platform-business-models

Platform Business Models In A Nutshell

A platform business model generates value by enabling interactions between people, groups, and users by leveraging on network effects.

There are various types of platform business models, and usually two sides: a supply and demand side. Kicking off the interactions between those two sides and keeping those interactions smooth is a crucial element for a platform business model success.

From products to interactions

In a platform business model, an organization moves from offering a product to creating an ecosystem for those interactions to take place. This shift is critical to understand how platforms work, as often those don’t require any capital or physical inventory.

The classic example is of Airbnb having among the broadest variety of homes around the globe, yet owning none of them. Often those interactions are on-demand thus if I’m looking for a driver I might access my Uber or Lyft mobile app to find the driver that can give me a lift.

lyft-business-model
Lyft is a transportation-as-a-service on-demand marketplace that allows riders to quickly find a driver and get from one place to another. However, Lyft has also expanded with a multimodal platform that gives more options like bike sharing or electric scooters. And it is also experimenting with autonomous driving. Lyft primary makes money by collecting fees from drivers that complete rides on the platform. It also makes money via subscription fees and single-use ride fees paid by riders to access the network of shared bikes and scooters.

From connections to transactions

A platform also makes it easy for people to transact. For instance, if I get to Amazon, I will find a variety of products, anything from books to music, apparel and more.

Amazon Flywheel or Virtuous Cycle enables third-party stores to feature their inventory within Amazon fulfillment centers that become part of programs like Amazon Prime, which makes them eligible for one-day delivery.

That makes it extremely easy to transact on those platforms, and the experience needs to be so smooth so that customers can have a great experience and sellers, which usually are small businesses, can benefit from Amazon‘s economies of scale.

amazon-flywheel
The Amazon Flywheel or Amazon Virtuous Cycle is a strategy that leverages on customer experience to drive traffic to the platform and third-party sellers. That improves the selections of goods, and Amazon further improves its cost structure so it can decrease prices which spins the flywheel.

From customers to network effects

Network effects are a crucial element of any platform business model. Indeed, platform business models are built on top of two kinds of network effects:

  • Direct network effects: a classic example is a social media platform like Facebook, where for each additional user joining the platform it gets better for future users. Network effects can also be as powerful as they trigger social pressure. Imagine a group of friends all on Facebook, except one. The one person not on Facebook might feel marginalized, and the pressure to join the platform grows as more people within the social group join it.
  • Indirect network effects: in a two-sided marketplace, when one side of the platform improves, the other side benefits from that. For instance, LinkedIn is a two-sided platform where the more experienced professionals join, the more the platform becomes valuable to the other side, the human resources professional or companies looking for qualified profiles.

A two-sided marketplace benefiting from network effects also need to leveraging on other key elements:

two-sided-marketplace

The chicken and egg strategy problem

Before networks effect kick in, it takes momentum which can be built “artificially” by bringing in the “chicken” that will allow the platform to take off.

In the Amazon Flywheel Model, before Amazon would become the tech giant we know today, it needed to broaden the variety of good available on its store if it wanted to dominate the marketplace.

Rather than wait for Amazon to build up that variety, Amazon Virtuous Cycle made it possible for third-party sellers, which at the time were also Amazon competitors, to offer their products on the platform.

That solved the chicken and egg problem. As more sellers meant more variety, which was something customers valued a lot. That variety improved the customer experience which in turn made it Amazon speed up its growth and take advantage of network effects!

Beyond technology and into business model innovation

One of the greatest misconceptions of platforms is that technology is all that matters for its success. However, a platform is, first of all, a business model and as such to avoid failure, in the long run, has to be able to build a distinctive business model that makes it hard to copy. Therefore, business model innovation is another key ingredient.

Platform business models tyles

There isn’t a single way to classify platform business models. Those, indeed, can be classified in several ways. For instance, based on the kind of interactions that the platform creates, but also on the type of relationships those same platforms nurture, or with a functional approach.

Thus, if we use these three classification methodologies, we’ll come up with different platform business models.

For the sake, if this analysis we’ll take into account the three approaches:

  • Interactions approach
  • Relationship approach
  • Functional approach

Platforms business models as interactions

platform-types

Source: applicoinc.com

According to Applico platform business models can be divided into exchange platforms and maker platforms. The primary difference is in the kind of interactions those platforms allow.

An exchange platform allows a one-to-one platform, where two sides interact as smoothly as possible. Some examples are Airbnb, Amazon, and Dropbox. In this kind of interaction, the two parts are made to transact based on supply and demand.

A maker platform allows an interaction one-to-many. In short, a creator connects with its audience. For instance, an App developer on the Apple Store can get many downloads, just like an author on Amazon Kindle can allow its community to purchase an info-product.

Platform business models as relationships

John Hagel, in The Power of Platforms – Deloitte University Press, 2015 divides the platform business models into four primary categories based on the kind of relationships they generate. 

We move from a transactional platform where the parts are made to transact as smoothly as possible, to platforms that instead nurture mobilization:  

  • Aggregation platforms
  • Social platforms
  • Mobilization platforms
  • And learning platforms

As pointed out in the paper “Aggregation platforms bring together a broad array of relevant resources and help users of the platform to connect with the most appropriate resources.” Instead, social platforms differ from aggregation platforms as they aim to “building and reinforcing long-term relationships across participants on the platform.

Mobilization platforms take a step further, and they don’t just allow people to form relationships based on interests but to take actions together. And learning platforms which aim is to facilitate learning, but also insights exchange.

Platform business models as functional marketplaces

In The Rise of the Platform Enterprise Peter C. Evans and Annabelle Gawer platform business models are divided into:

  • Transaction platforms: actings as an intermediary) facilitating exchange or transactions between different users, buyers, or suppliers
  • Innovation platforms: consisting of a technology, product or service acting as a foundation for other firms to develop complementary technologies, products or services (this is usually a loosely organized ecosystem)
  • Integrated platforms: usually a technology, product or service that works both as a transaction platform and an innovation platform
  • And investment platforms: consisting primarily of companies that have developed a platform portfolio strategy and act as a holding company, active platform investor or both

Resources:

Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which he brought to reach over half a million business students, professionals, and entrepreneurs in the last year | Gennaro is also Head of Business Development at a tech startup, he helped grow at double-digit rate and become profitable | Gennaro is an International MBA with emphasis on Corporate Finance | Subscribe to the FourWeekMBA Newsletter | Or Get in touch with Gennaro here

Leave a Reply