Towards a new business model canvas for platform businesses in two-sided markets

Taipale-Erävala, Kyllikki; Salmela, Erno; Lampela, Hannele Article Towards a new business model canvas for platform businesses in two-sided markets Journal of Business Models (JOBM) Provided in Cooperation with: Aalborg University, Aalborg Suggested Citation: Taipale-Erävala, Kyllikki; Salmela, Erno; Lampela, Hannele (2020) : Towards a new business model canvas for platform businesses in two-sided markets, Journal of Business Models (JOBM), ISSN 2246-2465, Aalborg University Open Publishing, Aalborg, Vol. 8, Iss. 3, pp. 107-125, https://doi.org/10.5278/jbm.v8i3.4621 This Version is available at: https://hdl.handle.net/10419/318941 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/3.0/ 107 Journal of Business Models (2020), Vol. 8, No. 3, pp. 107-125 Towards a New Business Model Canvas for Platform Businesses in Two-Sided Markets Kyllikki Taipale-Erävala1, Erno Salmela2 and Hannele Lampela3 Abstract The ambition of this paper is to increase the understanding of digital platform businesses and business model innovation in the context two-sided markets. A proposal for an instructive new business model canvas is developed by combining abductive reasoning with insights from a case study. The case was a unique driving school platform under the employee and professional service platforms. The proposed canvas builds upon Scholten’s canvas for platform businesses, complementing it with changes in terminology and the addition of new elements. The contribution of the paper derives from the insights provided by the case study and the identification of a new tool that can help platform businesses innovate in two-sided markets. Introduction Digital platforms in two-sided markets are capturing the market from incumbent companies by challenging the present structures, services and business models (Cusumano, Kahl and Suarez., 2015; Parker, Van Alstyne and Choudary, 2016; Salmela and Nurkka, 2018). A platform business is based primarily on innovative business models that create greater value for stakeholders than traditional models do (Parker et al., 2016; Scholten and Scholten, 2012). A two-sided platform business differs from a traditional one-sided value chain business. In a two-sided platform business, growth does not come from vertical and horizontal integration but from network orchestration that results in network effects. Instead of owning resources, the focus is on using external resources. In a two-sided platform business, the user ecosystem is a source of competitive advantage (Parker et al., 2016). Osterwalder and Pigneur (2010) originally developed the widely embraced Business Model Canvas (BMC) to support the innovation of digital business models. However, their canvas focuses on traditional value chains. The platform Keywords: digital platform; two-sided market; business model innovation; canvas; driving school. Please cite this paper as: Taipale-Erävala, K., Salmela, E., and Lampela, H. (2020), Towards a New Business Model Canvas for Platform Businesses in Two-Sided Markets, Vol. 8, No. 3, pp. 107-125 1,3 University of Oulu, Finland 2 Lappeenranta University of Technology Journal of Business Models (2021), Vol. 8, No. 3, pp. 107-125 108 108 business models in two-sided markets differ from the business models of value chains in one-sided markets, which led us to examine whether a different business model canvas should be used for the innovation of platform businesses in two-sided markets. In our literature search we encountered Scholten’s (2016) modified business model canvas for platform businesses in two-sided markets, which he has tested on a few platform cases. The case study that informs this paper resulted in suggesting improvements to Scholten’s modified canvas for digital platform businesses in two-sided markets, and aims to answer the following research question: what kind of business model canvas is most suitable for the innovation of platform business models in two-sided markets? The choice of Scholten’s modified canvas as a key focus for this study was supported by the research results of Parker et al. (2016). Their study examined the platform business in detail and incorporated the same elements as Scholten’s canvas. Wortmann, Ellermann and Dumitrescu. (2020) have also analysed digital platforms and utilised Scholten’s canvas as one example of a potential tool. In order to pursue the present study, an abductive approach and a case study were combined to suggest improvements for the current business model canvas (Dubois and Gadde, 2002) by comparing the canvases and presenting development ideas. The empirical case that informs the present paper is the Finnish digital driving school, Ratti. fi (hereafter Ratti), which matches people who require driving licences with people who provide driving instruction. Ratti competed against traditional driving schools, which operate in one-sided markets. Unfortunately, the company ceased operations in 2018 due to a change in legislation. This paper is structured as follows: section 2 presents the relevant prior theoretical knowledge, while section 3 describes the study’s research design, including an overview of the case company. In section 4 Ratti’s business model is subjected to a comparative analysis. Section 5 the findings of the research are discussed leading to the identification of a new canvas to be used for