The Digital Leader Newsletter — Strategies and Techniques for Change Agents, Strategists, and Innovators.
I think that not only do saints make poor role models, they are incapable in one sense of identifying radically with those of us who are mere mortals.
—Martin Luther King Jr.
Many think that “being a platform business” is beyond their business, beyond their capabilities, beyond this quarter’s results. Being a platform is only for a select few companies. Not true! Being a platform is within many companies’ reach and would have several benefits in evaluating and pursuing. Even if being a platform is not the right strategy, evaluating your platform strategy creates healthy dialog and critical thinking for the current business and highlights strategic and operational opportunities.
Let’s start the journey with understanding what a platform business is and how to evaluate your business's potential.
What’s a Platform?
A platform is a capability and business model that external users can access, utilize, and perhaps customize to accomplish a meaningful outcome. Often these external users leverage the capability in ways you could never imagine. Amazon consists of more than a dozen thriving platform businesses, including AWS, Fulfillment (FBA), Payments, CreateSpace, Direct Publishing, Audible, Advertising, Flex, Instant Video, Kindle, and Mechanical Turk, to name a few.
Platforms are horizontal networks that connect buyers and sellers, speakers and listeners, creators and consumers, to one another, bypassing traditional gatekeepers. The internet is such a platform, of course, and it hosts many others: Twitter and Facebook, YouTube, Etsy, eBay, and Airbnb. — Scott Galloway
That’s a good definition but primarily focuses on a marketplace concept. Platforms also include API-enabled business models providing an abstraction layer to an underlying complex service, letting the users not worry about building the underlying capability. Twillio is a pure-play “cloud communications as a service” business providing developers APIs and tools allowing developers and marketers easy access to messaging capabilities. Twilio has a market cap of ~ USD $61B.
Attributes of a Platform Capability?
What are some attributes needed for a successful platform business model?
First and foremost, a platform abstracts complexity and allows others to access and use this abstracted capability with speed and scale. The key attribute needed is finding the complex capabilities your business does that could be abstracted allowing external users access to the capability without having to build or understand all of the underlying capability. The “power to weight” ratio measures the utility a platform provides versus the complexity of implementing and operating. The higher your power-to-weight ratio, the stronger your value proposition and the better leverage you have to establish higher pricing and achieve adoption concurrently.
Building a platform tends to have significant upfront investment costs and efforts but low to zero marginal costs for each customer using the platform. Stripe, a “payment as a service” financial services technology firm, has invested in building the Stripe service. Still, they have meager marginal costs for each developer that uses the Stripe API.
When there is physical inventory, the inventory is owned by others. This “asset-light” business model is highlighted by Airbnb, Turo, Uber, and other marketplaces connecting buyers and sellers. The “sellers” have the inventory, capital equipment, and expertise in operating. The marketplace creates demand, curates selection, helps to match the right buyers and sellers, and provides transaction efficiencies such as payments and insurance.
Platforms tend to feature “by-the-sip” pricing, not requiring high fixed costs for participants on the platform as well as simplified business terms and clear operating commitments.
A platform tends to have a network effect, where more participants increase the platform's utility. This is one reason why patience and a definition of the flywheel strategy are key. It takes time to drive adoption and creating the network effect. Community features are one way that platforms create network effects and maintain stickiness for both buyers and sellers.
Amazon stresses one more attribute, perhaps the “killer feature” adding value to users. That attribute is self-service. Being a customer and operating with a company’s platform (or service) should not require a participant to talk to someone in that company. In fact, successful platform businesses innovate through contact avoidance. A participant should be able to discover, implement, and consume without an “engagement.” It should be “zero provisioned” where implementation efforts for each party are close to zero. Much like aspiring to perfection in your customer experiences or operations, a zero provisioning effort is an aspirational goal. Some capabilities can truly be self-service. For others, it simply is not feasible but usually, more can be accomplished than status-quo mindsets might conceive.
When a platform is self-service, even improbable ideas get tried because there’s no expert gatekeeper ready to say, ‘That will never work!’ Guess what? Many of those improbable ideas do work — Bezos in his 2011 letter to shareholders.
SHOULD YOU DEVELOP A PLATFORM?
Maybe. Maybe not. What you absolutely must do is carefully evaluate if you could take a core capability or set of capabilities and invest and transition to be a platform business:
1. Identify your core capabilities as a business. Can you define precisely what gives your company a competitive advantage? How easily can it be imitated? How do you deliver value to your customers? Evaluate your business as a set of processes and capabilities. Be clear on the definition, and break down big processes into smaller functions and services.
2. Identify the services. Think through what the service, and the API for the service, might be. How do you make it a “black box”? In other words, what complexity would you be abstracting, and what is the value proposition?
3. Where’s your advantage? How would you offer best-in-class commercial terms? Commercial terms include cost, speed, availability, quality, flexibility, and features.
4. Can it be profitable? Would these commercial terms and capabilities be viable in the market? Would it be a viable, profitable business at scale? What is the total addressable problem?
5. Test and evaluate. You have a critical and fact-based understanding of your core capabilities, gaps, and the potential benefit (or lack thereof) of a platform. Build your agile approach to testing, learning, and building value as you go. Get five to ten co-development customers to collaborate in building a platform to solve their business problems and pressure-testing your service.
Developing a platform takes effort and careful strategy. Whether you decide to proceed with a platform strategy or not, doing this exercise gives honest and current insights into improving and innovating capabilities.
Who Can Apply?
Much like the evolution of the SaaS ecosystem, the future of platforms is going from broad-based capabilities to specialized and industry-specific platform offerings. Find the ideal customer segment and solve their problem with your specialized and unique capability. Evaluate the market potential with total addressable problem analysis. Build as generalized a solution as possible, while still attacking the specialized needs of the ideal customer segment.
Your Assignment …
Your assignment is to ask this question — “which of our capabilities could be turned into a value solution for external users?”. This is the start of building your platform strategy, then continue using the steps outlined in this newsletter.
About The Digital Leader Newsletter
This is a newsletter for change agents, strategists, and innovators. The Digital Leader Newsletter is a weekly coaching session with a focus on customer-centricity, innovation, and strategy. We deliver practical theory, examples, tools, and techniques to help you build better strategies, better plans, better solutions — but most of all, to think and communicate better.