The term "platform" is on everyone's lips. Startups that hope for high financing rates are using it to promote their business idea - a successful platform promises power, influence and high profits. But what characterizes platforms and their business model? With the following information we will give you an overview.
Platforms: our everyday companions
We encounter the term "platform" far more often in everyday language than we realize: "We have offered him a platform to spread his ideas", "There is a platform from which we can see the valley", "Renault and Nissan use the same platform for their cars" or "Your train is arriving on platform 7". In all these examples, platforms play a passive role - as arrival points, viewpoints or forums. But what connects them is the enabling element. Without them, the speaker could not promote his ideas, the car could not be built, or the train could not receive guests. A platform thus aims to bring supply and demand together, to "match" them.
The mentioned applications of the term originate from our analog everyday life - deliberately not from the digital economy, which certainly evokes the strongest associations with the term in today's economic environment. When we talk about platforms here, we are mostly talking about large multinational companies such as Uber, Airbnb or Instagram. And even if these platforms could not be more different from a railway track in terms of their appearance, they have more in common than it seems.
What actually is a digital platform?
Digital platforms are not based on the value proposition of individual physical products; they pursue an overarching goal: the reduction of transaction costs and a more efficient matchmaking between two or more parties. In Uber's case, this means giving drivers the opportunity to serve customer requests directly via touch. In other words, drivers can see potential customers' travel requests in the app and respond directly with an offer by pressing a button, confirming the offer. This "match" should benefit everyone: The passenger benefits from the quick organization of the trip, the driver from the transparency of demand and the fare, and Uber from a share of the fare and the collected data.
In addition to the respective advantages, digital platforms ensure a balance between sellers and buyers and provide additional functionalities (search function, filter, tracking, etc.). Taking streaming services as an example: Who would have expected ten years ago that for a small monthly fee everyone could listen to almost any music available on the market, when, wherever and how often you like? As a platform for music providers and consumers, Spotify not only provides the music, but also simplifies selection through a search function and offers new, preference-based suggestions from other performers through self-learning algorithms. These functionalities are an essential part of the platform's value proposition.
However, the benefits of a platform do not even have to be provided by the company and sold to the customer. Platform users often generate the benefits themselves, which are then available free of charge. Instagram, for example, allows any user to share photos and videos with the world for free. The company benefits from advertising revenue and collected data. And, in addition, platforms like these have created a completely new, additional business model: influencer marketing. Influencers, who are users with a large number of followers, use free platforms such as these to place product recommendations or advertising for a fee, which subscribers then watch voluntarily. Platforms thus also serve as a basis for innovative value promises.
Technology as the driving force of change
How did the trend around digital platforms develop? Why has the importance of "platform economies" grown so much since the turn of the millennium? Why do companies invest large amounts in digital development? To answer these questions, let us take a brief look into the economic and social situation.
Since the Stone Age, technologies have been the driving forces behind social upheavals and radical economic changes. The most dominant technically driven trend is currently digitization. In the broader sense of Moore’s law, digital technologies are developing parallel to the exponential increase of computing power. The first mobile phone, the Motorola DynaTAC 8000X, came onto the market in 1983, and the first smartphone with the iPhone in 2007. This expanded the use of digital computing power in all areas and situations of society and is constantly generating new business potential. Since then, business models have developed in rapid succession based on the principles of digitization.
The impact of technological upheavals becomes clear when we look at different areas of life. In the Ruhr region, you no longer hear and see oversized machines that mine coal, but see high-tech hospitals and more theatres than anywhere else in Germany. The production halls of Daimler, Volkswagen and BMW are no longer swarming with employees who weld car body parts, but modern robot systems that perform this task autonomously and precisely. The famous yellow telephone booths that once shaped the German cityscape have also disappeared. It could also be that in the future we will no longer know any hotels, taxi collection points or classic banks, which are being replaced by crowdlending platforms on which the community lends each other money, and digital banks.
Platform-based business models conquer the world
These new technological possibilities also lead to the breaking down of industry boundaries that have grown over the decades. New suppliers open a completely different competitive situation by changing the rules of the game. High entry barriers in the form of massive investment costs prevented real competition with established hotel chains, such as Hilton or Marriott, for a long time. These chains owned hundreds of hotels in the best possible locations. Then the Airbnb platform revolutionized an entire industry without even owning a single property. Airbnb arranged apartments for private owners as temporary accommodation, nothing more. The consistent use of existing connectivity and the data provided by users shook the market worldwide - through radical rethinking towards matchmaking.
Established, mostly very capital-intensive business models are therefore competing increasingly with new players who are transforming the market with very specific performance promises or platform-based approaches. It is becoming increasingly difficult for traditional, vertically integrated and mostly product-oriented companies to face this challenging market environment and increased customer demands. However, platform-based business models can be not only a threat but also a solution to these market challenges.
Established players have a significant advantage over startups: network externalities. A platform lives on the number of its users. If very few drivers or passengers are active on Uber, the business model will fail. The more drivers are available, the more likely it is that passengers will download the app and use the service. This, in turn, means that the platform will also become more attractive for drivers in order to have less idle time between trips. From a certain number of users, the value of the platform increases exponentially, as these users, in turn, attract new users (e.g. Facebook).
On the other hand, platforms whose users are gradually decreasing are becoming less attractive. The number of users on a platform is therefore the key to success. Exactly this key is already in the hands of established companies in form of an existing customer base.
When the operating system "Android" came onto the market, the brand name Google was already firmly anchored in the minds of consumers as a search engine that offers reliable answers to all questions of daily life. Many users already had a Gmail or YouTube account. Winning these users over to Android and the Google Play platform was therefore a relatively easy exercise. The same applies to Apple's introduction of the App Store platform. Both offer software developers the opportunity to sell their apps to Android and iOS users through a unified and trusted source. Tesla also has good chances of developing its own platform. Tesla plans to revolutionize the Uber business model with self-driving cars by making "human" drivers redundant. Tesla owners should let their vehicles transport other passengers independently while they don't need their car. Precisely here, in the active use of existing customers for own platforms, lies great potential for companies that not only want to react to current market developments, but also to anticipate them with an expanded business model.
There is no doubt that many platforms will emerge in the coming years. Platforms still have a lot to offer, because they appear in various forms. One form that opens up very promising potential for established companies are "ecosystems":
In the digital world, business models are no longer vertical. Value creation takes place in the form of horizontally structured platforms and ecosystems in which different companies complement each other, but no longer sequentially represent the stages of service delivery.
Oliver Doleski, digitization expert, 2017
Today's highly competitive markets are characterized by customers whose demands are constantly growing and who are increasingly demanding holistic solutions. Ecosystems can be an answer to the question of how (established) companies can survive in the market. Ecosystems are networks of solution providers who have joined forces to provide customers with a more comprehensive offering. This offers completely new opportunities to stand out from the competition and create sustainable customer benefits. Many companies are aware of this unique opportunity.
Due to the high market dynamics, it is important to be fast in building a platform or an ecosystem. According to the theory of network effects, it is important to grow fast and unite as many users as possible. Therefore, courage for innovation, courage for platforms and ecosystems!