Platform Business Models – Are Investments Justified?

Can traditional process-based firms do asset light business? Is there a possibility to get into platform model of business as a replacement or an augmentation to existing source of revenue without increasing the operating cost too much?

More than 60% of the Fortune 500 companies employ platform-based business models for their operations (most of them are consumer focused software system based B2C organizations) and the trend has quickly shifted to B2B companies in the recent past who wish to be closer to their final consumers. The issue is of commercialization of the innovation model to generate consistent income from the same. C-suite management needs to be convinced that the investment will make commercial sense even though it might require an initial buy-in.

Virtuous cycle of traditional firms getting replaced with new value – based models

Almost every global manufacturing company has been stuck in the virtuous cycle of reducing their production cost through producing and selling more to achieve economies of scale. There is nothing inherently wrong in the process but when the same is compared to a company which is not trying to achieve economies of scale in production, without excess or at times zero inventory and yet is a direct competitor, things can get tricky immediately for the strategy team to plan and react.

The shift interestingly is not restricted to just the technology companies. For example, a famous Japanese agriculture machinery (B2B) company has developed a platform which aims to onboard the end-customer to provide a transparency on the demand structure. The customers (farmers in this case) can connect directly with the company or the contractors/ custom hiring centers (buyer/ decision makers in this case, who own and rent out the machinery) to check if there is an availability of machines and what would be the price to pay

The platform does not help the company make sales but is instrumental in providing free value in terms of weather forecast, seeds and fertilizers that are best suited for his farm, financing support etc. A brand perception is propagated to the consumer in cases, they might decide to push the contractors to go for the company’s product.

Automotive OEMs are introducing Mobility as a Service (MaaS) through platforms even though there is a chance of cannibalizing their own product sales business as they realize the changing consumer demands.

Need for Subsidization against Monetization of the Model

The end-user has been so accustomed to not pay extra (in fact get discounts therein) for the service offering through various platforms so that it is almost impossible to charge directly for added value. In other words, the service must be subsidized to them to get their loyalty. On the other side is the risk of the platform not being able to onboard enough users to create meaningful interactions.

Take for example the case of the agricultural machinery company platform. If enough farmers are not onboarded, leasing agencies will not be interested in catering to the same in addition to their traditional channel of reaching customers and vice versa.

A mechanism must be developed to monetize the system to get back the investment needed to establish the system and subsidize the consumers and that forms the crux of the pitch to the management of getting an early buy – in, whether it is in terms of money, people, or infrastructure.

It can be and has been done successfully. At times, it has been transaction-based model at others, advertisements, up and/ or cross selling, dynamic pricing etc. Companies have recovered investments in 18-24 months after implementation and anything has happened after that has been done with almost zero marginal cost but continued revenue generation, with the added element of brand building for the company and high cost of switching for the users.