Platform economy: Re-thinking your business model

Apple Inc. was once a weakling, a player facing stiff competition in the market for desktop operating systems. The market share of apple for desktop computers in 2007 stood at about only 4% with an insignificant or no share in the mobile phone market: as their iPhone was released mid that year. Fast forward to 2015, Apple, with its innovative design segmented customer appeal, has grown so fast in the mobile phone manufacturing business and was command about 90 percent of global industry profits. But what has accounted for this?

Apple Inc. harnessed the power of platforms and used it as the new rule in their business strategy. By connecting users in a two-sided market, consisting of application developers on one side of the divide and application users on the other. With the introduction of the app store, Apple was able to connect app developers and iPhone owners and this created a platform business.

This phenomenon accounted for its growth, is a concept in economics referred to as network effects (network externalities or demand side economies). This concept has become the new rule of strategy for most big business brands today for fast scaling, more businesses are finding ways to incorporate this to their businesses.

What is a platform business?

Pipeline businesses have existed and dominated for a long time. Pipeline businesses create value by performing a series of valuing adding activities from the receiving of raw materials or service to producing a finished product or delivering the service. With platform businesses, they develop a network of participants who inter-depend and add value to the system. They build relationships, give advice, build products or services and find other use cases to co-create and expand their market place network from within.

How does platform models work

Many businesses, highly competitive choose to use only the pipeline model or platform model, by adding a platform or pipeline, as the case may be, the growth becomes exponential. Platforms provide an ecosystem, bringing producers and consumers together to create high value exchanges. Value can be derived from making more sales, charging fees for access to platforms (through usage or exposure). Thus, encouraging mass adoption.

Most of the top valuable brands by market capitalization today, use the platform business: Amazon, Uber, Google, Microsoft, Apple, Facebook, Esty and others.

Microsoft possess a huge amount of consumers and software developers who utilize the technology on a daily basis. The more increase in their market share by users of the operating system, the more demand for applications from consumers, other hardware accessory products and the more third-party software developers who come on board their network to create value.

Amazon, which offers businesses small to medium the infrastructure they need from web services, business analytics and logistics to fulfilment, payments and lending in one place to quickly setup at an affordable cost. Users can also tap into their over 200 million plus unique visitors on a monthly basis. Amazon online marketplace doesn’t own the vast majority of the products they sell, they primarily sell other businesses inventory, yet they benefit greatly from the sales put on their platform.

The value to be created on these platforms is derived from the collection, distribution and analysis of user data. Data is king A platform model provides a means to connect tools, teams, data, and processes within an ecosystem.

Benefits of a platform business model

For businesses that can connect their customers to create a true network, the potential for value creation is incredible.

Sustainable competitive advantage

With the growth of users on platforms, network effects can propel a business to an unassailable market dominance. Data extracted from the platform provides unrivalled insight into the behavior of customers and potential competitors, and providers generate commission or rent from producers and consumers. Who wouldn’t want to run a platform? Once they’ve achieved scale and network effects have kicked in, platforms are tough to displace. Network effects create high barriers to entry and the data that platforms amass about their users both increase their switching costs and decrease their transaction costs.

Low marginal costs

Providers can enjoy a lower marginal cost, providers do not have to employ producers or consumers to create value on the platform, they producers and consumers join the platform by themselves based on the monetization prospects or other numerous unique benefits they derive.

Easy setup costs

Unlike traditional pipeline business, who have to build a brick and mortar business, own warehouses and pay associated costs and employ people to man the operations, Platform business models eliminate all these headaches and focus on developing an ecosystem or market place to foster growth and value.

Easy targeted audience reach

Platforms provide means for consumers, producers and providers to reach a large targeted audience with their offerings or products (thus a reduced transaction cost). Consumers are the end beneficiaries and they provide the money for the ecosystem to flourish.

Conclusion

A business need not only be a pipeline or a platform, a business can be both a pipeline and a platform. To complement ones growth prospects, a choice will have to be made to determine which approach will be beneficial based on existing market circumstances and resources at a business' disposal.