If you’re looking for the most viable business model the next decade and beyond, and it’s the platform model. Historically, these platform businesses have been created by venture backed startups or dominant tech companies. But that’s quickly changing as large traditional enteprises start to harness their advantages in creating new platform busineses.
Today’s traditional enterprises have a unique shot at building or acquiring these ventures, but for a platform to achieve winner-take-all status in its industry, it has to be designed properly. The mechanisms of Platform Design are hard to understand when looking at large, established platforms, but they are foundational to a platform’s success.
You might ask, how are new platforms conceptualized? Which third parties should get involved, and at what stage? How can you ensure buy-in among the executive team and board? And whether you’re spinning one off from your existing enterprise or building one from scratch, how can you set your new platform up for success?
At Applico, we answer all of the above through Platform Design, which is a process for helping enterprises validate and scale platforms that compete and win. It entails proving the core transaction, building the business case, and figuring out the right path to scale and profitability.
When it comes down to it, platforms are built to facilitate a core transaction. Defining that transaction and proving that users actually want to transact with each other are the first tasks of platform-building.
Proving the core transaction involves some initial manual prototyping. That is, manually doing the hard work of actually talking to people and getting them to connect so they can start exchanging value, for example, by exchanging money for a product or service.
This early-stage process is unrefined, clunky, experimental, and definitely not scalable. It comes before writing any code for a fancy app or website. It means sending emails and making phone calls to validate the business model and interest from producers and consumers, which are the two main types of users around which you will eventually spark network growth.
All these manual prototypes should be executed by a small team on a relatively low budget and within a small time frame, in as little as 2 weeks. Cheap, everyday apps and SaaS tools like mobile app templates and simple CRMs will also come in handy, depending on the type of platform being considered.
One of the most important pieces of information this process will yield is what your consumers and producers need and expect in order to keep transacting with each other within the context of your provisional platform.
If after a few months of prototyping the core transaction in this manner, it’s hard to get even a handful of transactions going and the experience you’re facilitating is not sticky enough to keep users coming back, you have your answer. The idea might not be viable in the long run. But if you do get a good number of transactions going, and there is a high level of user interest around the premise even when the process is still clunky, you have the seed of a business model that could scale once product development, technology and marketing are put behind it.
The focus of Platform Design is to prove the core transaction first. Then and only then, you can start planning how to scale the business model and the technology product behind it.
Some of the key market data you’ll harvest from the manual prototypes include:
There’s no way to shortcut the process. The manual prototypes are the shortcut to figuring out whether your nascent platform idea actually has legs before you sink tons of capital and other resources into it.
Once you have your insights from prototyping and testing the core transaction, you can combine that data with your own market research — such as competitive landscape analyses, user surveys, and focus group data. We also look at how the core business can accelerate the growth of the new platform entity via its existing assets and advantages and by acquiring or partnering with tech startups.
For example, the existing core business will likely have lots of detailed customer data, as well as an established brand, industry connections with suppliers, and the capital needed for innovation efforts. So do many of your potential tech partners. It is worth opening up the conversation with them to see what “digital” or “analog” supply and demand (or pools of potential producers and consumers they’re able to source either online or offline), big data, brand capital, proprietary technologies, value adds, or other assets they have that could, when combined with your own, help you get a platform business to scale within a 2-3 year timeframe.
This Platform Design process puts your leadership in a commanding position to evaluate your potential platform opportunities and puts real market data behind the decision to pursue it. Once you have solidified and validated the core transaction for this new platform business, you can confidently invest in building out the technology product to scale it or in considering acquisitions of startups that could accelerate the platform’s timeline. For examples, see the cases of Ford with a development platform for the connected car, or Klöckner & Co SE with a B2B marketplace.
While all winning platforms will involve building something new, scaling a new platform business can often be accelerated via partnerships and acquisitions.
Building a new platform entirely from scratch can be a riskier road to take, and a much longer one. But the potential benefit is lower overall operational and customer acquisition costs. In industries where you are truly first to market, this can be the right approach, but even then, there are often technology tools that may be worth acquiring to accelerate the platform’s ability to scale.
Other approaches are to “build and buy” or “build and invest.” This path involves validating the core transaction in Platform Design with a view towards strategically investing in or acquiring the technologies that will really help it take off. A big plus of going these routes is that your investment or acquisition could come with experienced development, ops, and product management personnel who reduce the risk early on and accelerate the time to market.
Another potential path includes exploring partnerships and joint ventures. As mentioned before, you could partner with an existing tech startup or incumbent player — no matter whether it’s a platform or a linear business — whose assets perfectly complement your own. Or, you could build an alliance with other enterprises operating within your own verticals, which may include some of your traditional competitors. Together, you could acquire or invest in the tech to build a stronger platform business. Depending on the level of fragmentation, this more collaborative approach with traditional large competitors may be necessary.
After years of helping enterprise businesses create successful platforms, we’ve seen a general pattern emerge.
In roughly 3 months, as mentioned before, you should be able to validate the core transaction. This amount of time is just enough to see if you have a winning platform idea that hits a nerve with users and will, under the right conditions, attract them organically.
Assuming you’ve proven out a strong core transaction, you’ll then engage in the process of gathering market data, assessing enterprise assets, exploring conversations with third parties, and digging into the possibilities with your executive team and the board. There are lots of moving parts here, but the more data you gather, the more you have on which to form solid cost-benefit pictures of the build, buy, partner, or invest routes.
A critical part of figuring out the right path is understanding what your board wants, in terms of a timeline for breaking even and scale. You can start to have conversations about what strategies are best for getting the new platform up to and beyond that point. Building in-house comes with less certainty but happens in a more-controlled environment. Seeking a significant stake in an existing dominant or fast-growing platform business might provide a much clearer window on profitability.
The right strategy for your company will depend on validating the strength of the opportunity and how well that platform vision meets with your key stakeholders’ risk tolerance.
The goal is that at the end of 2-3 years you should own outright, or have spun-off, a platform business that’s on its way to critical mass. The venture may not yet be profitable at this point, but there should at a minimum be a strong sense of when it will be and how you’ll get there.
Ultimately, the vast upside, defensibility, and unbeatable enterprise assets you can gain from your own winner-take-all platform are worth carving out the path and staying the course.
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