Investing In A Platform: The Model That Scales

This article originally appeared in Forbes on August 10th, 2017:  View Here

A cursory examination of the S&P 500 leaderboard reveals that the shift from asset-heavy to digital-centric business models is gaining steam. This is not just a transition from selling manufactured goods and services to bits and bytes, but rather a change in how organizations drive value for customers. Corporations have capitalized on innovations from machine learning to smartphones to cloud computing and delivered the results to their customers via a relatively new business model: the platform.

While previously a technology company’s value was equivalent to the value of its product, a platform business encompasses the value of the sum of its applications, network and openness to third parties.

While a product is a good or service, a platform is a gateway for access. If a hotel room is a product, then Airbnb is the platform. Because platform companies are asset light, they’re flexible and scalable by nature. It’s much easier and cheaper to add code to Airbnb to allow users to book rooms in a new city than it is to evaluate and purchase the equivalent number of hotel rooms. This asset-light model makes platforms attractive to investors who see the growth opportunity and to business customers who value a partner that can scale and adapt with them.

A prominent B2B example is Salesforce, which provides a CRM platform and allows the layering of third-party applications with a network of business partners. Salesforce customers not only get a best-in-class CRM; they also have the option to instantly access applications from hundreds of Salesforce partners on the AppExchange.

Digital Platforms

Businesses in a wide array of industries can incorporate elements of the platform model, but the majority of innovation has come from the world of technology. Consider the top five most valuable companies in the world (Alphabet, Apple, Microsoft, Amazon and Facebook at the time of writing). Every one is a technology platform.

These leaders have capitalized on the scalability the platform model provides. While traditional software is always a product or suite of tools – think Microsoft Office for creating documents or Adobe Photoshop for editing images – platforms tie multiple products together at a single point of access to drive greater value. As these products are connected across users and customer segments via a platform, their value begins to grow exponentially due to a phenomenon called the network effect.

The Network Effect

The network effect posits that the value of an ecosystem grows with increased use. The internet is a classic example. Initially, it was mainly useful for a few researchers to store and exchange data. However, as usage grew over time, the number of websites and users grew as well. This attracted more users, who added more value, and so it continues.

In a network, as more data points become referenceable, more users can ping them for more information, increasing participation, user growth and adding even more data points to the ecosystem’s set, thus propagating a virtuous circle.

Platforms benefit from the network effect in myriad ways. A buzzing ecosystem of users attracts development talent and business partners eager to access the network. This leads to a healthy app layer on top of the base platform, where ideas and tools beyond the scope of the original platform begin to emerge.

A second way platforms benefit from the network effect is via integrations with other platforms. This is different than an app in that it’s not a separate tool accessed from the platform, but rather additional data. To return to the Salesforce example, its integrations with Marketo, HubSpot and other marketing automation platforms allow for a vastly expanded commercial database because the data set now represents sales and marketing. This adds value and drives use in both departments, thus adding more data and, if applied correctly, delivering better results. The same effect can be observed in other departments and across subsidiaries as their users and data are brought onto a platform.

Thus, in addition to offering flexibility and scalability, platforms become more useful the more they’re used. The potential business benefits for customers are profound.

The Internal Business Case For The Platform

Most enterprise or high-growth businesses already work with platform companies like Salesforce for CRM or Amazon for cloud storage. In most cases, this is as much a function of these companies being market leaders as a conscious decision to buy a platform. However, any organization with a digital transformation initiative or plans to scale should put platforms at the top of the list when purchasing technology.

Global business is inherently unpredictable, so it’s key to have a solid but versatile foundation on which to conduct it. This is a major selling point of platforms. Take the CRM example above. If you’re using a CRM, or potentially could at some point down the road, that should be baked into any decision about tangential technologies since they can all be connected on a single platform.

If the legal or finance department is shopping for a solution, it should be able to integrate with the CRM and even offer complementary applications that can be useful for not just legal and finance, but also sales. This creates an internal flywheel where a company is leveraging not only the network effects enabled by platforms, but also the data and processes created internally.

Platforms have a major role to play in how businesses operate in the future. Just like the introduction of machines and the first wave of computing, early adopters stand to gain while laggards will suffer under legacy thinking and technology. The more people and processes that can be brought online on one network and on one platform, the greater the business benefits will be.