Characterization of the key distinguishing features of a digital platform as a business model

Nikolaev Pavel Viktorovich Master, Faculty of World Economics, Higher School of Economics 127221, Russia, Moscow region, Moscow, ul. Polyarnaya, 32 doci-99@mail.ru Other publications by this author

Introduction

       Digital technologies are rapidly penetrating into all areas of our lives. The economy is no exception, as one of the most important spheres of human activity. In this regard, it becomes especially interesting to observe the process of digital transformation of companies, thanks to which new forms of doing business appear. One of them is the activity of companies based on the business model of the digital platform. This study aims to identify the main characteristics of this business model and confirm them with an empirical example.

Signs of a digital platform as a business model

In order to most accurately identify the main features of a digital platform as a business model, we need to understand what any business model as a whole is. To do this, we can use the classic definition from one of the authors of the Harvard Business Review, which states that a business model is a way in which a company generates income and profits from its activities ^[1]. A more detailed description can be found in A. Osterwalder and I. Pinier, they believe that a business model is a concept that serves to describe the basic principles of the creation, development and successful operation of an organization ^[2]. In their work “Building Business Models", the authors identify nine parts on which any business model is based: cost structure, revenue streams, key partners, key processes, key resources, value proposition, customer relationships, sales channels, key activities.

The most important factors for the success of any business model include:

1. Personalization of goods and services. Many new business models involve a higher adaptation of goods or services to the individual needs of customers than the current dominant models. Companies also often use technology to achieve competitive prices.

2. Closed product cycle. To reduce the total cost of resources, instead of linear, a closed production cycle is used today, which is based on the secondary use of raw materials.

3. Sharing and sharing of things. Successful innovations today are based on the sharing of assets, especially expensive ones. For Example, Daily.<url> or Avito make it possible for property owners to provide them for use by travelers, and in Yandex.Taxi drivers benefit from the use of personal transport. In some cases, assets can be used by the entire supply chain. This usually happens through two-way online platforms that provide benefits to both sides: the owner receives money from renting vacant housing, and the traveler saves on accommodation. Sharing also reduces barriers to business entry in many industries, as a new player does not need to own certain assets — he can simply act as an intermediary

4. Pricing based on actual consumption. In this case, everyone wins, as companies attract new customers with their low prices, and customers pay only for what they actually use.

5. Building an ecosystem of cooperation. Strengthening integration with business partners, sharing business risks, all this becomes possible thanks to deeper integration between companies.

6. Adaptive institutional organization. Modern companies are moving from traditional hierarchical decision-making models to new, decentralized models that are more sustainable and efficient, and better meet the needs of the market ^[3].

Since we now have a clear understanding of what any business model is and what characterizes it, we can move on to defining what a digital platform is.

According to Russian regulatory documentation, digital platforms are complex information systems that provide interaction functions between market participants, open for use by customers and partners, application developers, service providers and agents ^[4].

Through the use of digital technology packages for working with data and simplifying the division of labor, digital platforms can reduce transaction costs and build algorithmic mutually beneficial relationships between counterparties – business entities. In other words, platforms create a digital structure of markets, eliminate intermediaries and complex hierarchies, and spread innovative business models ^[5].

All this allows us to further identify the most characteristic features of a digital platform as a business model.

The platforms are well-known and have been operating for a long time. So, newspapers connect advertisers and readers, and shopping malls connect sellers and buyers. The main innovation is that the need to own physical assets to build a platform is now much less than it was before. Modern information technologies greatly simplify the construction of platforms, and also make it possible for virtually contactless participation for any of the parties. This significantly enhances the existing network effects, because due to the qualitative increase in the ability of platforms to collect, analyze and exchange a huge amount of data, their value increases many times for all participants in the system.

There are many types of platforms, but they are all united by the presence of an ecosystem with the same basic structure, which includes four types of players. The owners of the platforms control their intellectual property and management. Providers serve as the user interface. Developers create applications and services, and users use them ^[6].

This system is inherent in any platform and this is what determines the desire of the platform to increase the number of complementary services and services in its perimeter, in order to develop into an ecosystem. The business model of the digital ecosystem is essentially very similar to the business model of a digital platform and can be considered by us as a kind of platform evolution. If the platform has no interest or opportunity to evolve into an ecosystem, such a platform significantly increases the risks of its functioning and even risks completely ceasing to exist in the near future ^[7].

