Platform businesses have taken over the world. What are they?
We’ve seen platform businesses dominate the world economy and influence many sectors due to the success they’ve found in early-market applications.
The business model has several characteristics that mean it is not only reserved for disruptive, tech-forward businesses in the startup world while piquing the interest of large and established companies and organisations.
What about platform businesses makes them so successful, and what do we mean when we talk about them?
A platform business | what does it mean?
⚡️ Definition
“A business model that creates value by facilitating exchanges between two or more interdependent groups, usually consumers and producers.”
What it is:
- An enabler that connects multiple parties in the value chain to realise value for the end client of innovation through access to internal, packaged intellectual property (IP)
- An orchestrator of exchanges between parties at scale
- A creator of scalable networks of users to leverage internal services and resources markets which allow for interaction and transactions
What it is not:
- A traditional, linear business model
- A supply chain business which owns or creates content, goods, or services
- A technology application, i.e. SaaS company or a mobile app
We’ve seen this business model find success and garner attention, as 3 of the 5 most valuable companies globally are platform businesses, subscribing to the business model of utilising network effects to realise and unlock value.
The evolution | types of platforms
The platform model first emerged in the 2000s and has taken many forms. As technology has become available as an enabler, it has allowed this foundational model to scale and amplify reach, adding to its success.
In a traditional business model, scale is derived from internal optimisation plays. In comparison, platform models are proponents of crafting a network of external parties/entities which can leverage infrastructure components to enhance the offering and create value for their respective customer bases.
Understanding the difference between platform types is important to ensure the optimal fit and applicability for your organisation. The underlying business model may be the same, but nuances exist.
Let’s begin by differentiating between exchange platforms and maker platforms:
⚡️ Definition
- An exchange platform creates value primarily by enabling direct exchanges between its consumers and producers.
- A maker platform creates value by enabling producers to create new or complementary products and distribute them to a large audience.
Simply put, exchange platforms facilitate 1:1 connections, while market platforms facilitate 1:many connections. These can be further categorised into the most popular/prominent platform models, namely:
- Aggregation platforms — Examples include eBay, Etsy or Takealot in South Africa. They all focus on bringing together service or product providers, connecting them to users and brokering all transactions on the platform.
- Social/content platforms — Rely on a relationship creation approach to connect users to each other as a primary service, for example, Facebook and Twitter. The users translate and mould this service over time as they engage with each other.
- Mobilisation platforms — Centred on fostering a collective or collaborative approach that achieves more over time versus doing the same thing individually. Open-source platforms such as Linux are an example. This model can also apply to supply and distribution networks, such as Alibaba, which facilitate and coordinate engagement between their participants over time.
Application of platform business model across industry
The modern world relies on connections. When we look at successful platform businesses, the network effect is the clear differentiator and additive to their overall success as a business. They are also focused on creating new markets, are less expensive to operate, and are highly expendable.
In the Asian market, we’ve seen players like Alibaba control over 80% of the Chinese e-commerce market. Tencent has become among the most valuable companies in Asia. WeChat has become the prototypical super-app by the trusted enabler and orchestrator between consumers and producers across several industries in China.
In Africa, South Africa’s Naspers has successfully positioned itself as a platform company by transforming from a print-based media company into a digital platform company over the past few years. They were an early investor in Tencent in 2001, built the OLX marketplace, and invested heavily in an array of startup businesses through their Foundry VC offering.
In Nigeria, Africa’s first unicorn, Jumia, is changing the way Nigerians shop by creating an online platform that connects merchants with buyers, making the user experience convenient, reliable, and user-friendly.
In the United States, a prime example of what platform success looks like is Airbnb. The platform creates value by primarily finding the balance between demand and supply within the accommodation sector in different geographies:
- Assists the homeowner supply side by increasing the utilisation of their assets to generate additional income
- Assists the traveller demand side by providing affordable, quality accommodation alternatives verified by other users when they need it
- Captures value by charging a percentage on each booking by providing a place where platform users can coordinate these exchanges at a low cost. Beyond offering this service, Airbnb doesn’t own any assets or inventory.
Implementation considerations
- Creating new value — Platforms enable organisations to venture down new paths and expand their client value propositions.
- Own the platform — Owning the platform allows an organisation to realise the true value of the employed platform business model by having the ability to commoditise and package IP/core services to increase margins.
Benefits to be realised
- Performance improvement — The ability to provide superior services to users so that they can provide value to their customers
- Leveraged growth — Allow participants to connect with the capabilities of others and make them available to their customers in ways that create significant value for platform participants and their customers. This is useful when wanting to expand into different markets.
- Innovation — Platform businesses are uniquely able to utilise and harvest information that can serve as early signals and competitive advantage due to the data they can access. This data assists in product development, iteration, and identifying gaps in the market early
KPIs and metrics to be considered
Scale
- Platforms grow or scale rapidly because they do not own the resources that create their value
- Measuring Gross Merchandise Value of goods and services
- Net Revenue — the actual revenue accrued on the platform
Customer Acquisition Cost (CAC)
- Deploy measures to lower this figure to as close to zero as possible
- Understand how much needs to be spent to bring new users to the platform
- Strategic partnerships can be explored to enhance value creation
Customer engagement metrics
- Measuring the number of active users regularly
- Conversion rate when a new user lands on the platform
- Channel scalability and mix — multi-channel offerings tend to be more successful than single-channel applications
Momentum and growth considerations
- Growth should be considered in the context of margins and unit economics to ensure sustainability and that growth is grounded in meaningful data
- Ensure the platform can scale and has the governance protocols it needs. Governance grounds predictability, which enhances trust
- Growth should not be contingent upon resources or capital
Market liquidity management
- More than simply acquiring users is required. The platform must be easy to use and encourage and support all interactions and transactions between users to ensure activity and engagement
For existing companies/organisations considering a platform model
It is useful to develop outside of existing corporate structures. Legacy systems, organisational culture, and a lack of understanding or buy-in can impede its implementation.
The shift towards platform models is largely driven by the need for digital transformation, changing customer behaviour, the convenience of a ‘one place’ model, and potential exposure to new revenue streams.
Considering the success of the platform businesses globally and their successful emergence and application in an African context creates excitement and unlocks endless opportunities for the market to explore in the near future.
