[Andrei Hagiu] Why and how all businesses should consider turning their products into platforms

In the current digital era, businesses are constantly seeking ways to innovate, grow, and maintain a competitive edge. One increasingly popular strategy is transforming products into platforms. This approach involves expanding existing products and services to also enable interactions among customers or between customers and external third-parties. With some creative thinking and careful implementation, this strategy can generate new revenue streams and enhance competitive advantage via network effects. This essay explores why all businesses should consider the product-to-platform transformation and outlines three key methods to achieve it.

-Any product can become a platform-

Platforms have emerged as one of the most powerful business models due to their inherent network effects, which drive exponential growth and scalability. These models facilitate interactions between various users, creating value for all parties involved. While giants like Amazon, Alibaba, Apple, Meta and Microsoft epitomize platform success, the concept extends far beyond these tech behemoths. Any business, regardless of its size or industry, can benefit from adopting platform elements to some extent.

The idea of transforming products into platforms revolves around creative and strategic approaches to generate new revenue streams and bolster competitive positioning. Here are a few recent examples that highlight the wide-ranging potential of this strategy:

- FreeWater: This company distributes natural spring water in aluminum bottles or paper cartons for free, funded by selling advertising space on the bottles. This model not only offers free water to consumers but also creates a new advertising platform.

- Samsung’s Refrigerdating: Samsung turned its refrigerators into a dating platform where users could match with potential partners based on the contents of their fridges.

- ChatGPT’s GPT Store: OpenAI’s GPT Store allows developers to create and sell custom GPT-based applications, expanding the utility of ChatGPT and creating a new marketplace.

These examples illustrate the diverse and innovative ways businesses can turn their products into platforms, benefiting from increased engagement, loyalty, and revenue opportunities.

Three methods to transform products into platforms

-Method 1: Opening Doors to Third-Parties-

The first method for transforming a product into a platform is by inviting third-party sellers or developers to promote or sell to your customers within your product or service.

The most basic version of this approach is to sell advertising space. As seen with FreeWater, allowing third-party advertisers to promote their products on your product’s packaging can create a new revenue stream. Similarly, brands like Amorepacific, Nongshim or CJ CheilJedang could explore selling advertising space on their packaging to complementary, non-competing brands.

While opening the door to third-party advertisers creates a new revenue stream, it does not really benefit your customers, except perhaps indirectly, in the form of lower prices (FreeWater customers get free water, sponsored by advertisements).

This is why the goal should be to implement a more powerful version of opening the door to third parties than just selling ad space on your products. This involves creating something like an app store around your product and getting third parties to create new complementary products specifically designed to work with your product. The classic example of this is Apple’s App Store, which enabled third-party developers to create new applications and functionalities that greatly enhanced the iPhone. OpenAI’s GPT Store is just the latest prominent example, and it follows in the footsteps of many other software vendors that have created app stores around their flagship products: Amazon Web Services’ marketplace, Shopify’s app store, Intuit QuickBooks’ apps portal, Salesforce’s AppExchange, etc.

This approach can also be adopted by manufacturers of hardware products. For instance, an automotive manufacturer like Hyundai could open its vehicle’s software platform to third-party developers to create new in-car applications or services.

Even consumer packaged goods companies can use the app store idea. For instance, Lotte Chilsung Beverage could invite third parties to come up with new formulas of nutritious supplements or flavors for its soft drinks, that can be selected by consumers online or at the point of sale.

-Method 2: Connecting Customers-

Another powerful method is to enable interactions or transactions between your customers, adding significant value to your product. This can be achieved in a variety of ways:

- Matchmaking Services: Products can incorporate features that connect users for various purposes. Samsung’s Refrigerdating and Virgin’s ill-fated inflight flirting system are unique examples where products facilitated (or attempted to facilitate) romantic interactions. Perhaps more promising attempts in this direction could be made by platforms like Kindle, Netflix, or Spotify, who could incorporate matchmaking features based on users’ content preferences.

- Building Communities: Establishing forums or online communities where customers can share experiences, tips, and information can enhance product engagement and loyalty. Webkinz by Ganz is a notable example where physical toys are linked to a virtual world, creating a community around the product. A similar example is Hyundai’s forum, where Hyundai car owners can discuss issues regarding Hyundai’s various car models.

- Enabling Transactions: Allowing customers to trade or exchange goods related to your product can foster a robust user community. Lego’s acquisition of BrickLink, a marketplace for trading Lego sets and parts, exemplifies this approach. It deepens customer engagement and adds value by facilitating interactions among Lego enthusiasts. The latest incarnation of this strategy is IKEA, which is currently testing a marketplace that allows customers to trade second-hand IKEA furniture pieces in Spain and Norway.

- Method 3: Reaching Out to Customers’ Customers-

This method is only relevant for B2B products or services. It involves offering products or services that enhance the interactions between your customers and their customers.

The quintessential example is OpenTable, which started as a supplier of reservation management tools for restaurants, and later launched a reservation website for consumers. This transformed OpenTable into a two-sided platform, creating strong network effects by connecting restaurants and diners.

More recent and similar in nature is Shopify’s Shop.app, which is designed to enhance the online shopping experience for consumers at Shopify-powered stores. It simplifies the checkout process, aggregates transaction history, and offers loyalty points, thereby benefiting both consumers and merchants.

In general, this approach could be leveraged by any “ingredient brand”. Consider for example Gore-Tex’s product: the trademark technology for building durable, waterproof and breathable garments that it licenses to branded manufacturers such as Arc’teryx, Patagonia, Salomon, Marmot, and Timberland. GoreTex could turn this product into a platform by building an online marketplace where its licensees could feature and sell apparel products based on Gore-Tex fabric. Or it could allow end-consumers to register any Gore-Tex-based product they buy with Gore-Tex and send the items in for repairs. In both cases, Gore-Tex reaches out to its customers’ customers by offering complementary services. This not only adds value for the consumers but also strengthens its branded customers’ relationship with their customers.

-Concluding thoughts-

Transforming products into platforms offers a compelling strategy for businesses to innovate, grow, and enhance their competitive edge. By creatively integrating platform elements into their existing products and services, businesses can unlock new revenue streams, foster customer loyalty, and drive sustained growth.

At the same time, there are also some important pitfalls to be aware of. Most importantly, once a product becomes a platform that enables interactions between third parties, ensuring the quality and reliability of third-party contributions becomes critical, since negative user experiences still mainly impact the original product’s brand. For example, a bad experience with a third-party app on Hyundai’s hypothetical app store would hurt Hyundai’s brand. And a bad date found via Samsung’s refrigerdating service might lead a frustrated user to blame Samsung. This means that becoming a platform requires careful governance and the alignment of the interests of all stakeholders—the platform, its customers and the third-parties.

Overall, however, most businesses would benefit from considering possible implementations of the product-to-platform methods described above. At the very least, this should spark new ideas for product innovation.

Andrei Hagiu

Andrei Hagiu is an associate professor of information systems at Boston University. The views expressed here are the writer's own. -- ED.