platform businesses operating in twosided markets. Finally, section 6 considers the main conclusions of the study and offers some brief suggestions for further research. Theoretical overview of platform business and business model canvases Business models and platform businesses A business model is a visualisation describing how an enterprise operates, who is the customer, what does he/she value, and how to make money in the course of business (Magretta, 2002; Drucker, 1994). To create, deliver and capture value, a business model is a summary of how the company plans to redeem its value proposition to profitably serve its customers by leveraging its own and its partners’ resources. A value proposition guides the creation of a new business model (Jaakkola and Hakanen, 2013; Nenonen and Storbacka, 2010; Osterwalder and Pigneur, 2010). After the value offering has been created for customers, further elements of the business model are created and verified. With those elements, the solution is made available to potential customers at a suitable price. Furthermore, cost-effective manufacturing and delivery are created (Osterwalder and Pigneur, 2010; Furr and Dyer, 2014). This paper focuses on platform businesses. A platform is based in the digital technology environment, including the internet infrastructure, with services being constructed on it (Gawer, 2009). There are various types of business platforms such as employee and service platforms, of which Uber and Airbnb are the most famous examples. A platform makes money through capturing the value from the network effect, for example, by taking part of the transactions for itself and charging for the use of the platform. (Parker et al., 2016; Scholten, 2016). Platform businesses can be divided into one-sided and two-sided markets. A one-sided market is related to a traditional value chain business where bilateral exchanges follow a linear path as firms purchase material, manufacture components and assemble them into products that are sold to customers. In a two-sided platform business, interaction follows a triangular relationship as stakeholders first affiliate with the platform and then connect or trade using platform resources. The two sides are usually labelled customers and producers (Eisenmann, Parker and Van Alstyne, 2006; Hagiu and Wright, 2015; Parker and Van Alstyne, Journal of Business Models (2021), Vol. 8, No. 3, pp. 107-125 109 109 2016). A two-sided market differs from a traditional value chain business in that the platform can receive revenue from both producers and customers (Parker et al., 2016; Scholten, 2016). Business models of platforms differ from those of traditional value chains in one-sided markets. Platforms are crucial to creating a cost-effective user experience and organising resources. The fundamental roles of a platform are to minimise transaction costs by matching customers and producers and to enable value creating exchanges that would not take place otherwise. A digital platform helps to scale business more efficiently than does a physical one (Evans, Hagiu and Schmalensee, 2006; Järvi and Kortelainen, 2011; Parker et al., 2016). Platforms capture the market from traditional operators thanks to their positive network effects. A two-sided network effect occurs when an increase in the number of people in a single user group increases the number of people in the other group. The growing number of people makes better matching possible; in other words, the customers’ needs and the provider’s offerings are more likely to meet. The more users, the more connection options between them. Negative network effects between different sides arise when demand and supply are not balanced or matching is difficult due to the heterogeneity of the user community. If there are too many negative effects, then people will reject or reduce the use of the platform (Parker et al., 2016). In a two-sided platform business, the platform typically does not own some crucial physical resource. This connects the platform business to the sharing economy (Parker et al., 2016; Vogelsang, 2010). The goal of business model innovation is to create and validate a strategy to go to the market being a source of competitive advantage (Teece, 2010) and enabling a long-term success (Bucherer, Eisert and Gassmann, 2012). Business model innovation may examine existing parts of a company’s business model or visualise a new business model for to satisfy customer needs. Business model canvases are commonly used tools to innovate business models. The Business Model Canvas (BMC) To visualise a company’s or product’s value proposition, Osterwalder (2004) proposed a business model ontology for digital businesses. Subsequently Osterwalder and Pigneur (2010) refined this model to create the BMC, which incorporates various elements to be defined when considering a company’s business: value propositions; customer segments; channels; customer relationships; revenue streams; key resources,; key activities; key partners; and cost structures. These elements form a holistic model as illustrated in figure 1.  