A platform business model is one of the most interesting models arose throughout the web era. Some of the components that make platform business models interesting are their scalability and the fact those platforms can leverage network effects and flywheel models to gain traction.
When can we call a business model a platform?
And how that platform business spurred the growth of other business units (AWS, advertising, third-party services, Prime) who might have not been possible without a solid platform business in the first place, and it all starts with building up critical mass to enable network effects.
Amazon platform-first business today
In 2018, independent third-party sellers (mostly small– and medium-sized businesses) sold 58% of the merchandise on the Amazon platform.
Amazon selling tools and the power of free tools
Amazon favored the transition toward a platform business model by building the selling tools (inventory management, processing payments, tracking shipments, reports) which made Amazon‘s website, not just e-commerce where they could distribute their product, but a management system they could rely on.
Fulfillment, Prime and the flywheel effect
When launching a platform business model that relies on third-party sellers, there are two major issues (among others).
First, you can’t guarantee the quality of the service (in this case delivery) if you don’t control the process.
Second, in the long-run, it becomes hard to have loyal customers, as transaction costs might make the repeat purchase not convenient to those shoppers, thus making a digital platform lose its initial competitive advantage over physical pairs.
How did Amazon, over the years, face those issues?
As Amazon highlighted in its 2018 shareholders’ letter, at the time it was not an easy decision to make, as both programs implied huge investment and financial risks and those went through many internal debates and discussions, so at the time their success was not given for granted.
As explained in Amazon leadership principles, and how Jeff Bezos made decisions at the time, the Amazon leadership team used “intuition and heart, nourished with optimism” to make such a decision, which in hindsight seems almost trivial.
Will Amazon keep its platform business model as it is?
For instance, Amazon might be able to revert this process by internalizing more brands.
In fact, as third-party sellers provided over the years incredible data about what people want, Amazon, in theory, has the power to have those items manufactured and sold with Amazon‘s brand, thus increasing again the portion of first-party products.
Will this happen in the coming years? We’ll see.
Is a platform business model still the most viable solution today?
We’re living in an era where arising competition on the web, its growing maturity, and penetration to the whole world, have also changed the whole digital business landscape.
Building a platform business today might not be an easy option as the consolidated platforms (Google, Amazon, Apple, Facebook, and a few other brands) are acting as winners who took it all, thus locking-in distribution pipelines with their algorithms, and working as gatekeepers.
In this scenario, building up a successful platform business might have become a risky option, initially.
Thus, a cheaper option is to bootstrap the business to product-market fit first, then evaluate whether a platform business helps better serve existing customers, and at the same time expand the customer base.
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