The Big Shift in Platform Business Models

Everywhere you look today, platform businesses are in the news. Most of the stories focus on what platforms do. Some highlight the value they provide in terms of ease and convenience in connecting with needed resources. Others focus on the risk of monopoly as network effects take hold and as platform participants become commoditized and their earnings squeezed. Relatively few look beneath the surface to try to understand the business models that drive platform businesses. They tend to ignore the most basic question of all: where’s the money?

I want to focus today on that question, exploring it at two levels. First, what’s the appropriate business model for the platform owner? Second, what’s the appropriate business model for platform participants? I suspect that the answer to both questions is that the appropriate business models are quite different from the business models that prevail today on platforms. To develop this perspective, I’m going to build on two earlier posts on business model evolution here and here.

The most basic shift for platform owners

Let’s start with business models for the platform owners. If we look across the business landscape today, two business models prevail. For platforms that focus on facilitating transactions or enabling social connections, the customer rarely pays – the revenue comes either from advertising or transaction fees paid by vendors. The one exception to this are platforms that aggregate resources like data or media where subscription business models often prevail.

Are these business models supported by advertising or transaction fees paid by vendors sustainable? I’m skeptical. Sure, these business models may make sense in the early stages of platform deployment since they increase the incentive for potential customers to participate and help to accelerate network effects. But, what’s the consequence? Over time, the result is that the loyalty of the platform owner rests firmly with the advertisers and vendors – after all, they’re the ones paying the bills.

But here’s the challenge. As I’ve suggested elsewhere, the real future of platform businesses is to evolve into learning platforms where participants can accelerate performance improvement based on feedback loops created by the platform owner. In a world of mounting performance pressure, the ability to accelerate performance improvement will become more and more essential, giving a significant advantage to platforms that focus on helping participants to learn faster.

Getting access to more and more data about the participants is a prerequisite for these learning platforms to emerge, so that this data can be aggregated, analyzed and fed back to participants in ways that help them to improve their performance.

But will customers be willing to share more of their data with the platform owner if they believe that the loyalty of the platform owner is with the vendor or advertiser? I doubt it. The platforms that will be most successful over time are likely to be those that shift their allegiance to the customer. How do they do that? By being paid by the customer.

If the platform owner is being paid by the vendor, customers will always limit their trust since they know who is paying the bills. If the customer is paying the bills, the successful platform owner will do whatever it can to serve the needs of the customer. As the platform owner provides more and more tangible value to the customers, the customers will be more willing to share even more data about themselves to enhance the value they receive back.

Platform owners can still be helpful to vendors on their platform even if the customer is paying the bills. After all, customers will benefit if vendors become more effective in tailoring their products and services to the evolving needs of their customers. But, when there is a clear conflict between the needs of the customer and the needs of the vendors, platform owners will be clear that their loyalty is ultimately to the customer when the customer is paying the bills.

This shift to customer payment may apply to commercial platforms that bring together participants wanting to do business with each other, but what about social platforms where there is no commercial motivation among the participants? Would they still be willing to pay for participation on the platform? Yes, because participants want to share more of themselves to deepen and enrich social relationships, but they want to do it in a safe environment, one where they know the platform owner will not seek to share this personal information with commercial entities in ways that might ultimately be detrimental to participant.

Three more shifts for platform owners

So, that’s one basic shift in business models for platform owners. It will be a very challenging transition for existing platform owners and makes them vulnerable to new entrants who adopt this business model from the outset.

But, that’s just the beginning. So far, we’ve talked about who’s paying the bill – vendors or customers? We also need to explore how the payments by customers might evolve along the three dimensions of business model evolution that I outlined in a previous blog post.

Payment. What will the customer pay for? The most basic model is a monthly subscription model where the customer pays a flat fee for access to the platform. But why stop there? As I’ve suggested, there will be increasing pressure to evolve towards usage based models where the customer pays based on how much time they spend on the platform. This will motivate the platform owner to find ways to be more and more useful to the customer so that they increase their usage of the platform. Beyond usage based models, many platform owners may be able to evolve to impact based pricing models where the customer pays based on the value they generate from participating on the platform.

