The Long View

Part 1: Why should you build a Platform + Ecosystem company?

This is the first in a series of three articles that describes the Why, What and How of building a platform and ecosystem strategy.

Avanish is a Tidemark Fellow and Board member at Hubspot; he's a former platform ecosystem leader at Salesforce, ServiceNow, Google

Successful software companies are increasingly developing and promoting a platform strategy that allows them to expand their footprint, deliver greater customer value and capture increased share of wallet. This entails both a product strategy and framework (e.g. exposing and maintaining APIs and/or platform-as-a-service (PaaS) capabilities) as well as building an ecosystem of developers and independent software vendors (ISVs) that can extend the platform and application offerings with their own expertise and deliver more complete customer solutions. Examples of companies that have effectively done this include Atlassian, Hubspot, Salesforce, ServiceNow and many others. The Platform decision is a product strategy and investment decision to drive better product delivery and ease integrations; it generally precedes a decision on whether to also build an ecosystem of partners to leverage the platform.

Technology companies that identify and act on a platform opportunity are able to sustain higher growth rates and valuations. This requires assessing what type of platform and ecosystem opportunities may exist, and making the right investments in tech, go-to-market and other key resources to capture the opportunity. In this article series, we will explore winning strategies to build such platform strategies and associated ecosystems. We will expand on these topics through thought leadership discussions, where we will capture insights from innovators who have adopted such strategies and what are some of the lessons learned and takeaways for their peers who may consider a similar journey.

What is a platform?

There are different ways to think about being a platform. For our purposes, we are defining a platform as a construct that allows the company’s offering to be extended rapidly through “extending with or building on top of” the core offering. There can be many different levels and tiers, but this is a simple starting point.Not every company can or should be a platform; but certain offerings, based on the problems they’re solving and how they’re architected, have more of a “right” to be a platform and we will discuss more about this in this series of articles.

Why are platforms becoming more prominent?

Over the last few years, the most successful companies in the world have been platform companies.

In fact, six of the 10 most valuable companies are platform companies, including Apple, Microsoft, Alphabet, Amazon, Facebook, and Tencent. Interestingly, many of these companies are less than 25 years old. So, relatively young companies have achieved trillions in market value by pursuing a platform strategy. Even Apple and Microsoft, which were founded in 1976, have grown substantially faster after adopting a more open platform mindset; Apple with the iPhone and Microsoft with the Windows ecosystem and now Azure and Xbox.

Another important point is that platform companies grow bigger and faster. Considering growth from a revenue perspective, companies hit $1 billion, $10 billion faster than other types of companies. Again, Microsoft is a great example of how embracing a platform strategy can lead to explosive growth.

What is an ecosystem?

An ecosystem is a way for platform companies to drive more value to customers and more customers to the platform. In the process, companies can capture greater market share and share of wallet. In tech, platform companies have a large cadre of developers or other supporting teams that specialize in delivering products or applications tailored to the operating system of the platform.

Again, think of the iPhone and its ecosystem of apps. The more apps a customer installs, the more entrenched they become in the ecosystem and platform, creating a virtuous cycle between the customer, the core device and the model. This approach also has the benefit of creating network effects. The more apps a customer uses, and their friends use, the more adoption grows, leading to opportunities for aggregated monetization, merchandising and so forth.

Companies can use a platform + ecosystem approach as a lever to help sustain their growth rate long term. Consider the track record of two platform and ecosystem vanguards, Salesforce and HubSpot. The below charts showcase their LTM revenue growth ($ quantum increase quarter-over-quarter as well as the % YoY growth rate). Both businesses have been able to consistently increase their LTM revenue, in part due to their platform and ecosystem strategy.

Salesforce, for example, ramped up revenue monetization of their ecosystem in 2010, after initially launching the AppExchange in 2005. The monetization approach brought greater value to partners through improved marketing and field alignment which created demand from customers (and thus drove stickiness and increased penetration for Salesforce’s own offerings).

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Since HubSpot went public, the company has demonstrated consistent growth north of 30%, with a recent acceleration of growth in part due to their success moving to a multi-product strategy (marketing automation, customer service product suite, sales force automation, content management,  etc.).

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What are the drawbacks of not pursuing a platform strategy?

Non-platform companies generally have slower growth rates and also face higher costs to vertically integrate their offerings and “build it all in house.” There are many examples of non-platform companies across industry sectors, including retail (Walmart) and industrial manufacturing (GE, Siemens) where they have typically tried to provide complete hardware and software solutions and haven’t adopted any open integration approaches. Companies may have very good reasons to remain closed and not expose their API to external developers, but the opportunity costs to growth and market share seem clear.

Questions to ask yourself when considering a platform

There are different approaches to creating a platform, depending on the problem you are solving. It is possible for a company to fit into more than one approach to a platform, but you may have one entry point and expand to others over time. Ask these questions as you consider becoming a platform:

  • Am I making it easy to do something?

Consider how Stripe and Twilio provide API-based access to accelerate key functions like payments or messaging, respectively.

  • Do I have a lot of data that is valuable?

Are you collecting data that is incredibly valuable and can serve as a system of record for others to leverage? Good examples of platforms operating in this way include ServiceNow and HubSpot.

  • Can you automate a broader process and, by doing so, significantly drive more value?

You are building and automating a business process by connecting various apps to a core. Salesforce is a good example of this platform approach.

While not for everybody, having a platform vision can help companies grow faster and achieve higher valuations than they could achieve otherwise. It requires a thoughtful approach to defining what the “platform strategy” for that specific company may mean, embedding that mindset as part of a company’s DNA, and then having a clear execution plan to build it out. With these core concepts established, our next pieces will look at the what and the how of building a software platform and ecosystem.

The author would like to thank David Yuan and Phil James at Tidemark for their sponsorship and contributions to this series. Also, much gratitude to JZ Rigney and Katie Curnutte at Kingston Marketing Group for their terrific collaboration.

Next up: Part 2 - What Does It Mean To Be a Platform + Ecosystem Company?

Avanish Sahai