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Friday, March 29, 2024

Platforms 101

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This week, we continue our discussion concerning business models. Specifically, we focus on the business model of platforms.

Pipelines versus platforms

Many platforms essentially provide a match making service. If we think about such businesses as Uber or Airbnb, these are essentially businesses that provide a facility that connects a consumer to a supplier.

Many businesses provide a venue for allowing a merchant to interact with a customer. Newspapers, radio stations and televisions studios provide an audience for advertisers. Mall operators provide spaces for commercial transactions.

Mall operators make money from leasing real estate in the same manner that newspapers sell advertising space or television stations sell advertising minutes. Unlike traditional media, where the interaction is limited to the one-way sharing of a message, a mall operator also provides a space for the actual transaction to take place. Marketing, through in-store merchandising or even advertising through posters or signs can also occur in these malls. Where media relies on audience, malls rely on traffic. While traditional media attracts audiences through skillful programming, mall operators attract shoppers through skillful choice of location, mall design and, most importantly, the creation of an attractive merchant mix.

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In business model terms, traditional media is a pipeline business. The company churns out content and attracts an audience. That audience then becomes the basis for selling advertising space or time.

On the other hand, a mall is a platform business. While a television studio produces the shows that attract the audience, a mall relies on its merchants to provide the products and services for consumers. A mall operator must be able to balance the two sides of merchants and consumers. A certain amount of desirable foot traffic is required to attract and keep merchant tenants and desirable merchants attract shoppers. Mall operators must constantly ensure that they are managing both sides of the platform. This involves skillful management of the space to ensure that shoppers enjoy their experience and tenants make money. This is not merely a matter of managing tenant mix through such things as skillful placement of magnet stores, it is also about managing shopper traffic through such mechanisms as mall-based promotions or events. The essence of success in platform businesses is in the skillful balance of both sides of the business.

Matchmaking and network effects

For many online platforms, the heart of the business model is in matchmaking – ensuring that consumers and suppliers are matched in a manner that creates repeat transactions. For malls, this is about mall layout, merchant placement and skillful communication. For companies like Uber, it is about making sure that riders find rides within a specified timeframe and that drivers get enough riders to make money. It must be clear that for both bricks and mortar platforms such as malls and online platforms such as Uber, the success of the business relies on building and maintaining a critical mass of both suppliers and consumers. New malls create traffic by concentrating on attracting magnet locators such as groceries or cinemas to generate the initial foot traffic. It then attracts early locators through easy terms on rental while shopper traffic is low. The key to success is to quickly ramp up shopper traffic and locators. The same thing is true for online platforms.

Matchmaking on online platforms can be trickier. For example, for Uber, some passengers may require a large trunk for baggage or an extra-large car to accommodate a larger group of passengers. In the case of Airbnb, renters might be looking for specific in-house amenities such as a pool or access to certain locales such as a beach or activities such as surfing. The ability of a platform to quickly match the needs of a customer to the appropriate supplier lies at the heart of many platforms.

What this means is that there must be choice and on online platforms, choice of suppliers means volume in terms of suppliers. Hence, onboarding suppliers is at the heart of setting up a successful platform business. However, suppliers do not stay on a platform if they are not able to get enough customers. Hence, managing the customer experience and ensuring repeat transactions is necessary for a platform business. A successful platform business creates a virtuous cycle. Satisfied customers and enough choice attract more customers. More customers attract more suppliers. More suppliers create mire choice, attracting more customers. This is called a network effect.

Creating and capitalizing on network effects lie at the heart of the basic business model of most online platforms. The difference, for example, between YouTube and a television station is that YouTube simply provides the platform for content creators to reach an audience. Hence, the operations of YouTube do not directly focus on finding watchers. That is the job of the content creators. The focus of YouTube is to motivate content creators to create the content that will attract viewers and to ensure that the platform provides easy access to viewers. At the heart of the marketing of the platform business is the ability to create a community of both suppliers, such as content creators, and consumers, such as viewers, to sustain the platform. Clearly, delivery of the marketing promise is reliant on the rules and design of the platform, and especially its policies, algorithms, and user interfaces.

Engine

Managing a successful platform business is not simply about concentrating n nothing but volume. Without a sophisticated engine, too much volume can be counterproductive.

A vacationer looking for a place to rent does not want to spend two days adding through Airbnb listings. Hence, the matchmaking algorithm at the center of many platforms is a critical element of platform management. For Airbnb, the ability to filter listing according to specific factors such as price, location, space and amenities is important. For Uber, the ability to identify type of vehicle is critical. For social media, the ability to match content to user preferences while being able to offer variety is important.

The key question for these platforms is always monetization. A mechanism for content creators to make money is important to attract quality content. On the other hand, so much free content is available online that asking consumers to pay for access is often counterproductive – essentially resulting in shutting down content consumption. However, too much advertising can also turn off some content consumers. For many platforms, the answer lies in striking a balance between free access with advertising and premium access with a fee for premium content or to exclude advertising.

Whatever business model an entrepreneur ends up choosing, the important thing is to understand that the heart of the business model is a clear understanding of how the business will make money.

Readers can email Maya at integrations_manila@yahoo.com.  Or visit her site at http://integrations.tumblr.com.

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