Data. This is one of the big untapped opportunities for platform owners. Platforms are rich aggregation points for data about a growing number of diverse transactions and interactions among participants. As platform owners begin to harness this data and design services for participants based on this data, there’s a significant new revenue stream that can be generated. As discussed in my earlier blog post, these data services could start with descriptive data but have the potential to rapidly evolve into predictive data services and, most attractive of all, prescriptive data services that advise participants on actions they can take to increase value for themselves. This will also be the untapped opportunity for peer to peer platforms like blockchain that make more data visible to all the participants. Rather than simply focusing on efficiency of transactions, there will be a rich opportunity for these peer to peer platforms to harness this data through services that help participants to create more value for themselves.

Participants. Platform owners are already in the business of connecting participants with a growing range of third parties that could add value to them, challenging the prevailing business model of one to one marketing - one vendor dealing with each customer. Platform owners are potentially vulnerable to new business models that focus on connecting participants with third parties, wherever they reside and regardless of whether or not they are on the same platform. The best defense against these competing business models is to expand the number of participants on the platform as rapidly as possible and to gather richer and richer information about the participants so that they perceive lower risk in connecting with each other than venturing out beyond the platform to connect with others that are less well known.

Evolving business models of participants

There’s no question that platforms intensify competition among the vendors on the platform. Yes, they will be able to reach more customers than they could on their own – that’s the core motivation to participate on the platform in the first place. But those customers will have a growing selection of options to choose from, they’ll have more information about the options and it will be easier for them to switch from one vendor to another.

In that kind of environment, vendors will need to evolve to business models that provide more and more value to the customer. They too will have an opportunity to evolve along the three dimensions outlined earlier – payment, data and participants. The key will be to enhance the potential for differentiation and to continue to evolve their offers as rapidly as possible to stay one or two steps ahead of potential copiers.

In this context, the data aggregated and made available by the platform owner can be a powerful driver of learning and evolution, but the challenge will be that this data will also be available to other platform participants. For this reason, platform participants will have a strong incentive to evolve towards business models that enable them to gain access to additional data about their customers, data that’s not more broadly available to the platform owner. The result will be an increasing emphasis on the data dimension of business model evolution where participants can focus on persuading customers to share more of their data in return for providing more descriptive, predictive and prescriptive value to the customer.

The net effect of business platforms will be to accelerate the potential for fragmentation as each of the product and service vendors seeks to focus on the areas of greatest differentiation. While scale will be a more difficult outcome to achieve, participants will find that they can be more profitable as they reduce marketing and sales expense because the platform owner is helping them to connect to the customers that are most relevant to them and that are most willing to pay a premium for their product and services because they are so unique to their individual needs.

They will also enhance their profitability by shedding activities that they previously felt a need to pursue because their customers wanted the convenience of bundled offers of products and services. Now they will be able to focus tightly on the areas where they have the greatest differentiation and rely on others in the platform to provide world class complementary products and services conveniently and reliably to their customers.

But what about the big squeeze?

Many platform participants are concerned because they may be vulnerable to the growing power of the platform owner as network effects take hold and the platform owner gains bargaining power relative to the platform participants.

While this will always be a risk, the increasing feasibility of business models - especially the trusted advisor business model - that go beyond an individual platform and help customers to connect with providers of products and services wherever they reside will represent a more and more powerful check and balance on the potential greed of the platform owner.

As suggested above, in this kind of business environment, the winning approach for a platform owner will be to focus on harnessing data and knowledge flows to help platform participants get better faster so that they can create and capture even more value from customers. If they do this well, the platform owners will be able to capture some of that value for themselves through value based billing of platform participants. Rather than seeking to capture more and more share of a fixed value pie, the platform owner can grow its revenue and profit flows through participating in the growing revenue and profits of its participants that it helps to enable, as well as through adding more and more participants to its platform as word spreads about the learning potential.

Bottom line

The quest to harness data to help accelerate learning and performance improvement is a powerful one. It will increasingly shape the business model evolution of both the platform owner and platform participants. This business model evolution will also help to create a “win, win” economic relationship between platform owners and platform participants where both sides gain the faster everyone learns. In the end, this will be the motivation that attracts participants to join platforms and to remain active on platforms over time.

(This originally appeared on my personal Edge Perspectives blog site)