Platformit — Part Nine — Platform Monetization Framework
In “Margin Re-monetization,” I introduced the platform monetization framework. Today, I would like to stress test the framework within the context of our story-telling white paper, “Industry-wide Platform Business Model.”
Monetization is complex, and that is the core message of this post. Yes, monetization is the punch that Mike Tyson warned us about it: a punch that knocks-out your unicorn (idea) plan, during the first encounter with your customer.
So, you think I am exaggerating? How about I invite you into an intellectual juncture: an intersect of threads of wisdom from some of today’s business thinkers (i.e., Ben Thompson, Clayton Christensen, John Hagel, Michael E. Porter, and Sangeet Paul Choudary)? They will convince you that it isn’t an exaggeration.
Have you ever sold lemonade during your childhood? If so, you might remember that the most challenging part of your glorious business was “how much to charge those thirsty customers.” Believe it or not, back then (in the industrial age) the “how much” was the biggest challenge, even for the fortune 500 companies.
Back then, businesses always used to start by identifying the problem (product-market fit), the required supplies (means of production), and the target market (customers’ demographic). Pretty much a sequential and straightforward process (pipes businesses as explained by Sangeet), yet it wasn’t an easy task. The real challenge always rotated around a one-dimensional struggle: convincing customers that your (how much) price is fairly backing the value that they are getting.
Fast forward to today with the platform-based businesses, monetization has evolved from a one-dimensional struggle into a four-dimensional puzzle. A platform must solve an equation with four variables, the “three plus one questions”: How much? Who? For what? And why?
With a one-dimensional struggle, it was relatively easy to benchmark your monetization strategy to your competitors. But benchmarking while facing a four-dimension puzzle is suicide. Monetization in the platform era is exceptionally complex, and it must be constructed from within; it will not work anymore by merely importing it from the outside.
Each of the above questions can be fully understood only if we unearth the underlying relevant building blocks that upholds the platform-based business models.
These questions cannot be answered in isolation. The economic fundamentals behind each question must be tightly joined to each other. Furthermore, the why (i.e., the plus one) question, must penetrate underneath each of the three questions. The monetization framework is proprietary to the uniqueness of the platform’s business model, architecture, and governance (i.e., the way you evolve your value proposition, your longevity growth, and the level of integration between the platform value chain and the network chain).
Let us briefly recall what was covered so far in the previous parts.
Platform Value Proposition — illustrative example from part Six
The platform, the producers of value, and the consumers of value, as well as other key stakeholders, must understand if the value proposition is designed to evolve or not. In other words, is the platform’s architecture capable of evolving its value proposition from merely enabling interaction by addressing a single job to be done, or it can evolve into the interaction enrichment territory by shaping a new context, or perhaps, it can upscale into the interaction empowerment sphere, by empowering a new creation? With such a broad understanding, the platform will be at a better position to know when to ignite the right monetization tactic.
Network chain — illustrative example from part Eight
The periphery of the network chain gets determined by the unique configuration of the network effects’ features and the degree of the overlaps between different network effects, from within the same ecosystem or an intersection of ecosystems.
The test for monetization strategy is to measure its direct correlation with the level of (positive) growth in the network effects.
A wrong monetization strategy might show a positive return on the platform’s value chain at least in the short run, but an adverse (negative) impact on the network chain’s configuration on the long term. In other words, the size of the network chain gets determined by the degree of friction in the integration with the platform’s value chain as well as the end-users’ value chains. Make sure that your monetization strategy is not a friction.
Monetization in the platform era is no longer the backyard of the CFOs, nor it merely a property of the income statement. You might enjoy a healthy quarter by looking at your financials, but the same monetization success might be the seed of a negative network effect disaster.
Longevity Growth — illustrative example from part Seven
For a platform to maintain its longevity growth, it must focus on its three pillars: producers of value (Investment Banks), consumers of value (Investors), and the ecosystem (Regulators and other stakeholders). To achieve longevity growth, all three pillars must evolve from the passive layer to the active layer to the interactive layer. Balanced and fair monetization framework is the seed for such multi-dimensional evolvement.
