Transformation #4 Of 4: Digital Platform

This type of transformation creates a business that delivers value for customers through pure digital products or services.  This strategy is the gold mine of the Digital Age because it delivers high gross margins at scale.  It can do that because the cost to ‘deploy’ 1s and 0s over the Internet is the price of the IT infrastructure.  There are no costs related to manufacturing, warehousing, or distribution, so it is easy to get a digital solution into the hands of the customer.  Because of the compounding power of (a) focusing on a single function and (b) network effects (see definition below), there is often little room for more than a few large players to address a particular function.  That said, there are a multitude of functions in the world still to be delivered via digital platforms. In fact, any organization can pursue a digital platform transformation by taking internally developed software assets directly to the market. (Figure 26)

In this strategy, the organization creates digital products and services that are primarily delivered through the web or mobile interfaces, and increasingly, through chatbots, SMS, and other user interfaces.  Organizations need to identify early customers and invest in externalizing the platform for outside consumption. In some business models, it requires developing a customer-facing user experience, but it could also require externalizing internal APIs to allow outside businesses to leverage your platform.

The platform business model underlies the success of many of today’s most powerfully disruptive organizations.  It deserves more of a description since it is the most unique of the digital strategies.

In a traditional business model, an organization designs a product or service.  The product is manufactured and offered for sale, or a system is put in place to deliver the service.  A customer purchases the product or service.  It involves a straightforward linear value chain, sometimes referred to as pipeline businesses.

A platform is a business based on providing a place (platform) that enables matches between producers and consumers.  A platform vendor does not own or control anything, it simply enables value-creating interactions between external producers and consumers. It provides an open infrastructure for interactions and sets governance conditions for them. 

Platform businesses create the means of connection between any two entities, not just producers and consumers. For example, platform businesses today connect:

• Business to Consumer (B2C)
• Business to Business (B2B)
• Business to Employee (B2E)
• Business to Government (B2G)
• Government to Business (G2B)
• Government to Consumer (G2C)
• Consumer to Consumer (C2C)
• User to User (U2U)

Platforms must be able to support large numbers of users who can interact in a variety of ways.  A Pure Digital Platform strategy can acquire customers directly, through channel partners and affiliates, and even through other customers because a well-developed digital platform has customer stickiness intrinsically built into the product or service. 

The design of a platform begins with one kind of interaction that is at the core of the platform’s value-creation mission.  As a platform grows it often finds ways to expand beyond the core interaction.  New kinds of interactions are layered on top of the core to attract new participants.  A platform needs to be thoughtfully designed to make interactions easy for large numbers of users.  It must also be designed to be flexible and adaptable since platform businesses often find that the users themselves will find new ways to create value on the platform.

The underlying early Digital Age technologies made platform-based businesses possible, and platform-based businesses drove the evolution of the capabilities included in the technologies as they matured.  They (the now mature early technologies) have been able to handle even the largest most complex requirements from the largest most complex businesses for more than a decade now.

Education, healthcare, energy, finance, insurance, and government are industries ripe to be supported by the platform business model and technologies. Many of the barriers put in place by traditional organizations in these industries needed a tipping point—a crisis—to break them down.  A worldwide pandemic may have provided that tipping point.

Pure Digital Platform Transformation often manifests itself in business models where the service is free to the user while paid for by advertisers, or freemium models where the service is free until the user is hooked on the product or service before being asked to pay for additional services. The longer the service can remain free to the end-user, the faster the number of active users is likely to grow.

These are common revenue models for pure digital platforms:

• Advertising revenue model where the digital capabilities and content are provided to users for free, and the organization monetizes the users eyeballs by displaying ads throughout their digital session.
• Freemium revenue model that combines the terms “free” and “premium” to create the term “freemium.”  In this revenue model, a basic set of capabilities and content are provided to the user for free, and the user is offered premium capabilities and content for a fee.
• Affiliate marketing revenue model that pays the organization a commission every time one of their users performs a transaction with a partner.
• Subscription revenue model where the customer pays a recurring fee for access to the digital platform’s capabilities and content.
• Data monetization revenue model where the organization collects data on the user and sells it to partners.
• Asset sharing model allows organizations or consumers to share the cost of expensive assets, creating additional value across existing resources. Famous examples include Zipcar and Airbnb, but this model’s potential B2B applications should not be overlooked – manufacturing start-up DOZR, for instance, enables contractors to rent industrial equipment from other construction organizations that are not currently using it.

Organizations that want to pursue this option must have the ability to lead their industry in customer retention and referrals before developing an optimal channel strategy.  This is important because it creates a stable foundation of customers to help create traction, and it establishes a defensible position as fast follower competitors come onto the market.  

If metrics relating to customer retention and referrals are adopted, they will lay the foundation for the heavy capital investment required in IT infrastructure and will deliver outsize gross margins once scale is achieved.

Pure digital platforms drive customer retention through network effects, i.e., as more customers come onto the platform, the platform becomes more valuable for each already existing participant. 

This strategy focuses on data relating to platform users, such as:

• Acquisition facts and statistics to help you understand how users of the platform found you, the cost of acquiring the user, and their propensity to refer new customers.
• Activation statistics that track user behavior on your digital properties to understand what they do when they land on your site and the probability that they will convert to customers.
• Retention and loyalty assess the factors that keep them engaged in your products and services over a period of time.
• User identification data including name, address and other information that uniquely identifies each customer.  This information is managed by placing cookies on user computers as well as in a central Customer Relationship Management (CRM) system.
• Data about the user’s social networks, so you can leverage those networks to acquire new customers and maintain engagement with your products and services.
• Purchase history data that helps determine user preferences including cost, convenience, and choice.
• Data that provides insights on how users feel about your products and services, acquired through online reviews, comments, and net promoter ratings. This type of data helps to monitor current customer satisfaction and can be leveraged in marketing programs.
• Data to help you understand why users stop using your products, in particular any data that will help you maximize retention and re-engage former customers.

The initial pure digital platform companies were built using the early digital technologies.  Those technologies are at the core of a platform offering.

In terms of emerging technologies, this strategy focuses on technologies that drive consumer engagement while providing better data on customer behaviors.  A digital platform can make use of the data-related emerging technologies, such as chatbots, natural language processing, data analytics, machine learning, and artificial intelligence. 

Successful digital platform strategies will be careful about introducing emerging technologies that may add capital expenses to the business such as sensors or robotics.  They will typically partner with organizations that are structured to handle the capital expense aspects of those businesses on an outcome-based cost model.

Pure digital platforms are the most valuable types of business. They deliver gross margins at 70%+ allowing for greater investments in sales, marketing, and research and development once they achieve scale.

Success Stories

We all know the basics of the major pure digital platform success stories:

• Facebook
• Airbnb
• Uber
• Google
• Match.com

These four types of digital strategies are not an exhaustive list, but they represent about 80% of today’s digital strategies and are an excellent place for discussions to begin.  Chapter 6 provides details on how to build your digital vision and portfolio.