Figure 1: The business model canvas (Osterwalder & Pigneur, 2010). Journal of Business Models (2021), Vol. 8, No. 3, pp. 107-125 110 110 Each of these components is now briefly outlined. The Value Proposition is that the bundle of products and services that create value for a specific customer segment. By means of a value proposition, a business endeavours to solve a customer problem or satisfy a customer need in a way that is different from competing value propositions. Customer Segments define the different groups of customers a business aims to reach and serve. When a company has identified its target customers, the appropriate business model requires to be based in a sound understanding of their customers’ needs. Via Channels, the value propositions are delivered to customers through distribution, sales channels and communication forming a company’s interface with the customers. The customers get to know company’s products and services through channels, which in turn help customers to evaluate a company’s value proposition. Customer Relationships relate to the types of relationships a business has identified are required by specific customer segments. Customer relationships are usually connected to boosting sales, customer acquisition and retention. Customer relationships are intended to influence the overall customer experience. The element of Revenue Streams symbolizes the cash a company generates from each customer segment. If a company has many customer segments, a company needs to specify what value each customer segment is willing to pay. Key Resources makes a business model to work. Key resources enable a company to create and offer a value proposition, to reach markets, attend to relationships with customer segments, and earn revenues. While the key resources make the business model to work, Key Activities are those actions that enable the business to operate successfully. When determining key activities, the requirement of value proposition, distribution channels, customer relationships and revenue streams are highlighted as important elements together with the designated key resources. Key Partnerships are formed through the network of supplier and partners making the business model to work. Partnerships have become important parts of companies’ business models, and therefore, the companies establish different collaborations and cooperation to acquire resources, reduce risks, or optimize business models and its operations. The final element is termed Cost Structure. The cost structure describes all the costs caused in a particular business model. The cost structure depends on the type of business model, and costs should be minimized in every business model. Scholten’s Two-sided platform business model canvas Osterwalder and Pigneur’s BMC provides a tool for innovating business models for value chains or pipelines. However, this canvas is not applicable to the innovation of business models for digital platforms in a two-sided market (Scholten, 2016). To address this, Scholten (2016) proposed a modified canvas (figure 2) to enable the creation of platform business models. He appears to combine the results of Parker et al.’s (2016) platform business research and the BMC created by Osterwalder and Pigneur (2010). In Scholten’s modified canvas, producers and customers are the main user groups in a two-sided market. This platform offers these groups value. Role changes are also possible. The customer can periodically be a producer and vice versa (Eckhardt, Houston, Jiang, Lamberton, Rindfleisch and Zervas, 2019; Scholten, 2016; Parker et al., 2016, Gabriel, Korczynski and Rieder, 2015). When designing a platform, it is important to first identify the core interaction, value unit (e.g., Airbnb’s list of rental homes) and key user groups. The core interaction must be simple, attractive and value generating for users. Platforms encourage producers to create useful, relevant and interesting value units for customers. The platform does not necessarily create any value units at all. It also has no control over the production process of a product or service, which is a major difference from traditional value chain business (Parker et al., 2016; Scholten, 2016). Partners, filters, rules, and tools and services enable a successful core interaction. Partners provide additional services related to the core interaction. Filters help to match customers and producers – they Journal of Business Models (2021), Vol. 8, No. 3, pp. 107-125 111 111 bring together the most suitable parties to create a successful interaction. For example, only relevant producers and their value units are shown for a particular customer. This prevents information overflow and facilitates decision making. Data and algorithms are used to match customers and producers. Tools and services are data-based tools that can create, for instance, loops of community feedback. The constant flow of interesting value units will bring people back and increase the number of users by creating a new value. User feedback helps to control the quality of interactions. In addition, users can recommend the platform to others. Facilitation tools help producers create and deliver high-quality outputs to customers as well as assist in producing marketing material (Parker et al., 2016; Scholten, 2016). The rules are used to orchestrate the ecosystem and guide people’s behaviour. They determine who participates in the ecosystem, how the value is shared and how conflicts are resolved. In the platform economy, the platform partners create a significant part of the value, so the profits must be fairly shared. This is not easy because different user groups may have different interests. There will inevitably be conflicts, something clearly