Understanding Platform Business Models Now and in the Future
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Platform business models facilitate the exchange of goods and services between two or more interdependent groups, often producers and consumers. They are responsible for totally new ways of doing business. In our interview with Benoît Reillier from Launchworks.co, we discuss his book entitled Platform Strategy, from which he derived a cartoon version. In this book he delivers his predictions on the future of platform business. To him, platform business models will not replace all kinds of traditional business. They should inspire rather than scare, as they offer boundless opportunities for mixed business models in the future.
Platform Business Models Today and in the Future
Understanding Platform Business Models
According to Benoît, some examples of companies that follow the Platform Business model are Airbnb, Uber, Google, and online marketplaces such as eBay, and Amazon. However, as the age of social media progresses, content from companies such as YouTube, TikTok, and other social platforms is now making up a sizeable part of the platform business.
Looking at consumer behaviour, there are different ways platform businesses can be deemed successful. Depending on how they fulfil the different needs and wants of a customer. This includes travel websites like Expedia which make it easier to book an entire trip on one website or others like Tinder when one is looking for a romantic partner.
Benoît explained that platform business might not be seen as a straightforward concept, as it may have multiple definitions.
What makes that kind of business different from other types of businesses is that their organisations are entirely built around a business model that attracts participants, matches them, connects them, and enables them to transact.
Benoît Reillier added, ‘Marketplaces create value by allowing people to be connected.’
Now thanks to Benoît we have a much clearer definition of what Platform business is.
Platform business model means no Value Chain
As depicted in Benoît’s Platform Strategy cartoon opus, platform businesses do not derive their competitive advantage from the quality of their value chain like traditional business ventures.
This is because traditional firm dynamics starts with buying material things and adding value to them. An example he gave, is that of a car manufacturer that builds and creates a car out of raw materials or semi-finished goods.
Traditional business models are based on linear processes that are resulting from their internal abilities to turn these manufacturing processes into value for the benefit of their customers.
Platform businesses are entirely different, Benoît Reillier stressed, since they, ‘are merely orchestrating their ecosystems’.
Platform businesses do not have to worry about inventories. They aren’t buying anything from anyone. All they do is connecting people who own something with people who want to buy it.
Platform Business models are underpinned by principles that are not applicable to traditional businesses, Benoît Reillier found out.
There are two main rules, the network effect and price elasticity.
The Network Effect
‘Networks are characterised by positive externalities. All the members of the network benefit from it. The more there are new members joining that network, the bigger its value for all its members.’
That’s what Benoît calls the network effect. A major underlying principle that confers value on the platform.
‘At the outset, it’s very hard to convince new people to join a new network,’ he added. If there is a network with just the two of us, it won’t fare very well. We’ll then have to recruit new members, relentlessly.
‘Yet, once you’ve reached a certain critical mass, maybe thousands of members, what happens is that people will start to spot that network and its value, and it will then start to grow organically.’
It may appear to some that setting prices may be easier for platforms than traditional businesses. This is because they are masters of their own ecosystem, or so it seems.
However, Benoît warns us that appearances may be deceptive.
‘Even though they seem to have full control over their pricing structures,’ Benoît added, ‘platforms are walking on eggs when they decide to change them. Because these network ecosystems are complex systems, changing the way you charge one of your members may have a serious impact on all the others.’
In other words, if a platform business is a tad too inconsiderate when changing its pricing structure, it can start losing members.
‘If your platform business creates too much friction, it might become less attractive to newcomers,’ Benoît emphasised. ‘Traditional firms do not give too much thought to price elasticity. But platforms need to be more circumspect in that regard.’
The Future of Platform Business
As platforms gain ever more popularity, there have been concerns about platform business models taking over traditional business models and disrupting the economy.
Thus, Airbnb has attracted much criticism about its disturbance of the hospitality business in many places. It happened in New York, London or Paris for instance.
There are many other examples such as Amazon. The Seattle Internet company has raised fears of disruption of retail business by ecommerce. And more recently, the foray of the retail behemoth (now employing over 1.2 million staffers worldwide) into food retailing has triggered even more concerns.
However, Benoît doesn’t believe that platforms will be the terminators of traditional shopping.
‘In the future, many organisations will mix different types of business models. Value chains will still be around in 30 years’ time, and platform business models too. Businesses will undoubtedly combine several business models. Depending on the industry and the product, platforms will be the preferred business model, and for other industries or products, value chains will still be instrumental in organising the business.’
Maybe some companies will conduct part of their business in the Metaverse, but other more traditional business models will persist
‘Considering all the technologies that are cropping up now,’ Benoît concluded, ‘including Web3 and the immersive Web, this mix of different business models will enable us to manage distributed organisations in a much better way, through the combination of all these business models.’
Fears that Uber and other platforms will do away with any other types of businesses, as we thought barely 10 years ago, were probably exaggerated. Platform business models could on the contrary be one more string to the bows of traditional businesses who had better think how they could reinvent themselves. Major platform business best practices should inspire rather than scare you.
You may download the illustrated version of the book from the Launchworks.co website.