A seismic shift in business models is already here

When a platform is self-service, even improbable ideas get tried, because there’s no expert gatekeeper ready to say “That will never work!” Guess what? Many of those improbable ideas do work.

—JEFF BEZOS, 2011 LETTER TO SHAREHOLDERS

The rise of the platform as a business model

Platform businesses model bring together producers and consumers in high-value exchanges. Their chief assets are information and interactions, which together with “network effects” are the source of the value they create and their competitive advantage. Many of these business strategies have existed for a long time (Malls link consumers and merchants; newspapers connect subscribers and advertisers.), digital technologies’ increasing capabilities and internet are fueling their rapid growth.

Apple’s App Store, connects app developers and iPhone owners, combine with its handset connect participants in two-sided markets — app developers on one side and app users on the other — generating value for both groups. As the number of participants on each side grew, that value increased —a phenomenon called “network effects,” which is central to any platform strategy.

New entrants like Uber, Alibaba and Airbnb, are all platform businesses, and they are all disrupting their industries. The 5 largest companies in tech are platform businesses.

Ireland

In Ireland, an example is PhysioLinked, products are the physiotherapy provider and the consumers are the patients. In the case of Popertee, property owners who have vacant space on one side and businesses looking for a retail presence on a pop-up basis on the other. You can say that Popertee is the Airbnb of retail space. Daft.ie made it easy for customers looking for property to rent and buy in Ireland via a single source.

Core Interaction

According to book entitled Platform Revolution by Parker, Van Alstyne and Choudary, getting users to participate in a platform is one of the major challenges. They put it down as

Participants + Value Unit + Filter → Core Interaction

The Value Unit is what participants on one side of the platform create for others. In the case of Daft.ie, this was the pricing and availability information about each property entered by the property owner. With Physiolinked, it’s listing the physiotherapist you want to make an appointment with.

The Filter is how the other users find the Value Unit, and is usually some sort of search interface. In PhysioLinked case, patients can use their location to filter the Value Units — available physiotherapists — and display them quickly and easily.

For platform to survive and prosper hinges on its ability to elicit a continuing stream of repeated interactions from platform participants. As the story of Monster vs LinkedIn in the book demonstrates,  successful platforms got to layer new interactions on top of the core interactions. LinkedIn foster additional reasons for participants to spend time on their platform by emphasis content creation and sharing.

Implications

From marketing to finance, the seismic shift in business models calls for a different way of doing things. Platform business owner also need to consider governance rules on how platform participants or members may interact, such as deciding to what extent they allow communication between participants.

"Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate. Something interesting is happening."

_—Tom Goodwin, EVP and Head of Innovation at Zenith, writing for TechTarget in 2015

Since a company no longer has to own or produce all the assets - product listings, cars and properties any more to create value. It’s capital expenditure is significantly lower because it uses the resources of third parties. How do accountants going to put these down in the balance sheets?  As far as I can tell, Platform Revolution does not offer any insight. ACCA based on findings from workshops around the world has published a PDF on this matter.

Metrics that matters

When you are running a platform business, forget about the total number of people sign up and number of page view generates. As the value of a platform is derived from network effects, platform metrics should seek to measure

• the rate of interaction success and 
• the factors that contribute it.

Platforms are driven by usage. One person’s usage will drive the other person’s usage. The metrics that matters are those that track usage such as volume of transactions. Are people from both sides repeatedly and increasingly engaged in positive, value-creating interactions? Are people happy with the platform to continue investing their time participating actively?

Some important metrics to keep track are:

• Searches
• Rate of conversion to Sale
• Net Promoter Score

All the above metrics seeks to track and measures usage on a platform. Snapchat a social platform, called daily user engagement a “critical component”

Curation and Reputation are the New Quality Control

The Platform business embrace and enable external vetted entities to create and capture value. Parker, Van Alstyne and Choudary mentions about curation to vet quality participants on to the platform.

In Physiolinked, physiotherapist on sign-up are require to produce “a photo, proof of qualification, insurance & relevant professional body membership.” This built credibility and trust thereby assuring the other side of the market, the people seeking treatment that this is a platform they can trust.

Conclusion

Platforms as a business models scale more efficiently and more quickly by eliminating gatekeepers; unlocking new sources of value creation supply and demand; using data to create community feedback loops; and centering on people, resources, and functions that exist outside the operations of a platform business.

As digital networks increase in ubiquity, businesses that do a better job of orchestrating all these competing elements will win.

Lesson from Nike and Samsung illustrated that the leaders of incumbent companies who understand the new business model can begin building tomorrow’s platforms in a way that not only leverages their existing assets but strengthens and reinforces them.

Have you made moves to turn your business into a platform? Tell me about it in the comments.

Resources: If you do not have time to read the 336 pages of Platform Revolution, these links are suffice. https://hbr.org/2016/04/pipelines-platforms-and-the-new-rules-of-strategy http://www.marketwatch.com/story/what-twitter-knows-that-blackberry-didnt-2013-10-10