evident in Facebook’s privacy policy. In addition, sanctions are defined if users act against the rules (Parker et al., 2016; Scholten, 2016). In the platform business, revenues can be made in the following main ways: 1) by charging a transaction fee, which is a percentage of the price or fixed fee; 2) by charging producers for access to customers or vice versa; 3) by charging for improved access to the platform (e.g., better targeted or more attractive messages for customers); or 4) by charging for higher quality than normal (e.g., offering exceptionally reliable child caregivers). The ‘freemium business model’ is also common (Parker et al., 2016). The pricing element of the canvas describes the need to define how much customers or producers are willing to pay for the relevant services. The cost structure presents the fixed and variable costs required to operate a business. Channels refer to how and where a product is distributed and sold and how users are attracted to and engaged in the platform. The customer journey involves the customer’s every interaction or touchpoint with the platform, product, service and brand before ordering, during the order-delivery process and after delivery. A comprehensive experience is formed when the customer is satisfied with the whole journey. The producer journey is like the customer journey but from the producer’s point of view (Scholten, 2016; Osterwalder and Pigneur, 2010; Kim and Mauborgne, 2005).   Figure 2: Business model canvas for digital platforms in two-sided markets (Scholten, 2016). Journal of Business Models (2021), Vol. 8, No. 3, pp. 107-125 112 112 Research design A case study approach (Saunders, Lewis and Thornhill, 2007) was chosen because it allows a broad and in-depth examination of a single instance of the phenomenon of interest (Collis and Hussey, 2003), enhancing understanding of the case by describing the phenomenon in its real context (Yin, 2003) and binding the case by time and activity (Stake, 1995). In this research, the phenomenon under examination is the two-sided platform business. Ratti, the case company informing this study, exhibits a business model in a two-sided market. Ratti was chosen because it was an innovative newcomer to the driving school sector and an illustrative example of a two-sided digital platform business. Ratti is an employee and professional service platform; this type of platform was chosen because such platforms can significantly change work life and people’s earning possibilities (Parker et al., 2016). The use of Ratti as a single case is justified because it is a unique digital driving school platform (Yin, 2003). Empirical data from Ratti were collected from public information found on the company website (www.ratti.fi), together with other digital information sources and from newspapers. An abductive approach was used to suggest improvements for the existing business model canvas. Abduction is understood as systematised creativity or intuition in research designed to create novel knowledge (Taylor, Fisher and Dufresne 2002) and to escape already known constructs (Kirkeby, 1990). Intuition may result from an unexpected observation that cannot be explained using an existing theory (Andreewsky and Bourcier, 2000). For researchers, an abductive approach is useful for discovering other variables and relationships (Dubois and Gadde, 2002). An abductive approach is possible when observations are connected to a main idea or clue, and existing theory models alternate in the researchers’ thinking (Tuomi and Sarajärvi, 2002) to refine existing theories rather than invent new ones (Kovács and Spens, 2005). Kovács and Spens (2005) described the abductive research process as a continuous movement between empirical and theoretical issues. In the present study, empirical data about the digital driving school business model and theoretical knowledge of business model canvases provided the sources of inspiration to refine and combine existing theory. The main phases of the abductive research process are illustrated in figure 3. The discontinuous arrows represent the movements in canvas development. In this study, we conducted four phases (0–3) of the abductive process to suggest improvements for the existing canvas, repeating phases 1 and 2 twice to refine the match between real-life observation and theoretical knowledge. The research process embedded in the abductive approach may begin with real-life observation (Alvesson and Sköldberg, 1994) or prior theoretical knowledge (Kovács and Spens,    Figure 3: The abductive process of research applied in this study (modified from Kovács and Spens, 2005). Journal of Business Models (2021), Vol. 8, No. 3, pp. 107-125 113 113 2005). As doctoral-level academic professionals in the fields of engineering and management, we had prior theoretical knowledge about business models in general and about their significance, which corresponds to phase 0 in the abductive process. This study started with real-life observation (phase 1) when the digital driving school Ratti entered the driving school business in Finland and aroused our interest in whether it would succeed in the markets. The platform business model of Ratti was entirely different from those of traditional driving schools. In our search for theoretical knowledge, we initially acknowledged Osterwalder and Pigneur’s BMC as developed for digital businesses. The business model of Ratti