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The rise and success of digital platforms

19 Nov 2019
The platform economy is booming, and it will likely continue to grow. The success factor of platform-based businesses: putting individual demand at the heart of everything in a scalable way.

Platform business models are well beyond their early days, and they become more powerful every day. Take Alibaba, for example. As per the second quarter of 2019, it has an active customer base of over 670 million people, which is more than twice the amount of the US population. So what drives the success of these companies? And is their success a good development, or are there downsides as well?

Wait, what do you mean, 'platform?'

The likes of Alibaba, Facebook, AirBnB, eBay, and Uber are widely written about. They’re coined as 'network orchestrators,' 'digital networks,' 'ecosystem orchestrators,' and 'digital platforms.' But the most simple (and, arguably, accurate) term is 'platform.'

What all these companies have in common is that they've established a network of people who participate in some form of value creation. The latter can be based on tangible assets such as products (eBay) or rooms (AirBnB) and on non-tangible assets such as relationships (LinkedIn) or knowledge (Gerson Lehrman Group). You could actually argue that platforms are really a very old concept: basically, they’re the old-fashioned market or bazaar in a new digital form.

The success of platforms: an explanation

A study published in the Harvard Business Review shows that back in 2014, platform-based companies already generated more profit and grew faster than other types of businesses. More recent research suggests that in 2016, the total platform market was already at $4.3 trillion. The latest research conducted by KPMG estimates the total market size in 2019 at over $7 trillion.

This success is mainly founded on the fact that platforms often put individual demand at the heart of everything. If, say, the customer requires a company to deliver a new pair of brown leather shoes at a local pickup point tomorrow afternoon, this demand is central, and the specific business supplying it is secondary. This particular dynamic applies to B2C platforms, but a similar dynamic can be found in B2B networks such as large e-procurement platforms. The latter link buyers to hundreds of suppliers and manufacturers to help them find the right party for fulfilling their specific demand.

Scalability is another reason why platforms are successful. Typically, platforms barely have any additional cost when a new participant joins their network, as most of them merely oversee it: interaction is automated by (AI-driven) software, and product delivery is often outsourced to suppliers or service providers. As a result, investing in platform-based businesses is highly lucrative.

The driving force behind it all is the power of data and technology. It's only because of technology that suppliers can easily participate in the network (strengthening its effect). Often, it requires a few clicks to expose a product or service to millions of potential customers. The platform can leverage data to pair customers who require your product with your offer. Algorithms, in turn, help customers fulfill their demand without having to scour through thousands and thousands of offers, most of which aren't what they're looking for.

What about the downsides?

It's abundantly clear that the platform economy is here to stay, and it will likely continue to grow in the coming years. However, there are a few problems we need to take into account:

• Security

There's the ever-lurking danger of data abuse. Most platforms depend on the handling of participant data, and they do not always succeed in protecting everyone's privacy (which is a soft way of putting it).

• Regulations

Many platforms operate across borders and don't fit traditional business models, which makes them hard to regulate for governments. The result: problems in the areas of employee rights and market competition. An example: the market for digital platforms is often of the ‘winner-takes-all’ type, which results in large monopolist platforms that can dictate an entire sector.

• The environment

Putting customer demand at the heart of a business doesn't always impact the planet in a positive way. In some cases, it results in millions of products being shipped from one corner of the globe to the other. Some platforms have addressed this problem by offering customers the opportunity to compensate their CO2 impact or informing them about the environmental impact of the product and/or supplier of their choice.

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