June 25, 2019

Becoming a Platform: What it Takes

In the SaaS world, branching out to a platform business is fairly common. It’s not a surprising move anymore, given the huge benefits of owning the building blocks of other businesses, as we talked about in the first article of this series. Since building a thriving platform ecosystem doesn’t happen overnight, in this follow-on piece we’ll explore the steps for implementation.

In this era of digital platforms, there is no limit to the number of customers you can reach out to. McKinsey noted recently that "companies pursuing offensive platform strategies yield a better payoff in both revenue and growth". Looking at this, one might think the sky's the limit for digital natives having an army of tech-savvy professionals. But this might be generalizing a bit. Incumbents can command a 20 percent share of digitizing markets, compared to only 5 percent for digital natives. But only 3 percent of incumbents have adopted an offensive platform strategy.

Though adoption is low, a growing phenomenon indicates that companies are transitioning from a product-based to a platform-based business model. Technology is at the core of this transition. Cell phones, which were once just typical products, have now become platforms offering a plethora of functions besides only making telephone calls. This is bringing subscribers together with application developers.

According to Harvard Business School, a successful platform strategy involves three components -

  • Connection: how easily users can get access to the platform to share and transact
  • Gravity: how well the platform attracts participants, both producers, and consumers
  • Flow: how well the platform fosters the exchange and co-creation of value

Example of a product organization supporting multiple products sharing components of the same platform - by Wyatt Jenkins

If you are considering branching out to a platform business model, the following steps may help in your implementation approach -

  • The foundation: It is critical to establish the core services that your platform will provide its users. From an IT perspective, a platform provides a complete environment for developing and deploying applications that can speed time-to-market and generate revenue when reused. As the platform grows, you can add more features or services depending on the needs identified by the platform users themselves. For example, LinkedIn’s initial offering to users was creating a profile page. Then they realized they needed to add more features to encourage active participation and added discussion groups followed by recruitment and advertising functions and finally letting users publish their content - turning the professional network site into a publishing platform. At this stage, IT can start to make build vs buy decisions.
  • The model: Adopting a hybrid model is useful when approaching platform-based business, as it can help enterprises create and capture value to attract new users without abandoning the existing ones. Let’s look at this example for better clarity. When computer game developer Valve came up with its first video game called Half-life, it became a sensation. Soon hackers were developing their own modifications to change the gameplay, creating barriers for those who wanted to play against each other. When Valve realized that there is a demand for an alternative to Half-Life, they hired those hackers who created the best-modified version and turned it into a second game called Counter-Strike. This way Valve turned the threat into a new business opportunity. But as a growing number of versions started creating problems for Valve users, the company created an online software channel in 2003 called Steam to distribute patches. As the number of users increased, Valve transformed Steam into an online platform that allowed developers to distribute their software titles instantly at zero marginal cost — a lucrative proposition for both gamers and game producers. The availability of more games attracted more customers to the platform, including new ones who were now downloading Steam and buying various games. Although Valve continues to sell its own software, today it makes more money by charging a percentage of every sale by other developers. Another example - Qihoo, one of China’s most successful internet firms, started as a security software product that cross-subsidized the development of a new platform with products that they gave away for free, creating more value in the end for the entire platform.
  • The demand: Creating a demand for your product involves attracting a number of users. This can be done in phases like Makerbot, the 3D-printer developer, did. They approached a group of devoted product fans to make desktop 3D printing accessible to all. To expand this group and build momentum for this product, Makerbot conducted a series of projects, conferences, and events. For example, many of the product fans helped build printers for Makerbot when demand started exceeding their production capabilities. The company then turned this enthusiastic group into early adopters of the platform which propelled the growth of Thingiverse - an online platform where makers can post designs and users can download them to print. With the platform in hand, Makerbot then leveraged the efforts of their early adopters to create more features for their platforms. Makerbot’s cultivation of its users as it moved from product to platform was immensely successful.
  • Provide adequate value: To create a demand for your platform, your platform should also create new value for your customers to use it. Valve’s Steam and Lego could both do it. But not SF Express, a leading parcel delivery service in China. In 2014, SF Express launched an e-commerce platform connecting third-party merchants to their customer base. They also opened many physical stores from where shoppers can order products using their tablets. Once ordered, SF Express would deliver the products to the customers who could try it and return back immediately if they wished. But this ‘try and buy’ concept did not attract the users as they were already getting this facility from Chinese retailers for goods purchased online.
  • Internal team: It is important to align your internal team and stakeholders to establish roles and responsibilities to ensure a smooth transition from product to a platform. For example, the IT team can develop the base services of the platform, and business units can develop applications using these services and infrastructure. Accordingly, funds can be distributed so that each unit can succeed. Apart from having a good internal team, companies can also benefit from including outsiders in the process. A Stanford graduate student opened up the code for Lego’s Mindstorm robots to create a platform, effectively transforming a toy into an educational tool for schools. Lego benefited by hiring an external agent and created new value for their product through a platform.

A mindset change

Shifting from a product mindset to a platform mindset can be downright counterintuitive—indeed, many firms discovered new platform opportunities almost by accident and in spite of their own missteps. But, like many transformational strategic moves, the successful transition from product to platform should happen in stages that demand flexibility. Platforms are at the core of the successful businesses of the future. By adopting platform thinking and new technology, any business can evolve to join the platform economy.