Understanding platform business before you build
Platform business or some call it, multi-sided platform, or Marketplace, it is a big product category. We can even call out many well-known players such as Grab, Airbnb, Amazon, Alibaba, Shoppee, etc. Since the success of these platforms, researchers did place an eye on this phenomenal business model. Although there are logics behind the scene, we could only point out some key considerations of a platfom business in this article.
There are 4 main players on a platform business: Demand-side, Supply-side, Platform provider and Platform sponsor.
2 core values of a platform business: search cost reduction and transactional cost reduction.
Idea of platform business model
In many ways, if you don’t bundle so many services inside your platform, online platform business is the perfect business model. Since they just facilitate transactions between suppliers and customers rather than take possession of or full responsibility for products or services, the business may have very low-cost structures with very high gross margins.
In our research, there are two perspectives about platform business: technology-oriented and market-oriented.
Roles in platform business model
Platform business model may have many players, basically there are 4 main players:
First, Demand-side platform users, or in most case is end-users. End-users transact with supply-side users under the support of platform provider.
Second, Supply-side platform users provide services/products to end-users (or end-customers) with the support of platform provider.
Third, Platform provider: it’s you, who supports user as the contact point for platform’s components, rules and platform’s architecture.
Last but not least, Platform sponsor: it’s also you, who executes rules and responsibility for deciding who can join into platform and to develop the technology for platform.
There are 2 core values of a platform business: searching costs reduction and transactional cost reduction.
Search cost reduction
The first value is “search cost reduction” among its multiple users before any transaction. Basically, The methodology to reduce search cost can be presented in different forms. It could be the well collection of information about product or service, or a suggestion system from Amazon to their customer base on their historical transactions, or base on the behavior of similar users acting on the same page of current user.
The complication of search function is various and should be determined basing on characteristics of sides. In that, the search tool may allow two sides search each other, but that requires sides (users) input basic information into searchable database.
Another approach is that multi-sides platform allow only one side doing search. The required input information in this context cannot be simple, the salient example is Amazon or eBay, sellers need to be qualified in order to sell their products. Therefore, the service providers (or sellers) need to go through series of question and being verified from platform owner. it can be appeared as comments, ratings and reviews, which can be used as the best reference source from the opposite side. The system which support for comments, ratings and reviews is called online reputation system (this was mentioned in another article).
Goods or services information of could be the valuable data for platform owner to attract their target audience. Hence, platform owner has to engineer their system to facilitate the information inputted from sides.
Transactional cost reduction
“Transactional cost reduction” is the second core value of a multi-sides platform. The transactional cost is the cost that sides have to be suffered when each transaction happens.
Consider before you build
There some traps that a platform might face:
- Growing too fast too early.
- Fostering insufficient trust and safety.
- Resorting to sticks rather than carrots to deter user disintermediation.
- Regulatory risk.
The market grows too fast is sometimes unnecessary or even dangerous for the platform business. The key to success is when your business model can generate value and fit to the market.
The first consideration is that executives should engineer their business model to fit to the market before they can grow, changing the business model in the middle of its growth might kill the entire ecosystem.
The second consideration is that pioneer may not be the winner. As the latter mover, entrepreneur can learn from mistake of others. Therefore, the winning marketplace is the first one to figure out how to enable mutually beneficial transactions between suppliers and buyers, not the first one out of the gate.
The last consideration about growing too fast is the “Wrong type of growth”. As the platform (market place) choose wrong target customers (sides or the way they join to the market) to dig in, they will then face the problem that some type of customers will dominate the others and prevent the platform from growing.
Because the platform is the facilitator for the transaction between sellers and buyers, they don’t directly control the quality of product or service but the sellers. Facing with how to make sides (customers/sellers) trust the platform is somehow hard to hit, a rate and review system (or reputation system) is needed but not enough. Because of that, there are some ways to help entrepreneur ensure the trust in the platform:
The first suggestion is the guarantee for stake holders to make transaction, such as the regulation related to transaction or more specific, the guarantee of fail transaction or property damage.
The second suggestion is screening member. Because customers may likely to make transaction with the trust supplier. Your platform should assure that suppliers are qualified and ready.
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