Platform Monetization Framework — the core of this part.
The platform monetization framework must tie between two distinct trajectories, the value chain’s trajectory, and the network chain’s trajectory. If the monetization framework is inclined unjustly toward the value chain, the platform’s gravitational power towards retaining existing users or attracting new users gets weakening.
I started this journey of a “story-telling white paper” with an objective to explain platform thinking via platforming an entire industry: liberating investment banks from non-investment activities, and democratizing the investment process for investors, with industry-wide platform thinking. History taught us that the cost of liberty and democracy is too high. So, let us explore how we can monetize such an ambitious objective.
In part eight, we explored the transformation process (from activities to distinct businesses). In summary, visualize the process of converting value chains’ activities into distinct businesses as placing separate stacks on top of each other.
Unlike the stacks within a regular platform, these stacks (distinct businesses) within the industry-wide platform operate as standalone yet integrated platforms (mini-platforms within a larger industry-wide platform). As such, each distinct business has at least two interfaces with end users. The degree of these interfaces ranges from being interdependent to modular. Are you ready to dismantle the above illustration into digestible bites? Let’s do it.
Step One — Infrastructure Management Business. KYC and CDD as an illustrative example.
1- In part eight, we envisioned the process of aggregating the relevant support activities pertaining to KYC and CDD within the investment banking industry, in order to transfer them into the industry-wide platform as a distinct Infrastructure Management Business.
2- The act of transferring those activities can free up a massive amount of resources (human capital, monetary capital, equipment, technology, time, space, etc.) to be more effectively, efficiently, and meaningfully redeployed into the core primary activities (investment process).
3- The distinct business became a fully fledged platform (infrastructure as a service) with (at least) two touchpoints: one with the producers of value and the other with the consumers of value.
Let us zoom in a bit further to explore the characteristics of these two touchpoints.
From one end, the touchpoint between the Infrastructure Management Business, and the investors is gated with an interdependent interface. This is an interface that supports the interdependent experience — a differentiated relationship “Identity Management Product” that ultimately yields a commoditized product (curated and up-to-date KYC & CDD).
On the other end, the touchpoint between the Infrastructure Management Business and the investment banks is governed via a modular interface. Accordingly, the commoditized product (KYC & CDD) gets delivered via a modular experience. In other words, investment banks can simply plug-and-play (on-demand) with this distinct business within the industry-wide platform.
Via these two touchpoints, the distinct business can transform the nature of KYC & CDD from being a heavy (costly) activity-based process into a light (lucrative) access-based service, by converting the underlying nature of the KYC & CDD process, from merely being viewed as a regulatory burden into a highly personalized identity management service.
From the modular interface viewpoint, this distinct business can commoditize time, effort, and identity. Investment banks can have access to a highly curated and updated set of investors’ identities at any time and with zero effort. Paraphrasing Ben Thompson’s logic, I would argue that an investment bank, too, can get access to a fully-fledged, Anti-Money Laundering unit, with nothing more than a corporate credit card.
Imagine an investment bank being able to stream the identity of potential investors, like streaming your best show on Netflix (with investors’ pre-authorization, of course). An investment bank can access and purchase a relevant bundle of investors’ identity.
You might be saying, are we drifting from the core (monetization) message? No, we are in the heart of it. Monetization is a philosophy before it being a mathematical equation. I know it sounds cheesy, but trust me, it is very true. Monetization is not shallowly about the product (service) itself, nor merely about the different components (fixed and marginal cost) associated with making the product/service. Monetization on a philosophical level can be viewed as a monetary derivative of the perceived and experienced value by the customers: a financial reflection of the impact yielded from your product/service on your customers.
