From Marketplace to Ecosystem: Evolving Your Business Model

What do Slack, Airtable, Salesforce, and Twilio have in common apart from their platform business model? They all enjoy the benefits of having an ecosystem:

• High user stickiness,
• Protected competitive advantage,
• Evolving functionality without extra R&D effort,
• Premium company valuations.

In ecosystem development, marketplace growth is often built on top of the core first-party app or API. For instance, an app that securely stores sensitive medical data, like Box, and also supports payments that require this data. It creates a marketplace on top of it that uses its APIs for medical data to list apps such as telehealth services, insurance claim submissions, accounting apps, e-signature providers, and more, up to 1,500 apps. 

Overall, the ecosystem path is a strong startup growth strategy considering a startup’s limited resources to build features. It allows not only to scale fast but also to do so with relatively lower customer acquisition costs (CAC), get lock-in benefit early, and outsource R&D experimentation.

The distinction of platform business models mainly lies in how you start out and what you monetize. In this article, we’ll explain three main platform business models that enable marketplace growth of third-party apps to create an ecosystem around your business.

Ecosystem Development Path 1: Free Marketplace on Top of Monetized First-Party App

Examples here are Box, Notion, Airtable, and Slack. 

Box monetizes its core app – secure storage. The tiered plans range from $15 to $50, with a free plan for individuals in addition to the API usage. 

• Core APIs are priced at $2.35 per 1,000 API calls/month,
• AI Units at $10 per 1,000 AI units/month, 
• Document Generation APIs $0.15 per document and, 
• Finally, Sign APIs are at $1.20 per document.

The APIs are used through different integrations with Microsoft Office, Google, Salesforce, Slack, and more. Box does not monetize the marketplace with third-party integrations and does not charge developers for posting their integrations. But every time any of these integrations fetches a file from Box’s storage or tries to generate a document or send it for signing, it hits its APIs. It means:

• calls to the servers, 
• going through authentication layers, and 
• then also compliance procedures involve their own server calls. 
• In addition, you should imagine the bandwidth required to service integrations which can push or upload files that are also serviced by BOX’s CDNs and compliance stack. 

So, what is the third-party marketplace growth giving to Box? Most of its clients use Box through these integrations, not through their core web app. Because of these integrations, Box is firmly embedded in the clients’ processes. Even to imagine a client moving its files from Box to some other storage system that is integrated via Slack is an extreme challenge. Enterprise usage often involves thousands of files, with nested folders, intricate permission controls, and compliance with sharing policies, including HIPAA. Then, new links to files will have to be resent or updated, which will take up hundreds of hours of employee time.

Core product

From the example above, it follows that the core app should occupy an essential point in business or consumer workflows. So, things around communication, file sharing, or even the management of processes or projects. It can be enhanced to stand out in today’s crowded market. For instance, Box is not simply a storage but a secure one. Other forms of enhancement may include: compliance, formatting, or AI-powered. 

The app itself should be extremely useful and simple to use to generate interest in the market without integrations first. Once it proves its success, the platform layer is added. It usually involves hiring a platform engineering team that creates a set of APIs, SDKs, documentation, and infrastructure to support numerous integrations. 

Monetization

In platform type 1, you start your business journey with MVP development of the core app. It goes through all the traditional milestones and proves its financial success. The monetization of the core app is not limited to a particular business model; it can be subscription, consumption-based, or whatnot. 

The platform layer remains not monetized. It serves the purposes of saving on R&D, as it is third-party developers who expand functionality, offer more ways of utilizing the core app. In addition, since core services become a vital part of a client’s processes, platform effect curbs the churn rate. Yet, you do get an increased API consumption, which is monetized through third-party apps. In the case of Box, it is 1500 of them.

More importantly, your business acquires an ‘economic moat’. It keeps its competitive advantage over the competitors due to this platform layer. 

Ecosystem Development Path 2: Monetized Marketplace on Top of Monetized First-Party App / APIs

The examples here are mostly enterprise-grade ecosystems such as Salesforce, Atlassian, ServiceNow, and SAP. They begin, same as in the example above, with a first-party app. However, here it usually targets more critical workflows and then turns into a marketplace startup. 

For instance, Salesforce came up with its CRM system at a time when most companies did this on-premises. It focuses on the activities around the sales process for enterprises. It extends its functionality toward managing client data and marketing automation.

When does the third-party marketplace growth show up? Within the sales process, many enterprises require industry-specific tools. Salesforce could not provide these fast enough. As such, it made sense to open itself to third-party developers who could create solutions and publish them within the Salesforce ecosystem to Salesforce customers. The Salesforce platform has around 7,000 third-party apps. 

Core product

Here, the core product is even more essential to the company’s workflows than in platform type 1. It is even safe to say that it is mission-critical. The examples include activities tightly linked to the company’s ability to generate revenues. Compare collaboration, messaging, and storage tools from platform type 1 to CRM, ERP, and IT Service Management in platform type 2. 

