Insights

Digital Products Vs Digital Platforms – 5 Ways They Differ

Difference between digital products and digital platforms

Technology has been paving the way towards business growth in every way possible. The two popular and trending business ideas triggered by the changing needs of the providers and consumers point at digital products and digital platforms. Business people are seen confused when it comes to digital product vs digital platforms. Where they both add value to a business, they both hold a unique stand in the market.

Giving it a simplest of definition, a digital platform is a business model that attracts value by connecting two or even more parties, which could be producers or even the consumers.

Whereas, a digital product is an end-user entity in the form of content or services that are sold to individuals that are seeking to benefit from what the product offers.

This is exactly what the two business models primarily focus on:

Platform = Communication
Product = Production

There is a fair range of other differences that significantly differentiate digital products from digital platforms. Let’s dive deeper into a meaningful analysis.

Key Differences Between Digital Product and Digital Platforms

Here are certain major parameters that differentiate a digital product from a digital platform.

1. Linear Model Vs. Circular Model

A linear model of business attracts value by producing products that are, in turn, sold to consumers/clients down the supply chain. For example, a linear business could be a car manufacturer like BMW or a video content provider such as Netflix whose products are sold directly to the consumers, i.e., BMW cars and the video content respectively.

Yes, Netflix is a modernly built video content provider system. But, using modern technology does not necessarily mean that the business is a platform.

How a workflow in a linear business model works

Now that we are talking about a platform, it defies the linear model approach to adapt to a better system called a circular model of business. Here, a business provides value by providing a means of communication between consumers and third-party businesses.

For example, YouTube can be considered as a platform where content creators from around the world share content with platform users. In a way, platforms have proved to be highly valuable. Even a study by Statista proves that the top 10 companies by market capitalization are platforms.

How a platform based circular model works in case of a platform

2. The Anatomy of Business Models

As already discussed, a platform is all about facilitating communication and executing transactions between the concerned parties. It all comes back to a transaction and how smoothly it is completed to produce and exchange value among the actors.

The four key functions to execute a transaction include:

  • Building an audience base (provider and consumer)
  • Connecting the right provider with the right consumer
  • Provision of core services and features for a great UX
  • Creating standards and T&Cs for maintaining authenticity

All a platform needs is to master the above core functions to facilitate a fruitful transaction.

the four functions of a platform business

On the contrary, a product has a much easier job at hand. It doesn’t have to worry about any transaction except product development itself. All it needs to worry about is offering content/service to its end users.

This condenses its role to three main key functions:

  • Building an audience base (consumer)
  • Provision of core services or content to the audience base
  • Creating standards and T&Cs for maintaining authenticity

3. The Complexity of Operations

A platform works on a “many make many sell” concept, whereas a product works on a “Make one, sell one” concept. Sounds complex, eh?

Let’s make it simple for you. A digital platform is a solution that usually benefits both the parties involved in the interaction or transaction (the two functions of a platform). On one hand, there is a demand and on the other hand, there is a supply.

In the case of YouTube as a platform, both the content creators and the content consumers benefit from the transactions. And, surprisingly, neither of them turn out to be the platform owner. So, a platform just bridges the gap by acting as an anchor between the two parties involved.

Parties involved in a YouTube transaction

Coming to products (traditional business entity), value is driven through the provision of one product to a single end-user. We can say that the product is provided by the business, and the user can only consume it, thus creating a single revenue stream.

Netflix, the best among the list of digital products, revolves around the business owners providing entertainment services to consumers. These consumers buy the content, watch it, and enjoy it. In simple words, Netflix is a licensed product that is the owner of all its content. Sounds fair?
Example of how Netflix acts as a product

4. Direct Network Vs. Indirect Networks

The incremental benefit gained from every new user that joins the bandwagon of connected networks is called the network effect. Taking an example, if you have a smartphone but your friend doesn’t, there is no value associated with your phone as you cannot communicate. On the other hand, if you and your friend both have a cellphone, it proves to be valuable.

And, if everybody has a cellphone, it is a cherry on the cake.

Diagrammatic representation of a network effect

Further, network effects are of two types, i.e., a direct and an indirect network type. A product comes under the direct network as and when the number of users goes up, so does the value of the business. Coming back to the example of Netflix, the greater the audience volume, the greater is the value of its brand.

Having a look at the different types of digital platforms, we can say that there are two or more groups that exchange value with one other. This thus is a similar scenario where everybody has a cellphone and everybody can contact everybody.

We can also quote in an example of the “Uber-like” platform here. As more riders join in the network, the value it adds up to the drivers also escalates exponentially for better profits lie ahead of them.

5. The Economics of Products/Services

Products do not offer significant disruptive value in the times to come, while platforms are deemed to be much valuable. The reason being, products need more financial resources and human resources in order to sell more.
Here’s a graph that depicts the average cost curve for linear and platform businesses.

average cost curve explained

Referring to the same Netflix example, when the product provider needs to add new content to the portal, they definitely need to spend more on its creation, production, launch, marketing, etc. If the content created turns out to be great, profits will reap in, else all the money spent will go in a pit.

In the case of platforms, contrarily, the marginal cost of production and distribution is considerably low. Which means, expenses are less, and revenues turn out to be manifold. Taking YouTube as an example, the cost to add new videos and content to the platform is negligible, as the platform only needs to add new users to produce new content.

Conclusion

So, this was all about Digital Products Vs. Digital platforms! Both business models have their own share of robust features and significance. No matter what business model you adopt, strategize well for the digital transformation as it will drive revenue in the end.

After all, creating a business is all about adding value to your end-user and your audience/s. That done, the business will be highly empowered to rise against all odds and to shine among the best.

Invest in Digital Products and Platforms to Drive Revenues

Ashish Dhawan

About the Author

Ashish Dhawan is working as a Business Analyst at Net Solutions. His major interest and experience lies in the healthcare domain and enterprise-related applications.

Leave a Comment