In the above example (theoretically), the distinct business (i.e., Infrastructure Management Business) created a significant impact on both ends. With the modular interface, it greatly reduced the cost of investment banks and allowed banks to reallocate resources where it should be. Moreover, it extended the reach of investment banks to access to a broader base of investors with a more profound cost-effective approach. This is how you create an impact within the value chain of your customers (platform’s users). And for such an impact, your users (investment banks) will be more than happy to pay you (i.e., charging access fee).
The same applies to the investors. With the interdependent interface, the distinct business can upgrade the inefficient, ineffective, duplicated, and non-value creation process into one-time value creation, identity management service, which can provide investors with greater visibility and readiness to engage with potential investment opportunities. And this is a real impact that can be monetized.
The distinct business reduced cost (i.e., monetary, time, and effort) for both ends (investment banks and investors). With such commoditized product (curated KYC & CDD), The Infrastructure Management Business can sell the curated KYC & CDD) infinite number of times to interested investment banks with almost zero-marginal cost. As such, the industry-wide platform can leverage such reduction in cost to benefit the entire ecosystem, a concept discussed under the “Margin Re-monetization.”
With this level of granular understanding of the perceived value experienced by the end-users, the industry-wide platform can decide which touchpoint to monetize. Perhaps the whole stack (distinct business) can be subsidized by one of the other two distinct businesses.
Step Two — Investor Relationship Business: CRM illustrative example.
Investment bankers are not bad people, and some might argue that they are not good people. What you need to know is that they do not care how you classify them. They are here to deal with money — a lot of money, period. Wouldn’t it be fantastic if you, as an investor, never have to deal with them? And instead, you could enjoy a highly personalized and tailor-made relationship (via an Infomediary) who is interested in your need rather than your money. And let those investment bankers, those sophisticated people who squeeze themselves in fancy Italian suits, look after your money.
The above three points, which are discussed under step number one, apply here as well.
This distinct business will function as an Infomediary: a powerful concept advocated by John Hagel two decades ago in Net Worth. I introduced a simplified version of an Infomediary (as a freelancer) in part eight.
The distinct business via the interdependent interface, will establish a strong and deep relationship with the investors, by upgrading what was conventionally known as a CRM system, from merely being a database to a vibrant network of value creation. Unlike investment banks, this distinct business is only interested in understanding investors’ needs and have nothing to do with their money. The product of this distinct business is a highly personalized and differentiated investor’s profile. Aggregate these profiles, and you will be able to move markets.
With the modular interface, the distinct business can hugely reduce the cost associated with investors retention as well as investors’ acquisition cost. At the same time, it can leverage investors’ lifetime value.
Investment banks can have access to relevant investors only when they have an opening slot for an investment opportunity. The industry-wide platform can allow investment banks to apply the London Bus (Hop-on, Hop-off) tours approach to discover and explore investors’ appetite. Without the need to shoulder the burden of maintaining a long-term (unproductive and costly) relationship. This can open a revenue stream, such as charging for enhanced access and enhanced curation fee.
At the same time, the industry-wide platform will allow the distinct business (Infomediary) to leverage its relationship with the ecosystem’s key stakeholders, via a modular interface. For example, imagine this distinct business as a virtual mall, only accessible by millionaires (accredited investors, HNWI, etc.). Such a mall is the luxury brand’s heaven.
Imaginary example — integrating luxury brands with investment process
This industry-wide platform can redefine the advertisement concept by placing it into the heart of the investment context.
1- An investment bank wants to raise capital ($500M, USD) to build a luxury resort that comprises of 200 luxurious villas.
2- A luxury interior designer got informed via an Infomediary about this investment opportunity.
3- The Infomediary liaises between the bank and the interior designer to structure a prize ($500K worth of world-class modern interior design) to one lucky winner out of the 200 investors who will invest in this investment opportunity.
4- The bank can make the investment opportunity more attractive by attaching to it such a prize at zero cost, especially if it gets compared to other investment opportunities that do not have the same incentive.