While there is a lot of argument about the taxation of the ecosystem, all participants in platform type 1 have considerably fewer third-party apps in their ecosystems than those within platform type 2.  The argument against platform type 2 is that 

“This model dis-incentivizes the third-party developers (revenue loss) and the end users (higher prices).”

Yet, in reality, we see that the number of developers willing to participate is much higher: Box’s 1,500 against Salesforce’s 7,000. It may have something to do with the fact that the end users are often less price-sensitive when the product is mission-critical.

Monetization

So, in this case, both the core app and the marketplace of third-party apps are monetized. In spite of the ‘taxation’ argument, for the platform, it allows approaching the development of its ecosystem in a strategic way rather than a free complement.

In terms of numbers, for 1$ that Salesforce’s core app makes, its ecosystem generates in economic value:

1. $3.67 in 2017;
2. $5.18 in 2022;
3. And projected to grow to $6.19 by 2026.

Salesforce takes a cut of this generated economic value, ranging between 15% and 30%. 

Some authors indicate that this type of platform monetization leads to a misaligned trap. Such as taxing developers decreases their desire to participate and reflects poorly on end-user costs. To back that, they cite the Atlassian decision to lower the cut to 5% only. However, Atlassian launched this offer only for the first year, then the cut is back to 15%. In addition, this move incentivizes developers to move from the older Connect framework to the new Forge cloud framework. The Connect one was based on-premise, while Forge comes with Atlassian-hosted cloud, compute, storage, and APIs. So, this move adds monetization of Atlassian’s core services.

Overall, whenever there is monetization, there is an opportunity to launch incentives and direct the marketplace growth of the ecosystem. No monetization – no lever. This is why the business path creates synergistic revenues between a first-party app mindset and a marketplace startup model. 

Ecosystem Development Path 3: True Platform with Monetized API consumption

Here, you have no core app. You immediately start as an API. Examples are Snowflake, Stripe, Plaid, and Twilio. This is the purest ecosystem, and it often consists of multiple stakeholders. For instance, for Snowflake, there are:

• native apps built on its framework,
• data providers that integrate data sets via Snowflake,
• connectors for third-party tools, and
• advanced tools that leverage Snowflake’s data capabilities.

Core product

So, there is no core app, only APIs and an SDK. You start as a platform immediately. This is the pure platform scenario. It is a higher-risk and higher-reward situation. 

With platform types 1 and 2, the business starts with a core app, has time to align product-market fit, build a client base, and get a scope of what the platform should be like. However, in the platform 3 type, your platform should be immediately interesting for developers to adopt and build for it. Therefore, you have a situation of a higher risk yet immediate lock-in. Once businesses adopt products built on Snowflake or Stripe, it is much more difficult to switch. 

However, Snowflake did experience a 30% drop in consumption of its services. Its competitors now include Databricks, Azure Synapse, Redshift, and BigQuery. While it is extremely expensive to change Snowflake for existing clients, nothing prevents companies from using a different platform for new business, projects, or negotiating lower rates. So, the competitive pressure is on marketplace growth, in spite of the high lock-in advantage.

Monetization

Platform types 1 and 2 start relatively slow; they figure out their core app at first. With a pure platform, you immediately get revenue from transactions and API calls. In addition, a pure platform has an extremely high scalability potential compared to the other types. For one, it does not require licenses, seats, or other things to track. It is usage-driven and has no limits to the scale, which is driven purely by the volume of transactions. Plus, the revenues are often protected by a lock-in advantage. It comes from the platform embeddedness in the code of thousands of applications. In addition, switching to a different provider will require extensive data transfer, retraining internal employees, and re-certifying compliance. 

Final Thoughts

Overall, there are 3 major types of platform business models:

• Type 1 – monetized core first-party app and free marketplace for third-party apps.
• Type 2 – monetized core first-party app and monetized marketplace for third-party apps.
• Type 3 – monetized platform with no core app.

From those, type 3 is the purest platform business model, which comes with the maximum of benefits in terms of revenues and scale, but bears an initial high risk and is still susceptible to competitive pricing. Here, you need to ensure fast developer adoption. 

Whether your business will take a route of platform type 1 or 2 mostly depends on how mission-critical your core app is. If it is essential, then it makes sense to monetize the marketplace. If it has a supporting role, then it is best to keep it free. With platform types 1 and 2, you have time to align product-market fit and arrive at a platform business model while enjoying the core predictable app revenue.

For the platform type 1, marketplace growth promotes the adoption of your core app and increases your API consumption.

For the platform type 2, marketplace growth directly increases your revenues in addition to wider core app adoption.

In all cases, a platform business model focused on ecosystem development is always a stronger path to take in terms of competitive advantage. No single company can innovate and create features faster than an ecosystem. It might not be easy, though, to come up with an innovative idea for a platform with an ecosystem. To aid in this, here is our article “10 Steps to find the unicorn Idea for your startup”.

FAQ: From Marketplace to Ecosystem: Evolving Your Business Model