What is the platform economy?
The platform economy refers to the current business model in which companies use online platforms to connect buyers and sellers. That means companies have to create an external ecosystem. You can also say, a platform business, in its most basic form, acts as a link between independent individuals and the goods or services they desire. This type of economy has disrupted a number of traditional industries, such as retail, transportation, and hospitality. Platforms such as Airbnb and Uber have allowed everyday people to become entrepreneurs by connecting them with customers and drivers. Platforms have also created new opportunities for businesses to reach a wider audience of customers. And because of the convenience and low cost of using platforms, customers are increasingly choosing them over traditional businesses.
However, the platform economy has not been without its controversies. Some have criticised platforms for exploiting their workers and not providing them with adequate protections. Others have raised concerns about the impact of the platform economy on local communities, as well as the environment.
Despite the challenges, the platform economy is here to stay. And as it continues to grow, it will likely have a profound impact on the way we live and work. Already in 2018, the market size of the global platform economy surpassed the $7 trillion mark.
Types of Platform Economies
Platform economies fall basically into these four categories (though platforms have many names like exchange/service/content/software/social/investment/etc. platform)
Innovation platforms give technology frameworks (like software, databases etc.) to customers that they can adapt for their own personal use. Companies like Microsoft, Salesforce or Oracle provide these products and services.
Think of transaction platforms as digital matchmakers. These platforms serve as a virtual marketplace. Amazon, Etsy and eBay are examples of transaction platforms when it comes to products, where Airbnb and Uber are examples for services.
An integration platform combines a transaction platform and an innovation platform, like the Apple App Store or its counterpart, the Google Play Store.
An investment platform facilitates the investing of money in new businesses or projects. Some of the most well-known investment platforms include AngelList, Kickstarter, and Indiegogo. OpenTable or booking.com also falls into this category.
How the platform economy Has Disrupted the World
The platform economy has truly had a profound impact on our society. It has disrupted traditional industries, created new ones, and changed the way we live and work. So, how did that happen?
First, the way we buy and sell things has changed, and it's now also easier for people to start their own businesses. As we learned before, this economy is based on platforms that connect buyers and sellers, like eBay, Amazon or Etsy. These platforms make it easier for people to find what they're looking for, and they also make it easier for businesses to reach a larger audience.
That obviously also impacted the retail Industry. In the past, retailers sold products to consumers through physical stores. Now they can also sell online and all the digital channels that open up by that. However, now they have to compete with giants like Amazon in this digital sphere.
The platform economy has also created new business models and industries, such as the sharing economy. In the sharing economy, individuals can share assets and services through platforms such as Airbnb and Uber.
The platform economy has also changed the way we work. The rise of companies just mentioned has made it possible for people to work in new and innovative ways. These companies connect people who need a service with those who are willing to provide that service. This has created new opportunities for people to work flexibly and on their own terms.
In this regard, also the so-called gig economy grew intensely. The gig economy is a term used to describe the trend of people working on a project-by-project basis, often through online platforms. Instead of working for one single company, people are now working for multiple companies on a contract basis. This type of work is often seen as more flexible and less risky than traditional employment (in a sense, you maintain multiple clients). This allows them to work on their own terms and to choose the projects that they want to work on. We will explore this topic in an upcoming article
And then the platform economy also had a profound impact on the way we live our lives. Social media platforms like Facebook and Twitter have changed the way we communicate and connect with each other. These platforms have also given rise to new forms of entertainment, like online gaming and streaming services.
As you can see in the figure (4) below, in just ten years the platform economy has built 7 companies that have risen to become some of the top 10 largest companies in the world and occupy the first six positions. This is a prime example of a disruption in the economy.
Pros and cons for consumers and businesses
So, how could this disruption happen? Let's take a look at the advantages and disadvantages of the platform economy, both from a consumer and a business perspective.
Pros for consumers
- Increased affordability and accessibility of goods and services.
- Greater variety and choice of products and services.
- More convenience and time savings.
- Increased flexibility and responsiveness to consumer needs.
- Greater transparency and accountability.
Cons for consumers
- Platforms can exercise a great deal of control over what users see and do on the platform, limiting consumer choice.
- A platform can change their terms of service or algorithms without notice or explanation, which can upend users' plans and expectations.
- Platforms can collect a large amount of data about users, which can be used to exploit them or sell to third parties without their consent.
- Platform economies tend to concentrate wealth and power in the hands of a few large companies.
- Platforms can be opaque in their operations, making it difficult to understand how they work, or contest decisions made about one's account.
Pros for Businesses
- Increased Efficiency: Platforms allow companies to more easily connect with their customers and partners, improving communication and collaboration.
- Increased Reach: Platforms provide businesses with a larger audience, due to the number of users on the platform.
- Increased Revenue: Platforms can help businesses monetize their products or services by charging a commission on transactions.
- Increased Engagement: Platforms can help businesses increase customer engagement by offering a variety of features and services.
