Digital Platforms – Building Digital Business Models Step by Step [Part 2]

In the first part of the new »Digital Platforms« series, we explained how marketing, sales, and services are changing through innovations and which challenges arise through disruptive business models. In the second part, we’ll first answer the following questions:

• What are digital platforms and how do they work?
• What are the requirements for the introduction of a digital platform?
• What are the most important processes and functions?

Tradition meets high tech

In swimming, there has been a great deal of discussion over the use of swimsuits for some years, which not only has greatly improved athletes’ performance but has also led to numerous new world records. There are two different sides. Some pursue traditional training approaches and refuse the high-tech suits. The other side uses the new materials and adapts their training methods to the new circumstances.

We find a similar situation in digital modernity. Here are the followers of two ideologies. One warns about the dangers of digitisation, the naïve release of personal information on various digital platforms, and voluntary self-illumination. This contrasts with Silicon Valley’s belief that the changes brought about by digitisation will always positively impact people’s lives.

The introduction of digital technologies is transforming numerous social structures, processes, and institutions. The transformation rarely takes place abruptly but runs over longer periods of time. This also applies to cloud platforms and has now been confirmed by a survey (in German) by the SAP user group (DSAG).

Only ten per cent of the more than 3,500 active SAP customers stated that they were moving their core processes (ERP) to cloud systems. By contrast, 48 per cent of respondents already use cloud platforms for their marketing and sales processes. More than half of the respondents attest that the cloud is highly relevant for digitisation. Here is a clear trend to recognise cloud solutions in marketing and sales. It is no longer a question of whether you should go to the cloud, but why you haven’t already done so long ago.

The platform as an interface between companies and customers

Digital platforms are a virtual interface between companies and customers, but also partners and their own employees. Benefits result from the interactions of the users. The key phrase: Network effects. The more people active on the platform, the greater the benefit for all participants.

A unique feature of digital platforms is the direct exchange of data across the platform itself. Among the digital platforms in the B2C include marketplaces, search engines, and social networks. The companies with the biggest disruptive potential are Google, Apple, Facebook and Amazon – the so-called GAFA economy.

But also in the B2B developing digital platforms, driven by the Internet of Things. At the same time, information is the foundation and driver of digital platforms. Manufacturers and distributors, such as Conrad Electronic, are using digital platforms to provide additional services to their customers.

In recent years, various categories have developed. A distinction is made between digital platforms as marketplaces, social networks and industrial platforms, whereby hybrid forms also exist.

Cloud computing first

The foundation for any digital platform is cloud-based technology. Cloud computing consists of the IaaS, PaaS, and SaaS applications. Companies increasingly use virtualised resources, such as memory and computing power, keyword: IaaS (Infrastructure as a Service). Using the cloud as a development and runtime environment is referred to as PaaS (Platform as a Service) application. The capacities are flexible and dynamically adaptable so that the complete development of new software can take place in the cloud.

These PaaS providers include Elastic Beanstalk (AWS), Google App Engine, Microsoft Azure, and SAP Cloud Platform. Applications such as Salesforce or Microsoft 365 are examples of SaaS (Software as a Service) services. The vendor is responsible for the maintenance and configuration of the systems that it provides in the cloud. The only thing you need for access is usually just a web browser. SaaS applications enable access to data and services anywhere, anytime.

Strategy as the backbone of the platform

Each swimmer, who pursues the goal of successfully competing, prepares an individual training plan in advance, which prepares them as well as possible for the coming challenges. Even entrepreneurs need to ask themselves some crucial and strategic questions before introducing a digital platform.

Similar to products, digital platforms have a life cycle. The first phase, the start-up phase, defines the design and main business activity of the platform. The added value for the user and the monetisation of the platform are thus defined. Furthermore, the focus is on the selection of the strategic approach with which users should be motivated to interact on the platform. In addition, it should be clarified whether the platform is open to other producers, but also to external developers.

In this phase, the wheels of the platform begin to turn: The first users interact. During the growth phase, the focus is on the users and their activities. And these interactions now need to be analysed. It should be examined which user groups, which provide added value and which users, outside the platform, should have access. Through various evaluation methods, the added value for users is to be steadily increased. This subsequently leads to an increased attractiveness for new potential users.

During the ripening phase, the digital platform already has a larger number of users. In particular, the binding of existing users is crucial now. Even more growth is possible in this phase, especially through the further development of the core functions.

In addition, the development of measured values for the determination of the added value and the individual activities on the platform is essential. When introducing new technologies or solutions, employee behaviour is crucial. This needs to be supported by role models, appropriate training, promotion of skills, and knowledge before, during and after the introduction.

Business models, processes, and functions

Before the most important processes and functions can be identified, the business model of a digital platform has to be described. In doing so, processes, functions, roles, and the generation of revenues are defined.

A digital platform includes at least four players: The legal owner and the operator of the platform as well as the producers and consumers. The operator acts as an interface to the customer. The producers offer their products or services on the platform. As the marketplace shows, eBay, the user of a digital platform can be both a producer (aka seller) and a consumer (aka shopper).

The main business activity of digital platforms involves three key components: the users of the main business, consisting of consumer and producer, the value-added units, and the filter.

The value-added units form the commodity traded on the platform:
Pictures on Instagram, available bus connections on Flixbus, or shoes on Zalando. The third component, the filter, attempts to build up the lack of trust on digital platforms through, for example, evaluation and reputation mechanisms. The lack of trust comes from the anonymity of users. The filter also serves to personalise the data.

The digitisation of processes plays a central role in the implementation of a digital platform. Only through digital processes is a digital business model possible. It is the in-house link in the value chain of digital platforms.

There are three additional levels within the platforms:

In general, the infrastructure layer of a platform serves to technologically enable interactions between provider and user. The key function for the architecture of a digital platform and thus the success of a digital business model is again the data management level.

Providers and users of a platform generate and consume information. The owner of the platform collects, structures, and analyses the data using algorithms. This is done at the infrastructure level.

However, the main business activity of the platforms is managed at the data management level. One of the main business activities of a platform is, for example, the brokering of products or services between providers and users of a marketplace. The mediation is mapped at the community level.

Monetisation

Monetisation is the crucial component of the platform. Here you can distinguish between different forms:

• Transaction fees
• Usage fees for the services of a digital platform
• Fees for access to extended platform offers
• Fees for additional or expanded services

Governance

Another central function of a digital platform is governance. Among other things, it controls access to the platform and the distribution of added value between users. Governance is based in particular on national laws and codes of conduct.

But also the design of the software plays an important role, for example, if it rewards a certain behaviour of a user. Another aspect of governance is the definition of authorisation procedures, policies, and role concepts on the digital platform.

Monitoring

Monitoring is an important function for the long-term success of a digital platform. The analysis of feedback, user behaviour, and the resulting recommendations for action is the basis for the further development of the services offered and the design of a digital platform. Because exactly these criteria are crucial for the customer experience and customer satisfaction.

Voting or rating procedures help put the user at the centre of all platform activity. Collaborative filtering leads to conclusions about the behaviour of users. This helps to see where the degree of personalisation and added value for the user must be increased.

Evaluation systems where the user of the digital platform can evaluate the performance or service provided establish values and standards. Within the framework of a social structure, this creates maxims such as reliability, trust, and transparency in an otherwise anonymous world. These values promote the added value of the platform and thus increase attractiveness. Therefore, rating systems should be part of every platform strategy.

Are you ready to take the next steps?

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