Two-Sided Platforms and Rent Capture: Platform Economics in Digital Flower Delivery

The concept of platform economics, as developed by Rochet and Tirole, describes the way that intermediaries generate value for users through the connection of two separate groups of users and through the internalization of network externalities between those groups. Digital flower delivery services can be considered a classic example of this platform model; they do not make or sell flowers themselves and operate as two-sided platforms that facilitate buyer groups (consumers who wish to buy gifts) to connect with the supplier group (the local florist), and the intermediaries earn rents through their control of the discovery process for products/services, their routing of transactions, and their pricing.

The Two-Sided Structure

In a traditional floral marketplace, the buyer has a direct relationship with the local florist. Buyers discover the florist anytime they stumble upon them in the neighborhood or see an ad done locally. Digital platforms have completely altered this model.

On one side of the marketplace, buyers are often not in close proximity to the recipient. They may search online forsearch online for options such as cheapest international flower delivery when sending gifts across cities or borders. On the other hand, local florists want to achieve consistent order flow from customers outside their immediate neighborhood.

The platform is positioned in the middle of both sides of the marketplace; it provides buyers an excellent combination of value through convenience, standardization of offerings, and a global reach. The platform provides local florists with aggregated demand and marketing exposure.

This is an example of the economic theory of two-sided markets: as one group begins to use the platform, the value of using the platform increases for the other group.

Rent Capture Through Intermediation

Rochet and Tirole demonstrate how pricing is optimally organized between two parties by using an example of "digital/online flower & florist services." Digital flower services frequently produce low search friction for consumers, while charging florists commission-based fees for their inclusion on the platform via the platform.

Research from the flower delivery industry indicates that large scale flower delivery platforms frequently charge florists between 15%-30% commission per order. The florists benefit from receiving customers that they would not have otherwise been able to access without the platform. Therefore, the commission that the platform charges is the primary rent for the platform's product (the florist).

In addition to pricing arrangements, platforms also standardize product offering by creating different pricing/product tiers. This means that when buying flowers from a florist's store via a platform, the customer will find 3 products at a standard price. Instead of the florist creating a unique vase of flowers for each consumer, the florist can have their arrangements categorised into basic, deluxe and premium bundles. The florist can also include value added products (i.e., chocolate, greeting card, vases, etc.) in order to increase the average order amount, as well as provide the platform with additional potential for rent (surplus) from the flowers.

Market Aggregation and Scale

The global market for online flower delivery generates billions of dollars annually, driven by urbanisation and increasing domestic and international gifting facilitated by online search behaviour. Numerous independent florists operate worldwide, each serving local markets, but none can independently aggregate global orders. A centralised platform, however, can aggregate this demand efficiently.

This ability to aggregate orders creates economies of scale. For florists participating in a platform network, costs related to marketing, payment processing, and customer acquisition are reduced. Once platform infrastructure is established, the marginal cost of processing an additional digital order is very low.

The two largest firms in this sector, 1-800-Flowers.com and FTD, operate as networks of thousands of independent florists. Their primary source of profit lies in controlling search visibility, marketplace presence, and order routing rather than in producing flowers themselves.

Economic Forces Driving Platform Dominance

The platform model has multiple forces in its favor:

• Reduced Search Costs: Consumers like to use one central marketplace since they do not want to have to search for local suppliers in new cities.
  
• Network Effect: The more Florists there are, the more Buyers are attracted by those Florists, with more Buying customer’s creating more attraction for Florists.
  
• Behavioral Elasticity: Flower purchases are generally time sensitive and driven by emotion, which reduces their price sensitivity.
  Standardization: The use of categories of bundled goods makes decision making easier and creates increased potential to upsell.
  
• Global Reach: The need for cross border logistics due to both Diaspora and International gifting is beyond the capacity of Local Florists to handle by themselves.
  

These forces work together to create an environment where Platforms have the ability to capture an economic rent by controlling market access.

Ramifications

Platforms lower transaction costs and increase access to markets from a welfare standpoint. Convenience and geographic scope are provided to consumers. Florists are also given access to a larger pool of customers.

Nonetheless, distributional impacts arise from rent capture through high commission rates, which can narrow florist margins, in some cases, result in the standardisation of goods, and result in market concentration, as leading platforms take advantage of brand recognition and search engine exposure.

Additionally, platform dependency may arise for florists relying on digital intermediaries when bargaining power is weak and/or direct customer relationships are lost.

Conclusion

The concept of the two-sided platform provides a robust way to understand the digital flower delivery business. The success of these businesses does not come from having a more efficient method of producing flowers; rather, they control the discovery, routing, and access to their networks. By connecting buyers with suppliers, and collecting commissions and upselling to both parties, the platforms make money off of both sides of the market. By doing this, they are able to take an item that is generally seen as being locally finished, and turn it into an internationally distributed transaction.