There are typically two types of businesses in the automotive industry:
- Producer businesses and
- Platform businesses
Let’s talk about the first type of business in our data world, the producer business. This kind of business produces a product (e.g. cars). Value creation in this type of business typically comes from inside the business.
The second type of business is the platform business. Value creation typically happens outside the business.
For example, if you think of Instagram, the platform wasn’t number one, Spotify was actually ahead of Instagram at one point. Instagram learned from its users to publish content.
Google learns from your interactions which makes the next users’ experience better.
Facebook also learns from your interactions and gives a very unique news feed compared to someone else’s.
On platforms, people interact from all sides. Buyers interact with sellers, sellers interact with sellers, buyers interact with buyers. For a platform business, if you increase the quantity and the quality of these interactions, you automatically increase the value of your platform.
Autotrader SA was a producer type business
- We were a print business
- We distributed 200,000 magazines and sold 120,000.
AutoTrader SA produced a magazine, we didn’t know how users interacted with the magazine, which pages in the magazine they frequented. All we could tell was how many we sold and how that translated to end-user value as a whole.
AutoTrader SA then became a platform business, it took 10 years, but we are now a platform business. It was a very difficult transition because we had our wagon hitched to this print magazine for a very long time. We could have been disrupted very easily. New online-only startups were coming into the market not having to worry about a legacy magazine business. Not only because they didn’t have magazines to worry about but they didn’t have current customers to worry about.
AutoTrader SA is a platform business commonly referred to as a “two-sided marketplace”.
Platforms need to harness network effects to their advantage.
Why you should consider harnessing network effects?
Being able to harness the power of network effects is not a trade secret. But, there’s something unique about platforms that get it right, they become valuable. Look at the value of BMW vs Uber for instance. Both provide mobility, one is a producer the other a platform.
Platforms don’t own assets, why?
Many people think that the value of the platform is a bubble, it’s not. The inherent value of the platform lay in its users, not in assets. This is also why platforms have to change all the time because they could also be disrupted.
But you’ve got to ask yourself these questions
- Why is Uber more valuable than any OEM?
- Why is Airbnb more valuable than Marriott?
- Why is Facebook more valuable than Walt Disney?
All these brands do similar things, to understand why this is the case and why it’s not a bubble, one needs to understand network effects.
The difference between viral effects and network effects
Viral effects are unidirectional meaning that the viral effect travels in one direction and is short-lived. Once you’ve seen a viral video or seen a viral piece of content you interact with at once or maybe a limited number of times and it’s over.
Whereas network effects are different, the interactions are ongoing. They solve the same side and cross-side network needs. And herein lay the magic of digital transformation and the power of data. Some companies have struggled to survive the transition to being a digital business.
Even if you’re a producer business, it doesn’t mean you can’t transform into a digital business.
If you can figure out how to create value amongst your customers using network effects and data, you can win the digital transformation race in your market. The more customers you have in aggregate, the more value you can create for each individual customer and between them. This is not only for your own business but better for each customer amongst themselves.
The key point?
Because old-world companies created products or services for customers. Digitally transformed companies create value with customers. And I think that’s the nuance difference.
Businesses and customers create value with, and for each other.
Many businesses miss that subtlety of making something with customers as opposed to making something for customers. So co-creation is the heart of digital transformation and then using data to your advantage to learn and change.
4 key competitive advantages in the world today
- Vertical integration.
- Building a brand.
- Building scale through lower prices.
- But potentially the biggest of them all in the 21st century is Network Effects
I believe that any business can benefit from these platform and network effects if you use data to your advantage.