- Increased flexibility: Platforms offer businesses increased flexibility in terms of how they operate and the products and services they offer.
Cons for Businesses
- Platforms are often difficult to create and scale
- Platforms may be vulnerable to competitive attack
- Platforms can be unstable and unpredictable, due to their reliance on network effects
- Platforms can be used to unfairly manipulate markets
- Platforms can be used to stifle competition or push them out of business
- Platforms can become monopolies or oligopolies
Looking at the advantages and disadvantages explains why the platform economy is so disruptive. On the one hand, it has created new opportunities for businesses and consumers alike. On the other hand, it has also led to a concentration of power and wealth in the hands of a few large companies. What does that mean for businesses, and how can they deal with and benefit from it?
How to succeed in the Platform Economy
Regardless of whether you want to utilise another platform’s ecosystem for your business model or create your own platform, you should consider the following aspects:
- Before you start, put yourself into the customer's shoes. Take a 360° view of the ecosystem you aim to create to gain cross-industry ideas.
- Consider partnering with other businesses in the platform economy. This can help you reach a wider audience, tap into new markets and scale faster. Platforms like Uber and Airbnb have been successful because they've built partnerships with local businesses.
- Think about your strategy and innovation within your organisation. Platforms are all about creating efficient ecosystems, so you need to make sure you’re on the same page as your partners (when you have them) and that you’re constantly looking for ways to improve.
- As also platforms rely on data to function properly, you must have a strategy for collecting and managing data. You could choose a partner for outsourcing this expertise, but also think about how to do it yourself.
- Platforms are constantly changing and evolving, so be prepared to adapt your business model as the landscape shifts.
- Platforms can be a great way to reach new customers and markets—think about how you can use them to your advantage.
- Platforms are the business model of the future. To succeed in the platform economy, you need to create an ecosystem that can be used by others to create value. You also must be able to quickly and efficiently scale your platform to meet the needs of your users.
- Platforms are different from traditional businesses in that they rely on network effects to create value. A platform with more users is more valuable than a platform with fewer users. This means that you need to focus on creating a platform that can be used by as many people as possible.
- Platforms also have lower barriers to entry than traditional businesses. This means that it is easier for new platforms to enter the market and compete with existing platforms. You have to be prepared to defend your platform against these new entrants.
- Finally, platforms are constantly evolving. You need to be prepared to evolve your platform along with the needs of your users. This means that you must be flexible and adaptable in your approach to platform development. Platforms that can successfully adapt to the changing needs of their users will be the most successful in the long run.
The role of culture in the platform economy
One more thing. Culture plays a big role in the platform economy. People want to feel good when they are using the platform. It’s the culture that makes people wish to use the platform and be a part of it. This is why Google purchased YouTube in 2006 for $1.65 billion USD. And more recently, in 2020, Oracle won the bidding war on TikTok.
When you think of Oracle compared to TikTok in terms of branding, products or the company itself, they couldn't be further apart. These companies are not on opposite ends of a spectrum - in fact, they are playing in an entirely different league. And that is perfectly fine. Oracle provides the data, TikTok delivers the content. As YouTube provides the content and Google has a lot of data.
Platform cultures can vary in many ways. Some platforms might be very open, while others might be more closed off. There also might be a lot of competition between different platform cultures. Therefore, a platform needs to find the right culture for their users and for their business. And that culture should make people want to use the platform because it makes them feel good about using it.
On the contrary, platforms that don’t have a good culture will have people who only use it because they have to or because it is the only option. That means that these platforms might not be sustainable in the long term. Whereas, a platform with a good culture can make people want to use it even if there are other options available. So you see, culture is a crucial element and component of a platform in the platform Economy. Don’t skimp on that.
The platform economy has disrupted the world in a number of ways. It has created new business models that are based on providing access to platforms, empowering people and businesses to utilise them. This has allowed for the rise of the sharing economy, which has had a major impact on traditional businesses. The platform economy has also made it easier for people to connect and collaborate with each other, which has led to the development of new ways of working. Creating and giving new opportunities for people to create and monetize their own content and services played out big, and led to a massive increase in the gig economy.
The platform economy has had a major impact on the way the world does business. To stay competitive, businesses need to understand how to use platforms to their advantage. Platforms offer a number of benefits, including the ability to reach new customers, create efficient ecosystems, and collect and manage data. Leverage all of these possibilities.
If you want to build your own platform, it’s good advice to look for partners, so you can scale the business quicker than doing everything by yourself. You need to make sure you’re on the same page as your partners and that you’re constantly looking for ways to improve. In a world of data, a platform relies on it to function properly, so again, you must have a strategy for collecting and managing data. Finally, as platforms are constantly changing and evolving, you need to be prepared to adapt your business model as the landscape shifts. And in a VUCA world (Volatility, Uncertainty, Complexity and Ambiguity), that can happen rapidly.