Is the scalability of platform models a myth ?

Blablacar, Meero, Backmarket and Vestiaire Collective : four of the first sixteen French unicorns (as of June 23, 2021) are built on a platform based business model. They have successfully captured their markets, often by disrupting them, and have demonstrated strong scalability, which reinforces the current interest in this model.

A platform business model can be defined as the connection of two independent groups in order to facilitate the exchange of goods or services : producers on one side, representing supply, and consumers on the other, representing demand.

Some examples : Booking.com connects hotels (producers) with customers (consumers) ; Uber connects independent drivers with passengers ; Acolad connects freelance translators with companies requiring translation services ; YouTube connects content creators with viewers ; Backmarket connects refurbished phone sellers with buyers ; Blablacar connects drivers with available seats to travellers without a vehicle ; Doctolib connects doctors with patients.

Three key success factors of platform models

The success of platform models relies on three key factors :

• Gravity : a platform must attract and retain both producers and consumers
• Experience : onboarding and interactions between participants must be seamless and of high quality
• Matching : exchanges must be facilitated and information asymmetries reduced, often through targeted and personalised matching between supply and demand, enabled by data science and, in some cases, the aggregation of fragmented supply

These three success factors ultimately enable network effects : the more members join, the stronger the value proposition becomes, and the more new users are naturally attracted to the platform, creating a virtuous cycle.

This dynamic positions platforms as structures that tend towards monopoly, at least at a local level. It also underpins the concept of first mover advantage or smart follower advantage : the first player to reach critical scale benefits from self reinforcing growth driven by network effects, like a snowball effect, and progressively widens the gap with competitors that have not reached this threshold.

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Platforms : a risk and an opportunity for traditional players

For incumbent players, the platform model can represent both :

• A risk of intermediation (for example Booking.com and the hospitality sector), price pressure (for example Backmarket and phone retail) or substitution (for example Blablacar and transportation)
• An opportunity for commercialisation and access to new markets (for example Molbase for chemical professionals), facilitation of outsourcing and cost variability (for example Acolad for translation), or business model transformation (for example Maisons du Monde, which has expanded its offering through a marketplace model)

Beyond these risks and opportunities, developing a platform model internally, whether as a new entrant aiming to disrupt a market or as an incumbent seeking to self disrupt, appears particularly attractive given the perception of scalability, that is, the ability to scale.

Technically scalable, but not necessarily commercially

From a technical perspective, the model is indeed scalable. Once the initial development of the platform has been completed, adding a new user or expanding into a new geography requires little to no additional effort, provided the platform has been well designed. In other words, growth in the number of users does not require significant technical evolution and therefore generates limited additional fixed costs.

From a commercial perspective, however, the model requires reaching critical mass in each geography or product or service category for the value proposition to become tangible. This typically requires substantial, and often increasing, investments due to competitive pressure in customer acquisition (online marketing, sales force, discounts, and more).

Moreover, this critical mass often needs to be built on a city by city basis, as illustrated by the example of Uber, which must ensure a sufficient number of drivers in each location to deliver an adequate service level to its customers.

Once this critical mass is reached, commercial scalability becomes a reality, at least locally, as growth is no longer driven by funded customer acquisition, but by network effects.

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A distinctive business model, difficult to align with traditional players

The need to finance customer acquisition in order to reach critical mass, make the value proposition tangible and unlock commercial scalability translates into :

• A required period, sometimes indefinite, of non profitability
• A significant funding requirement, driven by competitive intensity, often increasing, and by the size of the target market (resulting, for example, in rising keyword costs), as well as, potentially, by the expansion of the model into new geographies or business verticals

These financial characteristics explain the challenges faced by incumbent players when attempting to develop such a model or integrate it into their operations following an acquisition, for instance. The main pitfall observed is insufficient investment in customer acquisition. This results in the failure to reach the critical mass required to trigger network effects, as the model is inherently monopolistic.

To overcome this challenge, some players, such as Maisons du Monde, have pivoted from their traditional distribution model to a platform model only once their customer base had reached sufficient scale.

Launching a platform model represents a major strategic shift, which must be undertaken with full awareness of the required investments, as well as its impact on all stakeholders of the organisation : customers, employees, suppliers and others. The level of disruption must be carefully managed, and potentially isolated, to ensure successful execution.

Arnaud Couffin, Maxime Caro

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