The digital platform is not just a medium to interact but is one of the cornerstones of the crowd economy, that is poorly understood at best. This was a big takeaway from my interview with a top global CXO advisor on the platform business model, Sangeet Paul Choudary, who recently launched his second book, Platform Scale.

Whether you are a startup or a large corporation, the insights in this book will give you a better understanding on the basics of the platform business model, how it has emerged and how you can tailor your business strategies in the digital age. Sangeet explains why new platforms often fail and how to avoid these mistakes.

Sangeet is the founder and CEO of Platform Thinking Labs, a C-level and board level advisory firm focused on the application of platform strategies across industries. He is also a published industry analyst and author of the blog, Platform Thinking. Here’s a quite comprehensive interview that’s worth digesting.

Could you brief us on the concept of platform business model?

A platform business model is a business model that connects two or more participating sides and allows them to interact with each other. The goal of the business model is to enable interactions. To differentiate platforms business models from other traditional business models, I  think of traditional business models as “pipe business models,” where the business creates value and pushes it out to consumers, and value essentially flows in one direction. The whole business works like a pipe. If you think of traditional manufacturing, traditional service delivery models, traditional media- all of them work like a pipe.

A platform business model, instead of creating value and pushing it out, acts as an infrastructure on which producers and consumers can connect and interact with each other and sets the condition that govern, how the interactions should happen, what kinds of interactions are high quality, which kinds of interactions are not high quality.

A classic example of this is something like a Uber or Airbnb or YouTube, where the producers and consumers are being connected to each other by infrastructure, and the platform decides what kinds of interactions are valuable, what kinds are not and gives the community the tools to give this kind of social feedback to the platform.

Why do you think we are living in such an age of unprecedented scale? Can you cite significant factors on how we have come to this point in time?

We’re living in an age of unprecedented scale because, there are four different factors that are working together at this point in time to create really important implications for how businesses will work in the future.

The first trend is connectivity. Because of connectivity, new markets are being created and people are being connected to each other in entirely new ways. Producers and consumers are connected to each other in entirely new models.

The second is the democratization of production. Today, the democratization of the means of production coupled with the fact that producers have a ready market to access, is leading to the creation of new sources of production that did not exist in the past. Airbnb is unearthing new accommodation options, Youtube is creating new content creators. We may call this spare capacity or cognitive surplus. The democratization of production is unearthing this at an unforeseen rate. We’ve seen this happen to creative design and we’re now seeing this happen to industrial design with the spread of the 3D printer. The rise of new producers is a hallmark of the platform age.

Let’s go to the consumer side of the equation. Consumers require decision support systems while deciding what they want to consume. Traditionally, the goal of marketing has been to create this decision support system. However, with the rise of data and intelligence, we have new kinds of decision support systems today. On Facebook, your newsfeed is the decision support system that tells you what you should read and what you should not. We are going to see more of these intelligent decision support systems dominating business in the future.

Finally, these new markets of producers and consumers need to become more and more efficient over time. This happens because we have an explosion of data today. We have more data today than we have ever had in the past, and almost 90% of the data that exists today did not exist three years back. Data helps platforms orchestrate interactions between market participants efficiently.

These four factors – connectivity, democratization of production, intelligence, and data – are together driving the platform age – an age of unprecedented scale.

As a global CXO adviser on platform business model, what is your best advice to startups and SMEs that want to take advantage of it?

I work on advisory on platform business models for both startups as well as larger organizations and very often, the way the two would look at it is going to be quite different.

In the specific context of startups, the most important thing is to realize that a platform business is not a technology business. It’s a business of enabling interactions, so before you build technology and before you push technology out there, it is important to figure out who are the participants that are going to use this technology to interact with each other, and how will that whole ecosystem look once these participants come on board.

Only when you have that, should you go about deciding how to design the technology. Today, many platform startups start the other way round. Some startups building the “Uber for X” today may not try to understand Uber as a system. Instead, they may just see one feature – the fact that you can order a taxi using your mobile phone as a remote control – and may apply that feature to another solution. Instead, it is important to understand the interactions that drive Uber, the role that route density and network effects play and the factors that lead to market failure for drivers and travelers. Only once you understand this well enough can you build the right platform.

What inspired you to write platform scale? What is it about?

The reason I wrote platform scale is, because I believe that the four things that I talked about in question number 2, are becoming increasingly important. If we believe that the world is going to get more connected, and that data is going to be even more important, we need to understand how platforms work.

Unfortunately, new platforms often fail because they don’t understand the very basics of how platforms work and how they should be designed. A couple of years back, I started diving deep into this to create a framework, a methodical model, by which one can think about how platforms work and how to apply that to build new businesses. The book is essentially a way of encapsulating all of that thinking in one place. It lays out a framework for how platforms work, and how you need to think about the design and management of platforms.

Is platform business model suitable for startups only? How about medium to large corporations that work in conventional business models? Can they also use it and how?

This is a great question because a lot of my work applies the platform business model, not just to startups, but more importantly to large corporations. This is where it gets interesting because large corporations do not have the luxury that startups have, of starting from scratch. They need to implement the platform business model in the context of the traditional, “pipe business model”, and to do that, they need to acknowledge the assets they have, the organizational and process overhead they have, and then they need to carve out the platform implementation while recognizing those assets and constraints. Many large corporations today that are moving to platforms are realizing that they are no longer in the business of selling products or services, they are in the business of creating a connected ecosystem of offerings, all of which work together to solve the user’s pain point.

In the past, they would have solved it by creating a product, but today, they solve it by creating this whole ecosystem of connected offerings. A great example of this is Nike. It’s moving from the business of selling shoes to creating a whole ecosystem of connected offerings with its apps, with the Nike Fuel band, with the community of Nike runners, all of which interact with each other, and essentially help to solve the users’ pain point in a much larger context. It may continue selling the shoe, but the shoe now sits within a larger ecosystem of offerings that together create value for the users. The business becomes an ecosystem business that is enabled by a platform that connects all these users and offerings.

Another example of this is McCormick Foods, a company that manufactures spices and if you look at McCormick Foods what’s very interesting is that in the past, it’s business was entirely about selling spices. Today, it’s launched a platform  called FlavorPrint, which takes information from you and builds a data profile of the kind of food you like. Based on that, it recommends recipes to you. You can then connect with other people who have similar taste profiles, swap recipes and essentially a whole community gets created around recipes. All of these lead to further sales of spices and further business for McCormick, but the spices now sit within an ecosystem of offerings and interactions.

These are two examples of traditional companies starting to think of their business as a platform, and this is where the real power of the platform comes in. In the future, any company that can engage its users in a connected ecosystem can build a platform and attract third parties to create a thriving ecosystem of value exchange.

 

Sangeet Paul Choudary is the author of the #1 best-selling book Platform Scale, the founder of Platform Thinking Labs (platformed.info) and the co-chair of the MIT Platform Strategy Summit. Platform Scale, an Amazon #1 bestseller, is the definitive guide to building such startups. The book explores specific traction issues for these startups, particularly around solving chicken and egg problems, creation of network effects and details a planning canvas for designing organic viral loops into your product.  The book is available in Kindle and paperback format on Amazon (click here to get your copy). Also visit the book website to download the first 3 chapters for free and for additional bonus content associated with the book.