Companies that successfully offer well-established platforms to their customers (like Apple, Airbnb, Uber, and Amazon) continue to receive a lot of attention and with good reason. Their platform business models have allowed them to gain greater market share, establish an ecosystem of goods/services, and offer differentiated experiences to their customers. But, how does a business model platform differ from more traditional business models? And, what changes would you need to make to your existing business model to take advantage of a platform business model?
Traditional or vertically integrated business models are linear or sequential in nature. They process inputs through a regular or fixed process (often in a physical location) to produce output goods and services for their customers. In essence, they identify specific customer needs, marshal the raw materials, build or manufacture a product (or service offering), and sell that to customers.
By contrast, platform business models are not linear or sequential. Instead, think of them like a web that connects a variety of customers and a multitude of producers of goods and services through a platform. Essentially, the platform is a mini-ecosystem (or a mini-marketplace) where providers come together at a central location to deliver products, services, information, and experiences to customers. The platform owners may also provide products and services themselves, but their facilitation of a central environment (the platform) where other providers can interact with customers, allows the platform offerings to stay vibrant and relevant while creating greater customer loyalty or “stickiness” to the platform itself.
In many ways, we might think about platforms like virtual shopping malls. Shopping malls provide a centralized location where customers can shop for a variety of products; compare goods, services, and prices; and do so while having a unique experience due to building style, décor, lighting, services, etc. Each vendor (provider) pays the mall rent for their space in exchange for increased number of customers, some marketing, and a unique environment/location for their shop.
When customers and consumers utilize and benefit from the mall, the mall essentially becomes more valuable to both customers and providers. In return, platform owners can utilize this increased value to add additional services to the platform itself such as play locations for kids, child care, valet parking, etc. These increased services further enhance the value for customers and providers thereby increasing customer loyalty, raising barriers for competition, and improving differentiation.
For companies wanting to pivot their traditional business model to a platform, there are two guiding principles that business must address in their transformation:
It’s all about the experience. In a traditional business model, you might ask what product is necessary to fill a customer need. In a platform model, customers want the most convenient, safest, and most trusted market to make their purchases and connections. They demand much more than just finding the product they need. They want an experience that guarantees the product through reviews, forums to ask questions, and avenues to get service as they navigate and participate in the platform. They demand an easy and intuitive shopping and shipping experience.
This sounds like a tall order, and it is! It will require substantive changes to your strategy, organization capabilities, and organization choices (i.e., how work is performed, how the business is structured, what is measured, what talent is needed, how behavior is rewarded, etc.). You will need to realign your organization and make some hard trade-off decisions.
However, as we have seen from Amazon and others, there are substantial benefits associated with designing a platform rather than just solutioning a single product or service. Customers buy products from Amazon that they didn’t know they needed until they searched the Amazon platform. Amazon constantly suggests product bundles that increases sales. And, the ease and convenience of Amazon’s platform have led more and more customers to turn to Amazon for purchases that many people thought impossible to sell online (like lumber and detergent for example). Truly reorganizing to provide an experience rather than a single product can have exponential upsides.
Utilize providers. Successful platforms create an environment for uncontrolled or less controlled providers to thrive and thereby enhance platform offerings even if they provide offerings that compete with those of the platform.
A great example of this is Uber. Uber provides a simple and easy mobile application for customers to contract and pay for a ride-sharing service. However, they have very loose stipulations on the qualifications and cars that their drivers use (in most cities, cars must be 2001 and newer and drivers must be at least 21 years old). As a result, you may get a driver with little knowledge of the city, a cheap or dingy car, or a professional driver with a limo.
Requiring limited stipulations on Uber drivers and providers may seem like a liability. While this may be true in some cases, the flip side is also true when professional drivers and upscale vehicles are used and incentivized. When a knowledgeable, professional driver in a nice SUV shows up to get you, provides a bottle of water, and charges less than a taxi, Uber further solidifies their reputation, credibility, value, and ultimately differentiation over a normal cab ride and you are more likely to use the service in the future.
Additionally, Uber’s mobile application incentivizes better drivers and superior customer experiences through their users reviews for drivers. Those drivers with a less than stellar offerings (older car, limited service) get lower ratings, and customers will choose drivers who offer more. Uber customers can utilize these reviews to select their driver before contracting their services unlike a normal taxi experience.
So, while there may be occasional trade-offs by utilizing providers, a platform needs providers to add the connective tissue between the platform and the customer. Leveraged correctly, well-designed platforms can utilize providers to deliver immediate value back to the platform.
A platform business model has the potential to provide unique, differentiated customer experiences enabled in part through properly leveraging providers to the platform. However, to take full advantage of a platform business model, organizations must revise their strategy, rethink their organizational capabilities, and align their organization choices to a platform that creates value through information and interactions rather than traditional fixed processes.
So, how do you pivot your traditional business model to a platform? The answer is more hard work than magic: conscious strategy, good organization design, and relentless alignment.