The Business Model Canvas invented by Alexander Osterwalder is a popular tool for many who want to develop and communicate business model ideas. Since I have covered the Platform Business Model extensively over the last few weeks, I thought why not use this tool to summarise what we have covered in this format that many people know.
I will link back to my previous articles where you can find more details on what you are interested in.
So, here we go!
The Platform Business Model Canvas
Let’s go through the canvas from left to right.
Many types of platform have two sides. And for many of them, you can distinguish nicely between the supply and the demand side. But there are of course other cases, such as social media platform and other user-generated content platforms.
- For many platform types, we will have the supply side in this box:
- For Uber, these are the drivers.
- For Airbnb, it’s the hosts.
- On eBay, it’s the sellers.
- And so on.
- For other platforms, the key partners can be the demand side:
- Expedia and
- Yelp (normal users that pass on ratings) are examples that I have previously covered.
- For platforms where user-generated content is essential, the key partners are content creators:
- Yelp (mega contributors)
- Wikipedia, Quora, Medium, etc
- Different platforms have their own ways of incentivising these key users/partners (and sometimes it is just status gain)
- Social media is different again
- Here the key “partners” are the users.
- On some platforms, like Twitter, VIPs have a special status.
- Providers of leading-edge, proprietary (and ideally exclusively provided) functionality may in some fall into the category of key partners (e.g. Paypal was such a case for Ebay in the early day which led Ebay to acquire Paypal).
- Cloud providers (and many other tech API providers) are not key partners. These are easy-to-replace commodities (unlike a few years ago).
First, decide on your strategy as per point (8) in our complete guide to the platform business model. You can still tweak or even pivot. But it will set the direction. Irrespective of which 5 presented strategies you choose, the below are your key activities:
- Enhance positive network effects and
- Eliminate (or reduce) negative network effects
- Constantly engage the participants of your platform (see point 10 in the complete guide)
- Define/refine the value proposition of your platform (more below)
- In the early days apply the most fitting of the 8 tactics to get to critical mass
- Analyse captured data to constantly improve the points above
Your choice of strategy will decide on which side (demand or supply) most of your initial efforts will be focussed on. Even within the same industry, you can focus on different sides. And this will lead to a totally different type of platform. Compare Expedia to Airbnb. On a macro level, both are in the hospitality and lodging industry. but they have very little in common.
The master resource of your platform are its network effects. It is the resource that needs to be built and the nurtured.
- Same-side and cross-side network effects among demand and supply side.
- Your platforms algorithms.
- The data you are capturing and the insight you are gaining from it.
- Your ability to capture and analyse the right data.
- Actively involved 3rd parties/providers.
- Design decisions of your platform to open it to value-adding 3rd party components.
Your platform needs to create value for all sides of your platform.
Uber, Airbnb, Ebay enable (additional) income opportunities for their supply side (drivers, hosts, sellers). Many providers (Freelancer, Uber, Airbnb, Ebay) couldn’t participate in their respective industry as easily if they had to start up their own company. (For example, here in Australia taxi drivers would be up for a very high taxi plate fee – around $300,000 -, for no good reasons (pdf) which they have to pay down over the following decades.) Other costs are also significantly lower than starting a comparable standalone business and thus participation comes at low risk (but also lower exit/switching barriers).
Value proposition examples for the supply side:
- Additional income
- Significantly lower start-up costs, efforts, time than comparable standalone-business
- Very low upfront investment
- Participation in markets that would otherwise be unreachable
- Significantly lower customer acquisition cost (CAC)
- Reduction of advertising/brand awareness costs
- Status gains (e.g. social media platforms contributors)
- Insurance coverage by platform
Value proposition examples for demand side:
- Large amounts of choice
- Reduced search efforts
- Lower prices
- Established rating system that increases transparency
- Easy transactions (payments, order fulfilment, etc)
- Safety of real-world services through ID checks (more a necessity than a value proposition)
Many of the above fall into what economists call reduction of search costs and transaction costs.
Platform businesses need to see both the supply and the demand side as customers and plan out how to manage the relationships to both. The probably most important thing to say about the customer relationship though is that the platform needs to own it. And it has to not lose it to anyone else. There will be many attempts of adjacent platforms, API /plugin providers or even partners to take away your customers and there will be cases where the participants will try to circumvent platform transaction fees.
Some types of platform are particularly prone to this risk. Service platforms (e.g. Freelancer, Taskrabbit, Airtaskr, Fiverr and many others) connect people to each other that communicate with each other extensively to get the service provided. This can have significant impacts. In 2014 Facebook has changed their rules in that businesses could not reach all of their followers any longer without paying for it. Many companies had amassed large followerships through paid campaigns which they could reach without further payments. When Facebook changed the rules, they could only reach a fraction of their followers and now had to repeatedly pay to push content out to them.
Uber doesn’t necessarily like their drivers to build large communities as these always bear the risk of unionisation.
And Steve Jobs fought Adobe Flash player on the iPhone to avoid a backdoor to multihoming outside the Apple platform (thus reducing switching costs for Apple product owners and losing valuable user data to Adobe).
Apart from the consideration of owning the relationship, here are a few more things to take into account.
Relevant for both sides:
- Active monitoring and managing of negative network effects, adjustment of rules to reduce bad behaviours
- General transparency (e.g. around ads, privacy rules, etc)
- Transparency around the rating and review system
- Customer support: should be mostly automated but not appear arms-length
- Community of users (in some cases)
Especially for supply side:
- Responsiveness to issues (the platform may be their main income generator, thus response times matter)
- Guidance through the sign-up process to enhance network effects
- For development platforms: help systems, support forums, etc
- In some cases direct contact with the platform only (e.g. Uber)
To manage your customer relationships look also beyond them.
