The Concept Behind Digital Platforms: Sharing Economies

Dr. Marcell Vollmer / 27 Oct 2019 / Read: 3min

The main idea behind online platforms is to serve users with interactions between each other. The corresponding ecosystems are based on the dynamic cooperation of different participants in the sense of a common added value. Thus, Platform Economies are - according to these two ideas - economies based on digital platforms which use algorithms to link buyers and sellers online. This means today's dominant economic model 'capitalism' will change. Digital Transformation paves the way for Platform Economies which are taking an increasing part in today's business models - especially in a constantly expanding digital sphere.

What Is The Impact Of The Internet?

The internet enables the development towards a platform capitalism, which can already be seen with digital monopolists such as Uber, Amazon, Airbnb, or Alibaba. Three factors stand out to influence the form of the internet significantly: Referentiality and community, algorithmicity as well as "digital platform ecosystems".

Referentiality describes the fact that online content increasingly relates to one another and becomes even more reproducible. The reality of search queries can only be represented to a limited extent since the information pervasion of the search engine, e.g. Google, is never complete.

"With regard to platform capitalists, algorithms have a great impact on their businesses because they enable a small group of employees to manage millions of users."

Algorithms are needed to sort an almost limitless amount of data and information (Big Data) into a more compressed output (Small Data) which can be captured humanly corresponding to the results of a search query. With regard to platform capitalists, algorithms have a great impact on their businesses because they enable a small group of employees to manage millions of users.

As mentioned earlier, digital platform ecosystems link users of a platform to each other while relying on one another in their supply chains.

The Concept Behind Digital Platforms

The way for successful digital platforms is paved by trends like "Sharing Economies" which are already affecting various areas of life. Sharing Economies range from private transport providers, just as Uber, to shared clothing services. The popularity of the Sharing Economy has been underpinned by new technologies, such as the internet, smartphone apps, and cloud computing. Additionally, changing customer preferences towards a focus on using instead of owning goods allows online platforms to spread worldwide.

"In order to attract users, it must be attractive for both offering and consuming users"

So far, digital platforms are only responsible for information exchange. They do not own any warehouses or production facilities. They merely present added value. In order to attract users, it must be attractive for both offering and consuming users to avoid a "chicken-and-egg problem". Ultimately, the decisive success factor is matching, which must enable consumers and producers to network smoothly via Big Data Management. In sum, digital platforms are run by a "Consumer-to-Business" (C2B) model in which customers come together to form a community and make a budget available for companies to use company services in return.

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Initializing A New Platform

Take Facebook and Airbnb as an example. What they have in common is their spatially concentrated starting point: Facebook was originally a social media platform exclusively for Harvard University students and Airbnb began as an overnight option when hotels where fully booked during exhibitions in San Francisco. Many companies already fail to find a starting point for the beginning of this interaction loop. Global growth is only indicated when a company is already established in its niche market. There are different KPI's that must be monitored depending on the life cycle phase.

"The network effect describes how the benefits of a digital platform change for a user when the number of other users of the same platform changes."

During the launch phase, an important indicator is the sales conversion rate, i.e. the ratio of search queries to completed interactions. In order to reach the second phase of a business life-cycle, the growth phase, a so-called positive network effect must be achieved. The network effect describes how the benefits of a digital platform change for a user when the number of other users of the same platform changes. To reach positive network effects, numerous and qualitative interactions between suppliers and consumers must take place. This point is also called "tipping point" and is a prerequisite for developing from a positive network effect to an exponential network effect.

The principle "from free to fee" is followed. Only after the critical mass has been reached should a change to monetarization be considered. In the growth phase, the main focus is therefore on establishing and monitoring a balance between the number of customers and suppliers. Other risks associated with building a digital platform are too rapid and premature growth, a lack of user confidence in the platform, and the associated lack of security measures and regulatory risks.

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Challenges

The platform operator is always responsible for the content provided. Especially in the beginning, trust is a decisive criterion for a well-functioning platform due to the high anonymity between the offering and the inquiring side. Rating systems and real-time information processing help to build trust between two participating parties. Platforms like Facebook, Uber, or Amazon already show the reach and influence platforms have on us in our daily lives. Operating via platforms is certainly a business model to aim for because all gathered data helps to run businesses smarter by predicting e.g. demand peaks for certain goods. Amazon is already a leading example of the potential success Platform Economies offer once challenges are overcome. Over the last two decades platform businesses have disrupted a number of industries and changed the global economy. All in all, there is one thing to be sure about in the nearest future: platforms are here to stay and evolve.

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