Is the scalability of platforms a myth? | Eleven

Is the scalability of platforms a myth?15 October 2021

Innovation

Blablacar, Meero, Backmarket and Vestiaire Collective : four of the first sixteen French unicorns (as of 23 june 2021) are based on a platforms business models and have respectively conquered their market, often by disrupting it, which legitimizes the current interest in this model and its scalability.

One definition of the platform business model is the association of two independent groups to facilitate the exchange of goods or services: producers on one hand, who represent the supply, and consumers on the other, who represent the demand. Examples include:

  • Booking.com, connecting hotels (producers) and customers (consumers);
  • Uber – independent drivers and passengers;
  • Acolad – freelance translators and companies in need of them;
  • Youtube – content creators and viewers;
  • Backmarket – reconditioned phone sellers and buyers;
  • Blablacar – drivers with free spaces and travelers without vehicles;
  • Doctolib – doctors and patients.

Three key success factors for platform models

The success of this platform model is based on three key factors:

  • Gravity: a platform must attract and then ensure the retention of producers and consumers;
  • Experience: the integration of members, as well as the interaction between them, must be high-level and seamless;
  • Matching: exchanges must be facilitated, and information asymmetries removed. This is often the result of targeted and individualized matching between demand and supply, thanks to data science and sometimes the aggregation of a fragmented supply.

These three factors ultimately allow platforms to benefit from the network effect: as membership grows, so does the value proposition, which in turn attracts more new members. This effect puts platforms in a monopoly position, at least locally. It also results in a first mover advantage or a smart follower one: the first player to reach a critical size will see its growth self-fed by the effect, just like a snowball, and it will irreversibly widen the gap with the other players who are yet to reach this threshold.

Platforms: a risk and an opportunity for traditional players

For existing actors, the platform model can represent either:

  • A risk of intermediation (for example Booking.com and the hotel industry), price pressure (Backmarket and telephone sales) or substitution (Blablacar and traditional transportation);
  • An opportunity for commercialization and access to new markets (for example Molbase for chemistry professionals), outsourcing and cost variability (Acolad for translation) or for transforming business models (Maisons du Monde which has extended its offer with a marketplace model).

Beyond these risks and opportunities, developing a platform model in order to disrupt a market, either as a new or as an existing player, appears even more interesting when the model is perceived as capable of scaling.

Technically scalable, but not commercially

From a technical point of view, platform models are highly scalable. Indeed, once the initial development of the platform is done, adding a user or launching in a new location requires little or no effort (provided said development is of good quality). In other words, the growth of the platform in number of users does not require technical evolution and thus generates few additional costs.

From a commercial point of view, the model requires reaching a critical size in each location or product/service to be able to make its value proposition a reality. This generally requires significant and increasing investments (due to the strengthening of the competition) in customer acquisition through online marketing, sales force, discounts etc. Moreover, this critical size must sometimes be built locally, as shown by the example of Uber, which must ensure a minimum number of drivers in a city to be able to provide a sufficient offer and thus operate.

Once this size is reached, commercial scalability becomes a reality since the growth driver is no longer customer acquisition but rather the network effect.

A unique business model, difficult to reconcile with that of traditional players

The need to finance the acquisition of an important size to make the value proposition real and reach commercial scalability translates into:

  • A necessary, and sometimes indefinite, period of unprofitability;
  • A significant need for financing, often linked to the increasing competitivity of the market in question (for example resulting in the increase of keyword prices) and, potentially, to the deployment of the model in new locations and vertical markets.

These financial characteristics reveal the difficulty for existing players to develop such a model or to integrate it into their existing activities following an acquisition, for example. The main pitfall observed is the lack of investment in customer acquisition. This results in the failure to reach the size needed to trigger the network effect, as the model is intrinsically monopolistic.

To overcome this obstacle, some players like Maisons du Monde are pivoting their business models from their historical distribution model to the platform model only once their customer base has reached the necessary critical size.

Launching a platform model represents a strong strategic move, which must be executed with full awareness of the necessary investments, but also of its impact on all the company’s different stakeholders: customers, employees, suppliers etc. The level of disruption must be skillfully controlled, and eventually detoured, so that the transplant can take hold successfully.

 

Arnaud Couffin, Maxime Caro

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