Platforms are booming in the business world. More and more traditional companies are now starting a platform to increase their profits and follow in the footsteps of big tech. Hotel chain Marriott has looked closely at Airbnb and is just one example. 'The development of platforms in the sharing economy is going faster than ever before.'
„Everyone wants to be a platform. In the magazines they always compare General Motors to Uber, Marriott to Airbnb. And they say: these platforms have no assets. They have nearly nothing, but look at their market valuation." During a masterclass professor of marketing Jochen Wirtz (University of Singapore, author of 'Essentials of Services Marketing') outlines the enormous impact platforms have on the business world.
„Let's look at the most famous companies in the world. (…) What is fascinating is that 13 of the top 30 are in fact platform companies. If you take a look at who is trying to become a platform company we even see this is the case for firms like Toyota," says Marshall van Alstyne, professor at Boston University and author of 'Platform Revolution' during an online presentation.
The platform economy is everywhere
The wide variety of platforms makes it difficult to apply a simple formula for success. Retail Platforms (Amazon, Etsy), Sharing Economy Platforms (Airbnb, Uber) or Social Media Platforms (Instagram, LinkedIn) all have their own strategies. You can add Search Platforms (Google, Bing), Payment Platforms (PayPal, Alipay), Content and Review Platforms (TripAdvisor), Matching Platforms (Tinder), the possibilities are nearly endless. The question is which type suits best your company and offers the best opportunities for growth.
More and more companies are now taking part in the platform economy as Van Alstyne explains: „It is not just Google and Apple, there is Toyota, Honda, Siemens, American Express." In many cases value is created outside the organization. „Compare for instance BMW to Uber or Facebook to Walt Disney. The most important point here is the value that is created per employee. It is vastly higher for Uber than BMW. How is value created? In the case of Uber third parties create the rides or Airbnb third parties create the rooms. Or in case of Facebook you and I create content as compared to Walt Disney that hires it. This brings us to the concept of 'inverted funds' where value is created outside the organization."
How network effects stimulate growth
Some platforms receive high valuations because of immense network effects. The more users, the more successful you are. Well, that is not always the case. Let's us look how Wirtz explains the different kind of network effects. The 'primary network effect' means that a service becomes more valuable when there are more people on the network. „If I am the only guy on Facebook or on a social media platform it is pretty useless. But the minute my wife and kids are on the same platform it is already more useful, because I can communicate with more people. The bigger it becomes, there is a ton of value."
But not all platforms become better when there are more users around. This has to do with the 'secondary network effect' on sharing economy platforms like Uber or Airbnb. Wirtz tells the story of an Uber driver who only does two trips a day. „He goes from home to work and back home. He only needs two paid trips a day to supplement his income and he says these two trips almost pay for his car. The network needs to be big enough to find the one customer he needs. For him more customers or more drivers on the platform add zero value." So, there is a critical value of the number of users of the network and even with a small network a new competitor may appear. „This critical mass is a lot lower than people generally think."
Even beggars prefer WeChat Pay
Social network platforms continue to grow especially on mobile systems. Van Alstyne: „Look at something like WeChat. Their systems are so dominant in society that even beggars take WeChat Pay rather than cash. It is extraordinary how penetrating this is. These are driven by network effects: partners creating value for other partners or users creating value for other users. (…) You need value creating activities outside the firm. The reason is quite simple: you cannot scale network effects inside the firm as easy as outside the firm."
As traditional companies are moving into platforms, some tech companies are also learning from their more traditional rivals. Marriott combines its own traditions like an effective loyalty program with their new platform approach. Airbnb started as a platform, but is now owner of some apartments in New York, a step towards the traditional hotel world. „This whole space of platforms is really shifting," Wirtz elaborates. „My prediction is that in a few years you will have companies like Marriott or Airbnb that play simultaneously in these places. Traditional companies and tech platforms are coming closer to each other."