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Management

Five tips for setting up a successful digital platform company

We are still at an early, experimental stage for platform companies, though the rewards are potentially immense

PUBLISHED : Friday, 07 October, 2016, 2:30pm
UPDATED : Friday, 07 October, 2016, 10:45pm

Should you be running a digital platform company?

As consumers, we are used to the benefits of Amazon, Google, Alibaba and Didi Kuaidi, Grab or Lyft. These digital-born companies have used platforms to transform multiple markets and sectors and to create extraordinary new customer experiences at vast scale. But this trend will impact all businesses, large and small, traditional and digital. More than century ago, factories emerged as new platforms that united raw materials, workers, machines and distribution in order to produce goods at scale. Digital platforms are no less significant.

A digital platform is a technology-enabled business model that facilitates exchanges between two or more interdependent groups. Most commonly, platforms bring together end users and producers to transact with each other – again, think of e-commerce platforms such as Alibaba. They also enable companies to share information to enhance collaboration or the innovation of new products and services – think of how Visa has been working with connected devices.

The power of platforms comes from the network effects they generate – the more suppliers, the more customers and vice versa, as a virtuous circle creates new value through scale. The costs and risks of expanding the market lie less with platform owners. Instead they are dissipated among the network of participants. This transforms the economics of reaching new markets.

No wonder there are so many companies trying to copy their models. Platform businesses’ total market value is US$4.3 trillion; directly employ more than 1.3 million, and many more indirectly. More than US$20 billion was invested between 2010 and 2015 in 1,053 publicly announced deals.

For sure, digital platform companies are transforming the way we do business by creating vast markets, compelling customer experiences and new ways to innovate. But while platform businesses are proliferating our analysis in collaboration with the G20 Young Entrepreneurs’ Alliance suggests most new platform businesses will likely fail. That’s right, fail.

For one, startups often fail. But furthermore, we are at an early, experimental stage in the emergence of platforms. Some platforms do not have all the capabilities required and some economies do not have the right conditions to allow platforms to sustain and scale. As a result, consolidation is inevitable. Consider its role in financial services: the vast number of online lending platforms in China alone was reported to be in the range of 1,500 to 1,700 in early 2015. That does not appear to be a sustainable number.

That said, we have identified focus areas that could help businesses land up on the winning side.

To create successful platform ecosystems managers should:

Create differentiated services that extend beyond the point of transaction; and that support both customers on the demand side and service providers on the supply side.

Target customers through tailored experiences across mobile phones, internet and face to face meetings, using customer data to anticipate needs and offer bespoke experiences.

Apply new pricing models, such as pay-as-you-go, “freemiums”, surge pricing or subscription pricing

Make sure trust and security is at the heart of the platform, using both prevention and compensation techniques to give customers confidence in the security of the platform, as it will become exponentially relevant in the platform economy.

Scale the platform rapidly by identifying digital partners – such as app developers and payment service providers – who can enrich the platform experience and fulfil customer needs.

Both traditional and digital businesses need to decide not if, but how they will participate in platforms, either by starting up platforms of their own or offerings services through other platforms ecosystems. They will recognise that, not only can they reach new large scale markets rapidly, but lower the cost and risks of doing so.

Furthermore, the concurrence of exponential technologies—cloud, automation, analytics, artificial intelligence and cognitive systems, mobile, interactive and the industrial internet —is creating a new “as-a-service” economy where the whole is more powerful than the sum of its parts. Entrepreneurs are particular beneficiaries of on-demand services that cut up-front costs and accelerate access to new markets and distribution channels.

Digital platforms can provide a wealth of opportunities for businesses. But in order to succeed, managers need to focus on differentiated services that work for their partners and customers as well.

Gianfranco Casati is group chief executive for emerging markets at Accenture

Alibaba is the owner of the South China Morning Post

 

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