The platform business model: a 5-minute crash course

2020 will be a year to remember for many reasons. One reason which might fly under the radar of most people, despite the enormous impact it will have on the lives of many South Africans, is the mainstream arrival of what is commonly known as “super apps”. In short, a super app is a marketplace of products, services and offerings, delivered through 3rd party integrations. At the time of writing, Nedbank has already launched their super app, Avo, and Vodacom has announced the imminent launch of their own offering in partnership with Alipay. These might be the first of these full suite apps launched in the country, but they will certainly not be the last.

What all these apps have in common is their employment of an interaction-first or platform business model. Having developed beyond buzzword status (and it’s early spawning of far too many “the Uber of…” startups) the platform model now stands as a potential solution to some of the biggest challenges faced by businesses (even more so post-COVID).

For those not yet acquainted with the platform model, I have compiled a brief introduction based on what have I learned while working on Avo, the first app of its kind in Africa. While nowhere near a comprehensive discussion, it should give at least a high-level understanding of the topic to anyone looking to learn more.

Please do contact me directly should you have any questions not covered here or wish to discuss the topic further. And, if you find value in this, please consider paying for my next coffee via the button on your screen.

The platform business model: a 5-minute crash course

Advances in technology over the last two decades have enabled increased efficiency in traditional business models to the point where the use of technological infrastructure has become a goal in itself for many, if not most, businesses. Technology’s greatest strength is not in making existing business models more efficient however, but in enabling wholly new models. One such model is that of the platform business.

Characteristics of the platform model

The traditional or pipeline business model follows a linear flow, generating value through centralized processes and resources. The platform fundamentally model differs from this by creating value through enabling interactions between external producers and consumers. This is why the platform model is also referred to as an interaction-first model.

The primary goal of a business employing a platform model is to aggregate a fragmented market and improve the efficiency within that market, improving the quality and quantity of interactions between participants and allowing it to scale. This is done via 4 key components:

  • Mechanisms for creation on the platform. A successful platform should allow for easy participation with as few barriers to entry as possible. This includes both digital and real-world mechanisms for example Uber providing drivers with vehicle finance solutions.
  • Curation of the platform experience for all partners. Platforms are a product of the democratization of media and have become the new gatekeepers in many industries, taking over from traditional, centralized players. Think Amazon’s Kindle enabling anyone to self-publish a book. What this means though is that it is the platform’s responsibility to maintain certain levels of quality if it is to appeal to partners. This is achieved through various forms of access control, self-policing systems and restrictions on production and distribution. An example of this would be the levels of editing permissions on Wikipedia.
  • The means to customize the experience. As any user of social media knows, the key to a quality experience is relevance. Nothing kills a platform experience faster than the users being flooded with content or services that are irrelevant to them. Enabling automatic or manual customization of the on-platform experience to ensure relevance is therefore critical.
  • Mechanisms for consumption and feedback. As with any complex system, platforms improve through feedback. The use of centralized AI allows platforms to get smarter over time, setting it apart from “dumb” markets. This ability to benefit from feedback is a critical test for any platform, so ensuring the availability of high-resolution feedback from participants is of paramount importance.

Benefits of the platform model

One of the main benefits of employing a platform model is its potential for exponential growth. This level of performance is possible due to several factors, including:

  • Near-zero marginal cost. Arguably the most powerful characteristic of the platform model is its ability to scale with minimal increases in costs. A (slightly oversimplified) example of this would be a mobile app. To create the app would require an initial investment but creating a copy of that app for every new user costs next to nothing.
  • Network effect. Without getting into the math, Metcalfe’s Law shows that the value of a network is proportional to the square of the number of nodes in the network. This means the value of a platform to its participants grows exponentially as more participants join the platform’s ecosystem.
  • Virality of the platform. Not to be confused with network effect or word-of-mouth, Virality is when awareness of the platform spreads simply through its use. A person publishing their Instagram photo on their Facebook profile is a basic example of Virality in action.

To the participants on the platform, obvious benefits include convenience and access to a wider product or service choice, but also unique benefits like enabling more informed decisions through transparency and self-curation for example reviews on TripAdvisor and Airbnb.

In summary

The platform business model represents a rethink of the traditional ways of doing business, rather than simply an incremental improvement of existing practices. The use of the underlying technology is not the goal, but rather the infrastructure that enables the characteristic interactions of a platform.

There is of course much more to the platform model than covered here, including the implications of marketing to an eco-system rather than simply a consumer, but hopefully this brief introduction will give those unacquainted with the platform model a basic understanding of what it entails and why it is both exciting and important.

As mentioned above, please reach out to me directly should you wish to discuss the topic further or have any questions not answered here.

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