Traditional versus Platform
A traditional company usually owns the most or the entire production chain, from gathering of raw materials, refining them, producing the goods, storing the goods, to selling them to distributors or end consumers.
Examples include car manufacturers like BMW and Toyota, or fashion brands like Nike and Adidas.
A platform company, on the other hand, facilitate exchanges between multiple suppliers producing or seller the goods and multiple buyers purchasing the products.
Examples of platform companies include e-commerce platforms like Amazon and Alibaba, or food delivery platforms like FoodPanda and Deliveroo. Interestingly, platform companies are also prevalent in the brick-and-mortar sector, for example, supermarkets and department stores.
Pros and Cons of Platforms
Benefits
- Asset light – This allows the business model to scale much faster than a traditional asset heavy company. For example, a retail company holding inventory in its warehouse will need to build more warehouses in order to expand its business. On the other hand, there is no constraint on the platform company as inventory is held by its sellers and there is no need for a physical warehouse.
- Larger audience base – As platforms cater to a larger variety of sellers and products, they are able to attract a wider segment of customers. For example, a food delivery company will be able to attract customers who are interested in a wide range of cuisines as compared to a restaurant offering only Indian food.
Downsides
- Low quality control – As the platform is made up of third party sellers, it is difficult to control the quality of products and service level agreements such as delivery and pickup timings and customer service.
- Less customer loyalty – Customers are inherently loyal to brands. If a large seller or brand leaves the platform, customers are likely to leave the platform unless there is sufficient incentive to remain. For example, if Nike chooses to leave Amazon, loyal Nike fans may decide to stop shopping for sneakers on Amazon entirely.
Supply and Demand
In order for a platform to be successful, there needs to be a healthy mix of demand and supply in the ecosystem. As this increases, the ecosystem becomes more valuable grows.
Demand of Platform
The demand side of the platform is commonly associated with the numbers of customers or buyers in the ecosystem. This involves attracting more and a wider variety of customers across demographics and interests, and retaining them in the ecosystem.
Methods used to attract new customers include advertising on traditional and digital marketing platforms like television ads, social media, and social influencers. In addition to this, holding thematic campaigns on certain categories or events may help to attract more customers from a certain segment. For example, having a campaign focused on makeup will definitely attract more beauty lovers and female customers to the platform.
On the retention front, loyalty programs and ongoing promotions can help to retain customers on the platform. Offering other forms of entertainment such as live streaming and gamification, as well as tie-ups with other partners, can also help improve loyalty to the platform.
Supply of Platform
The supply side of the platform is related to the number of sellers or merchants and variety of assortment in the platform. This involves attracting sellers across a wide range of categories and price points.
Firstly, there should be a healthy supply of sellers, ranging from a wide variety of categories to sellers from different segments ranging from large brands such as Apple, Samsung, McDonald’s, L’Oreal to mid-tier brands and homegrown brands, and finally unbranded products. This will ensure that it caters to a wide range of customers.
Next, there should be a wide range of assortment from each seller. For example, assortment should include flagship products, new arrivals, popular products, and even long-tail products, in order to attract a wider customer base. Having popular and flagship products on the platform is able to attract the initial attention of customers, with the effect of them browsing other products on the platform, thereby increasing the value of the ecosystem.
Matchmaking of Supply and Demand
Lastly, a platform is only as useful as how it is able to match supply and demand. If customers are not able to view products they are interested in quickly, it diminishes the value of the platform.Easy categorization of products is one way to solve it. In e-commerce platforms or supermarkets, products are categorized and arranged by category pages (in e-commerce) or aisles (in supermarkets).
In technology companies, algorithms are also used to display personalized search results for customers. This could be based on search preferences, demographics, location, past purchases, purchases from similar customers, etc.
Furthermore, in some platforms, fulfillment is a third part of the transaction. For example, riders are needed to fulfill food deliveries and purchases on e-commerce platforms. Without an efficient way to match these riders to transactions, customers may get frustrated over long delivery times and leave the platform totally.
Creating Value through the Network Effect
Platform companies create a network effect through ecosystems. When the number of suppliers or sellers increase, there will be an increase in demand from customers. When the number of customers increase, this will in turn attract more supply, and the cycle continues.
Chan Jing Wei 