Platform companies play pivotal roles in nearly every industry. By enabling different groups—such as buyers and sellers—to connect and interact, they help drive innovation and growth in the digital age.
“Platform companies have become increasingly important to the global economy and are some of the largest and most valued companies today,” says Harvard Business School Professor Feng Zhu, who teaches the online course Winning with Digital Platforms.
Free E-Book:
So You Want to Be an Entrepreneur: How to Get Started
Access your free e-book today.
DOWNLOAD NOWWhat Are Platform Companies?
Platform companies use digital infrastructure to facilitate direct interactions between groups and generate revenue through transaction fees, advertising, and subscriptions.
They’re not only scalable and equipped to boost operational and revenue growth without significant cost increases but accessible regardless of users’ time zones or geographic locations.
Those characteristics make them attractive partners if your organization wants to pursue innovation but can’t transition to a platform business model.
Platform Company Partnerships
Partnering with platform companies can help reshape your business strategy without building new infrastructure. When selecting partner businesses, consider whether their platforms are open or closed.
- Open platforms are accessible and flexible with no single gatekeeper controlling access to or regulating them
- Closed platforms are owned and heavily controlled by one company to protect its interests at all costs
Your partners’ platform models can impact how you cooperate and compete with them—known as your coopetition dynamic. For example, open platforms allow for greater integration and flexibility, resulting in more competition and less control over quality. Alternatively, closed platforms offer more control and security, ensuring a consistent user experience but limiting innovation opportunities.
By understanding partnerships’ pros and cons, you can assess how they can propel your organization’s growth. Here's an overview of the benefits and risks of partnering with platform companies.
Benefits of Partnering with Platform Companies
Access to Advanced Technologies
One benefit of partnering with platform companies is gaining access to advanced technologies—such as artificial intelligence (AI), machine learning, and cloud computing—to enhance your products.
For example, agricultural machinery manufacturer John Deere partnered with artificial intelligence computing platform NVIDIA to create innovative products, like massive combine tractors that help reduce chemical costs using AI.
By integrating advanced technologies, traditional businesses like John Deere can compete and drive change in an increasingly digital marketplace.
Related: 3 Examples of Disruptive Technology That Are Changing the Market
Expanded Market Reach
Partnering with platform companies can also help you reach a larger, more diverse customer base.
In Winning with Digital Platforms, Stephen Herbert, Jr., head of online business for X Fire Paintball & Airsoft, discusses why his brick-and-mortar company partnered with global e-commerce platform Amazon.
“I saw brick and mortar as kind of having a limited future,” Herbert says. “So I experimented with Amazon to try to give them a path of relevancy.”
The partnership helped X Fire expand its customer base and fulfill orders through the Fulfillment by Amazon program.
“They provided us with Fulfillment by Amazon to fulfill orders that would be almost impossible for us to deal with on our own as a small business,” Herbert says. “It's a package of both customers and fulfillment that’s tempting and, frankly, great.”
Beyond assisting small businesses, like X Fire, to scale and compete in the e-commerce space, such partnerships also benefit Amazon.
“Partnering with third-party sellers lets Amazon offer a large variety of products, which makes them competitive against other e-commerce platforms,” Zhu says in Winning with Digital Platforms. “Amazon also charges commission fees to its third-party sellers.”
Boosts Sales
Strategically partnering with platform companies can boost sales by optimizing inventory management, enhancing customer experiences, and increasing product availability.
For example, retailer Walmart recently partnered with technology company Microsoft to support its digital transformation efforts. The collaboration enabled Walmart to develop an AI-powered inventory system that predicts product demand during peak seasons and unexpected events, leading to five percent year-over-year revenue growth.
Related: 5 Benefits of Platform Business Models
In Walmart’s latest earnings reports, Executive Vice President and Chief Financial Officer John David Rainey attributed the success to partnerships.
“The team’s strong execution and financial results of FY24 reflect our ability to reshape our business model,” Rainey writes. “We’re investing in our people and global platform to position us to drive profitable growth in the years ahead.”
Platform company partnerships can come with drawbacks, however. Here are common risks to consider.
Risks of Partnering with Platform Companies
Competitive Disadvantages
One of the major risks of partnering with platform companies is abruptly shifting from cooperation to competition.
In Winning with Digital Platforms, Herbert shares trends he observed in X Fire’s relationship with Amazon.
“They seemed to be courting sellers to bring new products to market,” Herbert says. “And once these sellers proved the products have a demand in their marketplace, they would approach the manufacturers to buy directly and kind of skip the third-party seller.”
Amazon also competes with third-party sellers by controlling how consumers purchase products with its “Buy Box.”
“That’s when you click ‘Buy’ from there; it's buying it from a certain seller,” Herbert says in Winning with Digital Platforms. “And a lot of buyers don't really think about that. But there's often 10, 20, 30 sellers selling the same exact product at the same exact price, or a similar price. And Amazon will, through an algorithm, select what seller they're going to give the Buy Box to on that page load.”
That level of control over third-party sellers can be debilitating for small businesses. Make it a point to negotiate and review partnership terms carefully before starting relationships with large platform companies.
Dependency Issues
Relying on platform partnerships can limit control over your business, leading to vulnerabilities if your partners change their terms or policies.
For example, Winning with Digital Platforms explores the constantly evolving partnership between game developer Epic Games and technology company Apple. In 2018, Epic Games partnered with Apple to allow iOS users to download and play the popular game Fortnite. While the relationship initially granted Epic Games access to Apple's vast customer base and app distribution network, it faced significant dependency issues due to Apple's dominant position and control over its platform.
As a result, Epic Games sued Apple over its App Store policies, arguing that Apple stifled competition by charging app developers up to 30 percent commissions on in-app purchases.
Not all partnerships with platform companies result in legal action. But, determine how depending on a powerful partner could impact your business operations and strategy.
Data Privacy Concerns
Data privacy and security are critical to consider when partnering with digital platforms because your business can be exposed to cyberattacks—directly and indirectly.
For example, retail giant Sears experienced a data breach in 2017 when its online customer services vendor, [24]7.ai, suffered a malware attack that exposed hundreds of thousands of customers’ credit card information.
[24]7.ai didn’t alert its partners to the data breach until months later, putting companies like Sears in challenging positions. Sears tried to play catchup by working with federal law enforcement and its banking partners to understand the breach and set up a customer hotline months later.
Since partnerships with digital platforms require sharing sensitive data, practice due diligence and assess platforms’ security protocols and contingency plans. In doing so, you can better manage risk and protect your business from data breaches.
Partnering with Platform Businesses
Partnering with platform companies can be a powerful business strategy. To maximize the benefits while mitigating risk, aim to build strong, trust-based relationships and understand partners’ business models, cultures, and objectives.
One of the best ways to learn how to work with platform businesses is by enrolling in an online course like Winning with Digital Platforms. Through real-world cases featuring partnerships between industry-leading companies, you can determine the best approach for your organization.
Do you want to dive deeper into how to partner with platform companies? Explore Winning with Digital Platforms—one of our online entrepreneurship and innovation courses—and download our free entrepreneurship e-book to take the next step in your educational journey.