5- The interior designer can enjoy exclusive or preferential access by the bank to communicate directly with 199 investors (highly curated HNWI) who, for sure, will soon be needing an interior designer to furnish their luxurious villas. In addition, the interior designer works can be promoted within the industry-wide platform, which will give it access to the entire investor base. In other words, the industry-wide platform can provide the private sector curated access to the investor community in a way that is arguably more significant than what Google can offer to brand advertisers.
6- Gated via the Infomediary, investors can get high quality and relevant products and services to their investment behavior. Utilizing investors’ investment graph in a way that can yield benefits for them.
Here, once again the industry-wide platform created a direct impact on the interior designer’s value chain by granting it access to such a curated community of relevant investors, thus enabling the interior designer to capture some of the value that gets created within the ecosystem. With such an impact, the interior designer can monetize services better than with conventional ad-based marketing. And when you can create an impact on someone’s value chain, s/he will be more than happy to pay you (i.e., charging third party for advertising/sponsorship fee).
Step Three — Investment Innovation Business: Investment Banking
The above is an illustrative salvation of investment banks: liberation of investment banks from all non-core activities, and commoditization of all non-core relationships. Investors do not need investment bankers in their daily lives, and investment bankers should not interact with investors beyond core investment activities. The first sin committed by the regulatory body is when they enabled investment banks to directly (almost unconditionally) establish relationships with investors. Unfortunately, it seems that history is repeating itself. We might be on the verge of another sin: a deceptive notion that Fintech can fix what got broken by investment banks.
The solution is not in a technological stack or cosmetic Fintech intervention. The investment banking industry problem was, and still is, that none of the key players (i.e., regulatory body, investment banks, and investors) are integrated within the industry’s ecosystem. With the industry-wide platform thinking, such envisioned integration can take place. The industry must reconstruct its boundaries and redefine its touchpoints.
The investment banking industry must start by modularizing the touchpoints that yield commoditized value proposition. In other words, non-core investment activities must be managed by the distinct specialized businesses and, of course, can be enhanced via the Fintech industry. Such a move will allow investment banks to operate with the industry-wide platform via an interdependent interface as a closed proprietary architecture, thus only focus on core investment activities. Accordingly, investors would enjoy a state of autonomy to plug-and-play with an open architecture and modular interface at their discretion, rather than being locked-in for ages, with investment banks’ legacy investments.
The three distinct businesses can operate within the proprietary closed architecture, and they can communicate with each other via interdependent interfaces, in order to serve the entire ecosystem and beyond. By doing so, investors’ investment graph can be monetized in a way that can leverage the core interactions, as well as support interactions. In other words, the platform monetization framework can be embedded in the value experienced by end users. For example, investors may be charged on every investment they subscribe to (i.e., commission fee, transaction cut, etc.) or charging investment banks a percentage of the investment size.
Even the regulatory body will be able to direct its attention to the hot spots. The heavy touchpoints that must be under strict supervisory surveillance, while allowing the light touchpoints to enjoy a greater level of autonomy.
I do not want to stretch this post beyond its mandate. However, maybe (and I am only saying maybe), the above can have direct implications even on Basel III accord. If we can remove the non-core, investment-related activity from the equation, this will eliminate a sizable portion of the operational risk component from the Capital Adequacy Ratio. Accordingly, a portion of capital can be deployed in the touchpoints that can leverage value creation, rather than serving and administering legacy assets on a balance sheet.
See you in part Ten
Special thanks to the amazing business thinkers for their knowledge and wisdom. Below are few references to the core thinking behind the above post (in an alphabetical order)
Clayton Christensen — The Innovator’s Dilemma & Competing Against Luck
John Hagel — Net Worth & Contextual Age
Michael E. Porter — Competitive Advantage
Sangeet P. Choudary — Platform Scale & Sangeet’s Library
You are most welcome to connect via https://twitter.com/KhalidiAlmadani or https://www.linkedin.com/in/khalid-al-madani-2009a1160/