- Manage the social, communal, economic and environmental footprint of your platform
- Manage the platform’s image
- Monitor media landscape and sentiment
- Review transactions that failed badly and react quickly to avoid any viral spread of it
- Liaise with cities, communities, regulators as required
The cost of customer acquisition(CAC) is for many new platforms the big barrier (and rendering the customer’s lifetime value positive).
Channels for the initial awareness and customer acquisition can be:
- Free media coverage based on the novelty factor
- App stores (obtain high ratings in app stores, get featured)
- Social media
- Digital or traditional ad campaigns
- Direct campaigns, e.g. vouchers
- Celeb endorsements
- Freemium pricing model to get entry users to help spread the word
- Be a useful one-sided tool that gets spread
- Use user’s contact lists (obtain permission) to bring more people in
Channels for the daily transactions:
- Transactions should be managed fully automatedly through an app
- Through web pages (first contact and signup is often through the web pages)
- Emails & notifications: engage, stimulate participation; reinvigorate/recover (special offers, reminders, …)
Both the supply and the demand side are your customers. Yes, it appears to be a contradiction that they are key partners and customers. On Uber, the drivers are key partners. The passengers are the customers. But it does not hurt to see the drivers as customers as well.
I would recommend to add all sides of your platform to the list of customers. This will help to remind yourself that some are in a double role, being partners and customers (a good reminder even for the Ex-CEO Uber). You could argue that only who pays is the customer. But then you would also not see the users of social media platforms as customers (but only the advertisers). It’s your choice.
If you have more than two sides (=distinct types of participants), they too are customers. Within each side, there can further be segments. Here are a number of examples.
- Demand side
- Supply side
- Any other side (=distinct types of participants)
User generated content platforms (e.g. Wikipedia, Medium, Quora, etc) have
- Creators (~1% of participants) who create content from scratch (or curate)
- Editors (~9%) that edit/amend/comment on other’s entries
- Readers (~90%) who read only
- Full-time drivers
- Part-time drivers
- Casual vs regular vs business passengers
- Offering segments:
- Price sensitive,
- accessibility and
- car pool
In general, though the ride-hailing industry is not very much segmented which is why it is assumed that the winner will take all (or most) of the market. In more clearly segmented markets more than one winner can possibly emerge.
The first step in becoming a (or “the”) winner your platform needs to get to critical mass (aka overcoming the chicken-and-egg problem). The network effects of the different customer segments (especially supply and demand side) are critical interactions to get right on this journey (or race).
For many online platforms, the biggest cost driver are customer acquisition costs (CAC). This is often compounded by a high weighted cost of capital (WACC). And if critical mass is not reached, switching barriers are low and fierce competition present, this can be further compounded by high churn and thus low customer lifetime values (LTV).
Some typical cost elements are:
- CAC: Cost of customer acquisition (free vouchers, one-off subsidies, digital advertising, etc)
- WACC: Weighted average cost of capital (can be ~25% for start-ups)
- Ongoing subsidies may be required to keep the harder-to-get side onboard and they erode margins
- Development of new features, ongoing fine-tuning of algorithms, etc
- Expansion from the initial niche into other locations or adjacent niches
- Legal, insurance: provision of legal frameworks and bulk insurances
- Infrastructure costs, computing power, bandwidth, customer support, etc
- And other (lobbying, regulatory compliance, etc)
Note, that the platform doesn’t pay for the assets and inventories involved in the transactions of the platform. This in itself is a huge saving of upfront capex, ongoing sourcing costs and lower risk profiles.
These are not only hurdles for start-ups but also for innovators within established firms who want to add a platform related to their core business. On the other hand, if your platform idea involves your current customers (whose data you are hopefully already collecting through loyalty programs or similar), then your CAC may be very low. Your WACC might be also low (10-13%) and many of the other costs may also be much lower as you can leverage already existing assets.
On the surface, revenues depend on your monetisation model. Prof Parker presents 4 ways to monetise:
- Charging a transaction fee
- Charging for access
- Charging for enhanced access
- Charging for enhanced curation
Any revenues need to be enabled by the value you are creating for the participants. Without sufficient value creation, your platform will be unable to extract sufficient value to be profitable.
Value creation for the supply side
Have a look at the value proposition for the supply side. A lot of those factors are value created or at least enabled by the platform. This leads to significantly lower unit costs for the supply side than a comparable stand-alone business would be able to achieve. But the platform has to bring the unit cost down to below comparable offerings in order to be able to extract a portion of these difference for themselves.
Value creation for the demand side
The platform also creates value for the demand side in terms of reducing their effort for search, offering more convenience, choice etc. Again, check out the value proposition for the demand side. The more value the platform creates for the demand side, the better its chances to extract some of that value for themselves (=revenues)
Some of these considerations are very complex and have sparked public debate. E.g. do platforms avoid taxes that comparable businesses pay (and extract some of this for themselves)? Or are those taxes outdated, poorly designed and not appropriate for the current economic circumstances? A good thing that platforms and trends like the gig-economy may do is to bring these discussions back on the table.
When talking about revenues it is important to not just look at a transaction level. It is essential to look at the macro view. Where does your platform generate economic value-add? I have elaborated on this. It is a good idea to ask this question early.
Platform Business Model Canvas
So, now finally we can put all of the above into the platform business model canvas.
So, there is a little challenge for you. Compile the business model canvas for some of the businesses that you know. Or choose 2-3 of the companies that I have covered in my articles on the platform business model: Uber, Yelp, OpenTable, Ebay, Facebook.