. This has given rise to Amazon Web Services, the company’s most valuable profit centre.
Can your business take on elements of a platform and / or marketplace? How could your business profit from becoming part of or participating in a marketplace? What is needed to create a platform model for your business? Can your business easily re-use business software and tools internally and externally?
You’ll find a wealth of insight into what it takes for large companies to see the future and rethink innovation in From Incremental to Exponential, or take a look at these posts: How the innovation game has changed; What exponential disruption can teach us about transformation.