Conventional business models have been governed by traditional laws where the economies of scale symbolised the inverse relationship between fixed costs and output. These business models are characterised by either being physical capital intensive (think manufacturing) or human capital intensive (think services).
The conventional business models suffer owing to the drivers of scale, scope, and learning also being the constraining factors—more the number of users, lesser the value of the firm.
The digital business models—those based on software as a service—suffer from no such constraints since they leverage data to unleash insights and capabilities hitherto unknown. Netflix and Salesforce symbolise such businesses for B2C and B2B segments, respectively.
Platforms use technology to connect people, organisations, and resources in an interactive ecosystem where resources are created and shared. The principal purpose of a platform is to facilitate user interactions for an exchange of goods and services or social currency, thus leading to the creation of value for all users.
Platform thinking thrives on the strength of curating the learning from common elements: algorithms, shared digital infrastructure, leveraging scarce resources, co-creating in context, connected marketplaces, network effects, minimalistic design, ecosystems, and ubiquitous data.
Firms leveraging digital platforms to co-create and share value benefit from the force multiplier effect of the networks. These “network orchestrators” scale faster with lower marginal cost to yield the highest revenue multipliers.
The lethal combination
Almost all of big-tech—Google, Apple, Amazon, and Microsoft—take things further by combining tech as a service along with platform business models. This turns the conventional logic on its head where more the number of users, more is the value of the firm.
The arrival of platforms and technology as a service have led to the phenomenon of ‘economies of unscale’. No wonder then, small startups are emboldened to pursue niche global markets and successfully challenge large conglomerates, turning advantages of legacy investing in economies of scale on its head.
The consumer today is a multi-platform consumer and consumes the narrative that she wishes to—wherever, whenever, and however. The key component of all modern-day business model successes remains aggregation of users, engagement of users and monetisation of users or ART, i.e., acquisition, retention, and transaction of consumers.
Research shows that the combined platform-based marketplace and technology as a service—where consumers are willing to pay a subscription fee (think Spotify or Shopify)—is proving to be far more resilient than the traditional business models in the wake of a crisis and disruption.
AI enables matchmaking and personalisation at scale while delivering intelligence transformation. It is a virtuous cycle—much like the flywheel—where more the number of participants on each side of the platform, the more the network and learning effects, the more the engagement, and more the value of the firm.
The new growth model is thus characterised by a marketplace where buyers and sellers meet the power of community and networks and are amply supported by AI-powered intelligent data insights. The revenue model typically being a subscription-driven one. Welcome to the business model of the 21st century.
Views are personal. The author is Executive-in-Residence at UCLA, a Stanford Seed Consultant, a global CEO coach, and a C-Suite + Start-up advisor.