was compared with their canvas. However, their canvas was designed for one-sided markets and is thus not suitable for two-sided platform businesses as we found out after testing. In the theory search, we discovered Scholten’s modified canvas, developed for two-sided platform businesses, and compared it with the Ratti business model (phase 2). In the comparison and analysis, we noticed an incomplete match between Scholten’s theoretical model and Ratti’s empirical business model (phase 1). This incomplete match led us to a second loop of theory matching in which we searched for novel theoretical elements to complement the existing canvas (phase 2). After identifying the differences and similarities of existing business model canvases in comparison with Ratti business model, the research process ended with a theory suggestion in the form of improvement propositions for business model canvas for two-sided platform markets (phase 3). The Ratti.fi case This study began by gaining an understanding of the business logic of the Finnish driving school platform Ratti (officially “driving teacher brokerage service”), which was established in 2015 to compete against traditional driving schools. The platform took advantage of Finnish legislative reforms, which made it possible for teachers to teach three non-family students during three years. In the beginning, the platform operated in the Finnish market although the business had the ambition to evolve into an international operation. There are 70,000 driving school students in Finland each year, and Ratti was targeting half of the €120 million Finnish driving school market. The Ratti platform match-makes driving teachers (producers) and students (customers), as shown in figure 4. For students seeking a driving licence, Ratti’s operations offered a value proposition for about half the price of a traditional driving school. A cheaper option naturally interests them. Teachers offer driving lessons for students and make money this way. The driving lessons are offered by teachers using own cars. Ratti pays teachers a fee for driving lessons. If a teacher teaches the maximum number of three students outside her family, she can earn €960 over a three-year period. Unfortunately this did not attract enough teachers, being Ratti’s greatest problem, as a consequence of which many students did not receive a local driving teacher sufficiently rapidly. This reduced the students’ willingness to join the platform. Hence, the network effect was negative. Figure 4: Ratti.fi platform two-sided market. Journal of Business Models (2021), Vol. 8, No. 3, pp. 107-125 114 114 Ratti also offered theory lessons for students and, if necessary, also for teachers through the digital platform. Additionally, Ratti offered other services for teachers. Teachers can therefore be both producers and customers at the same time. Because of this, the figure 2 shows money flows in both directions regarding teachers. Ratti believed that the legislative limit of three students would be removed in a short time, which would provide instructors with more opportunities to earn money. If this limitation had been removed, teachers could have earned almost €3,000 per month by teaching 150 hours. This would have proved more attractive teachers. However, the opposite happened with the teaching of non-family students becoming banned through changes in legislation. Unfortunately, as a result, Ratti ceased operations in 2018. A Comparative Analysis of Ratti’s Business Model with Extant Alternative Visualisations This section presents a number of observations regarding the business model in use by Ratti. First, differences between Ratti’s business model and the traditional driving school model are presented. Second, the Ratti business model´s fit with Osterwalder and Pigneur’s BMC is examined. Finally, Ratti is analysed using Scholten’s platform business model canvas. Differences between Ratti’s business model and that of the traditional driving school There are some significant differences (table 1) between the business models of traditional driving schools and that of Ratti. The identified differences are based on a content analysis of text descriptions about Ratti business model. Ratti has outsourced the critical resources of traditional driving schools serving private individuals, namely driving instructors and cars. It also has no physical teaching and staff facilities. For these reasons, Ratti has considerably less fixed and investment costs, which permits a lower price for its customers. On the other hand, it does not have professional instructors and the quality of car supply is varied. Compared to a traditional driving school Ratti has to attract a critical mass of instructors other than through a fixed salary. Teaching individuals to drive is just a source of additional income for instructors. In traditional driving schools the permanent staff receive a fixed salary. In consequence, teachers are usually quickly available for students. Furthermore, driving schools do not have the student quantity limitations that Ratti’s teachers have. In addition to service producers, instructors are also customers who buy services from Ratti, such as theory lessons for themselves. Ratti does not have its own quality control or a traditional management structure for monitoring instructors. Students who complete their driving license provide quality control insights through