The business model of a digital platform differs significantly from the classic business model of a sales funnel. The funnel model is based on the classical process of linear value creation, which was described by M. Porter ^[8]. The incoming raw materials at the initial stage of value creation, after the company introduces improvements and additions to it, are transformed into a much more valuable thing – a finished product. The platform, as it were, defines the rules of the game for the entire market, providing its own infrastructure, thanks to which sellers and buyers of a particular product/service meet on it. Therefore, the relationship between the parties both inside and outside the platform is extremely important for its successful functioning.

At the same time, a company does not necessarily need to be just a funnel or just a platform, a combination of business models can be much more effective. For example, we can take Apple, which successfully combines the funnel business of selling a smartphone with a platform one – its own operating system and an application store for it. But it should be remembered that if a company with a digital platform business model enters a particular market, it will be more successful than the current classic funnel companies in this market, which is confirmed by the growing market power of Amazon in comparison with its less effective main competitor, Walmart, which was previously the undisputed leader in the market the market of consumer goods ^[9].

The main reason for these changes is, of course, network effects. In the Internet economy, those companies that benefit in terms of transaction volume offer a lower average cost of their services. This is due to the large amount of data obtained, which allows you to predict demand and calculate supply more efficiently. This is most successfully implemented by companies such as Alibaba and Amazon in the e-commerce market or Google in the advertising market ^[10].

The well-known model of M.Porter's five competitive forces is also not relevant for platform businesses, as is the value chain model, since external forces in this model are considered as reducing the value of the company, therefore, the company must protect itself from them ^[11]. But in the platform economy, external forces often play a positive role, on the contrary, adding value to the business. For the most successful building of a company with a digital platform business model, understanding when external forces have creative and when destructive effects on the company is one of the most key factors.

If successful, the platforms launch an effective cycle: an increase in demand from one user group leads to an increase in demand from another. For example, the more video games developers (one group) create for the platform, the more players (the second group) buy the latest version of the console. At the same time, the more players use the console, the more developers are willing to pay the company for a license to produce new games. The user base is growing, and profits are growing with it.

Due to the fact that all participants of the platform can change their roles within it, as well as exit it, companies should closely monitor their activity in order to stay on top. New technologies such as artificial intelligence and the ability to use big data are now significantly contributing to this.

But managing platforms is not so easy. Strategies that ensure the success of traditional offers do not work in bilateral markets. To take advantage of all the advantages of the platform, you need to solve the main task – proper pricing. The most effective way that most modern platforms use is to subsidize one group of users and at the same time charge another additional fee for access to the subsidized group. This is how mobile app stores work, for example. In them, app buyers pay only a relatively small amount, whereas the main income of the platform company is brought by the developers of these applications, who pay a significant part of their income in the form of commissions for access to a wide range of buyers.

Competition in industries with two-way network effects, fueled by the promise of revenue growth, can be very fierce. Platform leaders can use their growing profits to increase investments in research and development or lower prices, pushing weaker competitors out of the market. As a result, mature two-way networking industries are dominated by a few large platforms, as in the case of credit cards. In exceptional cases, such as in the operating system market, the winner is the only company that occupies almost the entire market ^[12].

At the same time, the following risks must be avoided for the successful operation of the platform.

 1. Clustering of the network. The more a company's business is fragmented into local clusters and the less dependent these clusters are on each other, the more at risk the company's business is. For example, you can consider Yandex.Taxi. Drivers from Moscow are primarily concerned about the number of passengers in Moscow, and passengers from Moscow, respectively, the number of drivers in the same city. With the exception of those who travel a lot, no one in Moscow cares about the number of drivers and passengers in St. Petersburg. Because of this, it is relatively easy for any other similar service to occupy at least a part of the local market and operate successfully on it, especially thanks to some distinctive offer, for example, a price reduction. To strengthen the network, you need to build global clusters on top of local clusters.

2. The loss of the role of an intermediary, when network participants communicate with each other directly, bypassing the platform, can become a serious problem for any platform that receives the main profit from organizing or supporting transactions. Imagine that you hired an employee for a temporary job through a platform like Avito and were satisfied with his work. It is unlikely that you will go to the platform again to hire him, because you still have all his data and it is much easier to contact him directly. You have almost no incentive to access the platform again. In addition, having recruited enough clients through the platform to fill out their work schedule, such an employee will also cease to need the services of the platform.

