Digital Platforms: What They Are & How They Create Value
Are you trying to move your business to a digital platform model? Hereās an overview of digital platforms and how they create value.
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Subscribe to the BlogRSS feed - 08 May 2024
Kate GibsonAuthorContributorstag- Digital Transformation
- Entrepreneurship & Innovation
- Winning with Digital Platforms
Digital platforms are business models that use online infrastructure to facilitate interactions between groups. Examples include:
- Social media channels
- Online marketplaces
- Crowdsourcing websites and apps
Digital platforms have several features that enhance their functionality and appeal.
For one, they can grow and accommodate transactions without significant cost increases. That scalability is essential to expanding market reach with minimal business infrastructure.
Accessibility is another important feature. Digital platforms operate continuously and are accessible regardless of time zone or geographic location. This boosts user engagement by enabling real-time interactions and transactions.
Digital platforms also streamline business processes and automate complex tasksāreducing the need for extensive manual labor, minimizing operational costs, and improving resource management.
These features allow digital platforms to generate substantial value. If you want to shift your organization to a digital platform business model, here are three ways it can enhance the user experience.
How Digital Platforms Create Value
Connect Buyers and Sellers
Digital platforms have revolutionized how buyers and sellers connect. They’ve moved business interactions from traditional settingsālike physical marketplaces and classified adsāto online environments, significantly increasing their reach and partnership opportunities.
To help users connect online, digital platforms use matching designāalgorithms that link them based on criteria like their needs and preferences. According to Winning with Digital Platforms, there are two types of matching designs:
- Centralized matching design: Automatically matches users with a seller according to the platformās algorithm
- Decentralized matching design: Offers multiple options to users who search all the options before choosing based on their preferences
Selecting the right matching design is crucial to optimizing the user experience and operational efficiency.
āWhen the preferences of users are easily identifiable, and buyers and sellers view each other as largely interchangeable, it makes sense for the platform to be designed so that search and matching is automated,ā Zhu says in Winning with Digital Platforms. āThis is efficient because centralized matching minimizes search costs without compromising the quality of matches.ā
In the course, Zhu explains how ride-sharing companies use centralized matching.
āIn the ride-sharing sector, the preferences of both drivers and riders are easily identifiable,ā Zhu says. āRiders want a ride from point A to point B thatās as safe, fast, and inexpensive as possible. As long as these three criteria are met, riders donāt care much about which particular driver they’re matched with. Drivers want to be matched with riders as soon as possible, and as close as possible to minimize idle time. They also want a rider to be respectful. This transparency of preferences explains why most ride-sharing platforms adopt a centralized matching designāwith the added option of rejecting a match if need be.ā
Alternatively, decentralized matching works best when predicting usersā preferences is challenging. For example, eBay allows sellers and buyers to connect directly on its platform with little interferenceāenhancing user autonomy and personalizing the buying experience.
Related:Understanding 3 Common Types of Customer Needs
Set Pricing
Digital platforms also add value through strategic pricing. Unlike traditional retailers, digital platforms collect and interpret large amounts of data to adjust prices in real time.
Common factors that affect pricing include:
- Market demands
- Supply chain conditions
- Consumer behaviors
To meet usersā needs, align your matching design and pricing model.
Pricing models include:
- Centralized pricing model: When your platform has enough information to ensure prices donāt deter buyers or sellers from using it
- Decentralized pricing model: Prices set by individual sellers or through bargaining based on important information your platform doesnāt have
āPricing decisions almost always go hand in hand with search and matching,ā Zhu says in Winning with Digital Platforms. āIf a platform has a centralized matching model, theyāll have a centralized pricing model. And if they have a decentralized matching model, theyāll often use a decentralized pricing model.ā
For example, online grocery delivery platform Instacart doesnāt allow users to choose āshoppersā and bases its design and pricing models on factors such as inventory availability and its āfavorite shopperā feature. Conversely, platforms like house rental app Airbnb allow homeowners to set listing prices, giving them more control.
There are exceptions to this rule. For instance, ride-sharing companies use centralized matching designs, but drivers donāt have the high-level knowledge to determine prices. As a result, companies like Uber use dynamic pricingāsetting flexible prices based on current market demandsāby adjusting rates based on routesā time and distance, traffic, and rider-to-driver ratio.
No matter your model, be transparent about how you set prices.
Establish Trust
Since the rise in e-commerce has led to fewer physical transactions, digital platforms now act as a credible intermediary to establish user trust.
In Winning with Digital Platforms, HBS Professor Krishna Palepu talks about how wholesale marketplace company Alibaba addressed trust concerns between geographically spread out buyers and sellers.
āThe trust problem comes in two forms,ā Palepu says. āOne: The customers who are buying the product don’t know whether the quality of the product is going to be according to what is advertised on the site, and also whether itāll be delivered on timeāand, in fact, whether itāll be delivered at all. On the other hand, merchants are concerned about whether theyāll receive payment once the goods are shipped and they’re delivered to the customer; the credit risk involved in collecting the payments. Both these issues have driven a lot of distrust. And this is just a common distrust that you will have in any marketplace.ā
To overcome that issue, Alibaba introduced mobile and online payment platform Alipay, which uses an escrow account to safeguard transactions and protect buyers against undelivered goods and sellers from unpaid deliveries. The system ensures legitimate transactions by mandating Alipay accounts for all users, helping identify credible partners.
Establishing trust isnāt just about securing transactions; it also helps reduce online interactionsā perceived risk. By building credibilityāas Alibaba did with Alipayāyou can boost user satisfaction, the likelihood of repeat engagements, and platform reliability.
Create Value with Digital Platforms
Transitioning to a digital platform business model isnāt easy and requires buy-in from employees and organizational leaders. To ensure your digital transformation efforts succeed, focus on creating an effective digital platform strategy.
One of the best ways to learn how to do so is by enrolling in an online course, such as Winning with Digital Platforms. Through real-world cases featuring industry leaders and interactive exercises, not only can you apply your knowledge but gain skills and insights that enable you to advance your career.
Do you want to learn more about the digital platform landscape and how to launch and scale a platform business? Explore our online course, Winning with Digital Platforms, and download our free entrepreneurship e-book to discover how you can take your career to the next level.
Kate Gibson is a copywriter and contributing writer for Harvard Business School Online.
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