the feedback mechanism. Almost any person can become a driving instructor with Ratti, and is not required to exhibit the values and culture of a traditional driving school. For some students this provides an attractive option. However, for the majority of students, as well as their parents, a traditional driving school that has a history both as a way of working and also as a company offers a preferable alternative. As a new venture, Ratti is only able to rely on a relatively small stock of user experiences of the service. In addition, the absence of a bricks-and-mortar business estate is a concern for some potential clients. A new business model with low demand and little feedback causes doubts in people. A major attraction of Ratti, however, is that it offers a more flexible way to obtain a driving license because of the independence of time and place. There are no eight to four working hours and no need to go to driving school for theory classes. Ratti differentiated itself from traditional driving schools through its novel, youth-oriented marketing approach. In summary, the core functions of a traditional driving school are to get customers and teach, while the core functions of Ratti is to achieve positive network effect and match-making; in other words, to create a critical and balanced mass of teachers and students, and to provide a local instructor for students. However, Ratti is not a pure platform for a two-sided market because it has its own theory teaching. Ratti also does not provide students with a list of instructors Journal of Business Models (2021), Vol. 8, No. 3, pp. 107-125 121 121 professional service platform but it can also be used in innovating other types of platforms in different industries or even in the public sector services. The canvas tool can also be utilized for comparisons between different business models. The proposed canvas was developed with the help of abductive logic and the case study of Ratti a business that incorporated an employee and professional service platform. The new canvas could be applicable to analyse these kind of business platforms. However, more research is needed to gain greater insights into possible canvas applications, which entails applying the proposed canvas in practice. In addition, the applicability of the new business model canvas should be tested on other types of online platforms in future studies and the implementation process of the proposed canvas improvements should be tested in a follow-up study. As this study covered one case example in one industry, and was carried out employing one methodological approach, there are many possibilities for further research by broadening the scope of empirical cases and by including multiple complementary methods such as systematic literature review, survey or interviews. 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Towards an Ontology and Canvas for Strongly Sustainable Business Models: A Systemic Design Science Exploration, Toronto, On: York University, 2013. Vogelsang, M. (2010). “Dynamics of two-sided internet markets”, International Economics and Economic Policy 7(1): 129-145. Wortmann, F., K. Ellermann, A. Kuhn and R. Dumitrescu. (2020). “Ideation for digital platforms based on a companies’ ecosystem.” Procedia CIRP 91: 559-564. Yin, R.K. (2003). Case Study Research: Design and Methods, California, Thousand Oaks: Sage, 2003. Journal of Business Models (2021), Vol. 8, No. 3, pp. 107-125 125 125 About the Authors Dr. Kyllikki Taipale-Erävala works as a Post-Doctoral Researcher and a Project Manager in the MicroENTRE research team at the Kerttu Saalasti Institute, University of Oulu, Finland. Her research expertise is competencies enabling business survival in micros and SMEs in changing business environments. She is also interested in developing micro enterprises, innovation, business models, knowledge management, and advanced services. Additionally, Dr. TaipaleErävala is evolved in entrepreneurial education and training over 10 years. She has experience of personal entrepreneurship, in the field of training and education in several school levels, supervision of apprenticeships, and HPA and energy technology. Dr. Erno Salmela is post-doctoral researcher and project manager at LappeenrantaLahti University of Technology. His research focusses on innovation management, business ecosystems, digital platforms, entrepreneurship, experimental innovation, e-sports and supply chain management. He has 20 years’ experience in collaborative university-industry research and development projects. Dr. Salmela is also a serial entrepreneur; from digital platforms to current e-sports business. Dr. Hannele Lampela is a Senior Research Fellow in Industrial Engineering and Management research unit at the University of Oulu, Finland. She has more than 15 years of experience in university teaching and research, with diverse topics in information and knowledge management such as networked value creation, innovation management, distributed knowledge work, competence management, inter-organizational learning, and product lifecycle information management. Her current research interests focus on information and knowledge-driven transformation in different industries, ecosystems and platforms. In addition to her teaching and research experience, Dr. Lampela has extensive project experience by being involved in several EU and nationally funded research projects.