3. The use of multiple platforms by users. This usually happens when the costs of joining an additional platform are low. In the industry of shared rides and taxis, many drivers and passengers use Yandex and Uber at the same time. For passengers, it is convenient to compare prices, tariffs or waiting time for a car, and drivers can reduce downtime or find more paid orders. In the same way, customers interact with different stores of the same type, and cafes or restaurants cooperate with several food delivery networks at once. Including those mobile application developers, they believe that it is worth working with stores for iOS and Android systems right away ^[13].

Considering all of the above, we can conclude that the main features of the digital platform's business model are:

- Non-linear value creation

- Work in bilateral markets

- A special competitive environment

- Generation of network and system effects

- Unique risks inherent only to platforms

- Striving to form partnerships and evolve into an ecosystem

Characteristics of Yandex.Market as a digital platform

Yandex.Market is an independent business unit of Yandex Corporation and offers the services of a digital marketplace platform. YAM is one of the largest players in the Russian market. YAM does not operate outside the country, so we consider its activities only in Russia ^[14].

Within the framework of the internal business structure at Yandex, there are two large groups - "Search, advertising and cloud services" and "E-commerce and ridetech (ridetech)". The second block is the online trading services, logistics and transport services of the company. As you can understand, Yandex.Market belongs to the second group.

The main strategy of Yandex.Market is to rely on the uniqueness of its trading offer, namely, a special user interface that is noticeably different from its main competitors – Wildberries and Ozone. In this case, YAM is the most classic version of the marketplace, where the main advantage when selling / buying goods is the ability to immediately evaluate competitors' price offers and, accordingly, switch from the current product card (with a higher price) to another product card with a lower price. Thus, the main competitive advantage when selling goods on YAM is solely the price, and not the quality of the product or its advertising promotion, unlike other marketplaces ^[15].

Yandex.Market implements the business model of the digital platform, which is confirmed by the signs that we have identified above. Nonlinear value creation is provided by the role of an intermediary with a large number of additional services that can bring benefits. Working in two-way markets means that the company unites both sellers and buyers. A special competitive environment is associated with the fact that the company operates in the market of monopolistic competition, when several firms occupy the entire market. The generation of network and system effects is related to the fact that the growth of buyers leads to the growth of both buyers and sellers, and the growth of sellers leads to both the growth of sellers and buyers. The unique risks inherent only in platforms are characterized by the fact that the company tries to build global clusters, while avoiding encouraging users not to leave the platform, but using multiple platforms, the company can do nothing. The desire to form partnerships and evolve into an ecosystem lies in the fact that the company actively cooperates with other Yandex services, forming an integrated ecosystem ^[16].

Yandex.Market operates in the market primarily as a company that eliminates information asymmetry. With the help of the platform, consumers and producers learn about each other. YAM also performs the role of a provider, providing its infrastructure, and defining the rules of participation in the platform's activities for both sellers and buyers.

The usefulness and properties of Yandex.Market services for customers:

1) Elimination of information asymmetry. YAM provides a huge amount of additional material that allows the buyer to make the most informed choice. These are photo and video reviews of the product, product reviews, links to third-party expert opinions on the quality of the product, the product rating system. The same applies to providing information about the seller's store.

2) Ease of use. YAM provides a wide range of additional search characteristics, which facilitates the customized selection of goods. This is facilitated by a filtering system by parameters and a product comparison system by parameters.

3) Providing a wide selection. YAM provides hundreds/thousands of options for buying one product, primarily by price, by store-seller, by country of origin.

The usefulness and properties of Yandex.Market services for sellers:

1) YAM itself acts as an additional sales channel, which already makes it valuable for sellers, helping to minimize the cost of finding and attracting a customer, thanks to its own wide base of YAM.

2) In addition, YAM reduces sellers' costs for logistics, warehousing, as it stores goods itself, as well as a full cycle of delivery from the seller to the buyer.

3) YAM provides analytical data for sellers in a convenient, structured way. This is, first of all, the number of goods sold and the amount of proceeds, including by city. The most popular products. The number of rejections of goods, goods with defects. Data for SEO optimization of the product.

