Platform business models (PBMs) are on the rise. Although the term 'PBM' may sound innovative, it doesn't do anything new: a platform business facilitates interactions — or, as one of our customers says, it "creates happy matches." If you think about it, a brick-and-mortar shopping mall does the exact same thing — it gets paid by retailers that want to connect with shoppers. The benefit of a digital platform is that it's not limited by time and place. So, the question on many companies' minds is, Should we become a platform business?
Running a platform business seems to come with the necessary benefits. You get to 'outsource' many activities to platform participants and have to make fewer investments. As a retail platform like Amazon shows, your sellers will complete a lot of traditional retail work (such as setting prices and creating content). Moreover, a fully digital platform doesn't involve messy 'analog' processes like fulfillment and shipping — sellers will handle these, too.
That means your business can grow much faster. For example, you can add more categories or cities. And growth is essential to a platform. More customers will attract more sellers. That, in turn, will expand your offer and make prices more competitive. So, the snowball effect will kick in: you can accelerate business growth.
But it's not as easy as it sounds. For to reap such benefits, you'll have to tackle a few challenges.
To grow and maintain a happy customer base, sellers should only offer high-quality products and services through your platform. This is crucial for your platform’s success. After all, customers will associate the quality level of their purchase with your platform rather than the individual seller, and they'll hold you responsible for it (only trading platforms such as eBay and Marktplaats can avoid this pitfall).
But as you expand, it will also be increasingly difficult to guarantee quality. You'll require robust processes and automation to check tens of thousands of offers and prices and track the performance of thousands of sellers. In our experience, businesses severely underestimate the tasks involved — which results in a lot of additional work (and apologizing!) during the start-up phase.
Not every platform participant is there to play by the rules. Some may try to take advantage of your procedures and systems. Retail sellers might sell but fail to ship. Customers could claim they haven't received (expensive!) items while they have.
In such cases, you'll need to trace (and prove!) what happened, so your processes should be up to par. Otherwise, you will have many unhappy players and spend significant amounts on compensating them because you don’t know whom to believe.
Before your business becomes a platform business, you’re in a situation where everyone works for 'the customer:' the individual who buys your products or services. But now, there's another type of 'customer' you need to serve: the seller.
Often, these two groups have conflicting goals, which results in complex — and sometimes polarizing — internal discussions. Sellers may find your return policy too flexible, while customers love it. And while strict onboarding procedures protect customers from bad players, they also limit your ability to scale up fast by adding more sellers.
You will have to navigate such conflicting goals. Failing to do so will turn them into conflicts between teams that each fight for their customer.
Up until now, many processes (such as content management or product sales analysis) have only been used by your employees. Most internal processes are less polished than your customer facing processes, but that's never been a problem — your employees are professionals and have learned to handle internal process flaws.
On a platform, though, sellers will need access to these processes. So, not only will you have to build suitable systems and interfaces (a major task), but you will also need to substantially improve the quality of these processes to ensure they are robust enough to service hundreds or thousands of sellers. While a retailer might tolerate a small percentage of lost items in its warehouse (they will eventually turn up), a seller most certainly won’t accept it if their products have gone missing!
Successful platforms have a lot of power. As a result, regulators (such as the EU) increasingly treat them as public utilities, demanding a fair and level playing field for all participants.
Creating this level playing field, though, has large implications for platform businesses. Typically, they have much better data than their sellers (examples include aggregate price levels or top sellers), which they can use to steer their business. Regulatory pressure demands that they either refrain from using such information (bad for business!) or make this data available to all sellers (a lot of complex work!).
That depends. Transforming your business into a platform may come with significant benefits — but only if you tackle the above challenges first!