Digital Platforms
A platform business, as opposed to a product pipeline business, is a digital environment with little or no marginal cost of access, duplication or distribution.
The platform owner creates a marketplace for service providers and customers to meet in, and what they are really aggregating is supply and demand. What comes out of that is product innovation and personalised service, and the network effects that drive both further innovation and cheaper customer acquisition. New revenue opportunities open up for the owner and for suppliers, while customers get instant, customised, reasonably priced services.
What defines a platform economy
Platforms are open-source marketplaces. Contributions come from outside users, which produces innovation and more choice for everyone on the platform. That creates a consumer surplus and pushes the demand curve outward, which enlarges the market itself.
Platforms create complementary offerings, which stimulate demand, which increases supply, which increases the services available, which increases demand again. Services are free, fair and instant, and that raises engagement and interaction, which creates new revenue opportunities for everyone.
They run on user-generated content and on users curating it in real time, which is what maintains quality control and the integrity of the marketplace. User interaction produces two-way reputational systems: people rate each other, and trust and reliability emerge from that rather than from the owner policing it.
The relationship between different user groups creates network effects, and network effects create liquidity and switching costs. Switching costs are loyalty by another name.
Personalisation drives the whole thing. A customer-centric focus creates engagement, and engagement is what makes a platform liquid.
What the owner gets
The platform owner controls and influences the user experience, which is what lets them generate revenue from every participant.
They benefit from the economics of bits: cost-effective, high-quality, instant services push the demand curve out and improve the odds of being a price maker rather than a price taker.
They get significant data mining opportunities, using machine learning to track and analyse customer preferences, which positions them to make effective recommendations and set prices accurately.
And they get an environment where innovation can be fostered, which creates choice for users, which brings in new customers. In short, the owner can take the diverse interests of everyone on the platform and turn them into revenue.
What the customer gets
- The economics of choice. Every participant has the power to act as buyer, seller, customer or service provider.
- The economics of price. A centralised market disintermediates the middle man, so buyers and sellers negotiate directly. Transaction costs fall and pricing gets more efficient for everyone.
- The economics of instant. A real-time environment for immediate transmission, sharing and use of products and services.
They also get free or near-free functionality, revenue opportunities of their own through engagement, and self-regulation through the ratings and curation they generate themselves. They control the service offering, because instant feedback dictates what it becomes.
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