4) YAM also provides advertising and promotion services for sellers, providing an opportunity to increase the frequency of product display on the site, its place on the site page, in the recommended ones, when viewing similar products. Also, participation in promotions, when the YAM itself reduces its selling price for the goods for the buyer, without affecting the seller's price.

The added value that Yandex.Market brings to the online sales model of goods on a digital platform:

1) Extensive customer base. YAM is one of the top 5 largest marketplaces, has its own wide and loyal audience for sellers.

2) The quality and security of the transaction. YAM requires sellers to provide a large amount of information about the product, which significantly reduces the likelihood of buying low-quality or even dangerous goods for the consumer.

3) Speed and convenience. Purchases are made using 1-click technology, which makes them much more comfortable and saves time.

4) Flexible pricing. Based on data about the product, the seller and the buyer, YAM can change the price of the product in real time, launch promotions, due to the work of artificial intelligence algorithms of the marketplace and big data aggregation.

Factors of choosing Yandex.Market as a digital platform:

1. Usefulness. Yandex.Market, as a platform, provides a wide range of services on its site that are equally useful for both sellers and buyers. The use of pits significantly reduces all types of costs. YAM takes over the function of communication between the seller and the buyer, while also providing information and advertising support. The presence of a wide client audience and a flexible customization system ensure the wide popularity of the service.

2. The price. The demand for marketplace services is rather inelastic, since competition in this segment is low, and the attempt of sellers-buyers to independently carry out (provide) those actions (services) that the marketplace provides is more expensive due to the lack of the necessary level of organic traffic, infrastructure and loyalty programs that other Yandex services provide when using.

3. Limited choice. Yandex.Market is one of the largest marketplaces in the Russian e-commerce market. We can say that the company is in the framework of monopolistic competition. The main rivals are Ozone and Wildberries. Each of the companies aggregates approximately 30% of the entire e-commerce market. But, it is worth noting that the majority of both sellers and buyers use all these companies, since both the range of goods, the list of services, and the price are extremely similar. Another alternative is to create your own online store. Usually, consumers use all these methods ^[17].

4. The period of consumption. The demand for Yandex.Market services, as a marketplace, is constant, growing and not subject to seasonality. There may be exceptions for certain seasonal categories of goods, but for logistics, warehouse, information, advertising services, the demand from sellers-buyers does not change, since in case of seasonality of their goods they usually adjust to the sale / purchase of similar goods.

Consumer expectations of sellers contributing to the growth of the platform:

1) An increase in the number of sales and revenue growth, thanks to a wide customer audience.

2) High-quality analytics, thanks to which targeting activities and SEO optimization can be carried out.

3) Reducing the cost of attracting and retaining customers, advertising, logistics and warehousing, thanks to the use of PIT infrastructure.

Consumer expectations of buyers contributing to the growth of the platform:

1) Purchase of high-quality goods, thanks to the extensive information provided.

2) Flexible selection system, the ability to customize the search.

3) Fast and convenient delivery of goods (especially by Yandex Express service) and thanks to a wide network of PVZ.

The following factors may also influence the desire to cooperate with the company: the loyalty program of the Yandex ecosystem, as well as prestige, security, reliability, convenience and high quality of services created due to the unique role of the platform.

Conclusion

Based on the results of this study, we can conclude that the main features of a digital platform as a business model are:

- Non-linear value creation

- Work in bilateral markets

- A special competitive environment

- Generation of network and system effects

- Unique risks inherent only to platforms

- Striving to form partnerships and evolve into an ecosystem

An analysis of the experience of the Yandex.Market company confirms the above signs. The company non-linearly creates value due to the unique role of an intermediary and a large number of additional services. The company operates in two-way markets, bringing together both buyers and sellers. The generation of network and system effects is based on the fact that an increase in the number of buyers leads to an increase in both buyers and sellers, and an increase in the number of sellers leads to an increase in both sellers and buyers. A special competitive environment is expressed in the fact that the market is divided between several large players with similar functionality. The unique risks are expressed in the use of multiple platforms by consumers. The desire to form partnerships and evolve into an ecosystem is expressed in close cooperation with other Yandex Corporation services.