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 network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements 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 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
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

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 leverage other key elements:

two-sided-marketplace

Negative network effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining.

When building up a platform business model, it’s important also to know its limitations as it scales in usage and size. Negative network effects can cause the platform to lose value quickly.  

The chicken and egg strategy problem

Before the network’s 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 goods available in 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 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 their success. However, a platform is, first of all, a business model, and as such to avoid failure, in the long run, one has to be able to build a distinctive business model that makes it hard to copy. Therefore, business model innovation is another key ingredient.

RelatedWhat Is a Business Model? 30 Successful Types of Business Models You Need to Know

Platform business models types

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 of 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 her audience.

For instance, an app developer on the Apple Store can get many downloads, just like an author on Amazon Kindle can allow their 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 that 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.

The course of platform business models

One of the most successful business models of this era has been the “platform business model” or a company that managed to nurture an ecosystem, and as such, it captured economic value in the form of transaction fees. 

However, as these platforms have scaled, they became the major centralizers.

This became apparent as some of these same platforms’ changed policies had the ability to influence and negatively impact hundreds of small businesses across the world. 

Thus, while the web digitized information thus creating “information superhighways” speeding up communication across the globe, and in the first wave, enabling anyone to become a medium.

It did almost nothing when it came to governance, money, and decentralization at scale. 

Companies like Google did try in the early days different governance models, like perhaps holacracy – for at least the engineering team (where the power to make important decisions is decentralized and distributed).

Yet, over the years as the company grew it first organized in functional departments, then more hierarchical.

Some small departments (especially those involved in developing innovative products) might still be flatter, yet no denying how Google (and the rest of the tech giants) have turned into more centralized organizations.   

For instance, if we look at companies like Google or Facebook, those created business ecosystems, but from a governance perspective, they are still companies owned by a few major shareholders.

Larry Page and Sergey Brin still owned more than 74% of the company’s stock, as of 2020, and they exercised a voting power of more than 50%

This means that while those companies do have complex decisional organisms (boards, management) when it comes to the strategic decisions to potentially move a whole business ecosystem those are still in the hands of two people.

The same applies to all the other major tech giants, with no exceptions. 

Therefore, while the web innovated at the information level (which we might argue is only the tip of the iceberg in terms of real potential impact) it leveraged the old way of doing business when it came to governance. 

Once again, if you run a small or medium business, being in charge of it, and deciding its direction it’s legitimate and indeed it might not cause harm at a collective level. However, when a company turns into a platform and then a business ecosystem, the governance structure skewed in the hands of one or a few individuals doesn’t work anymore, as it becomes a “business tyranny.” 

This is also where Blockchain Technologies and Protocols might help. As they propose a new form of governance based – as we’ll see – on decentralized autonomous organizations at scale.

This sort of governance might be extremely useful, especially when a whole business ecosystem needs to be governed.  

vbde-framework
A Blockchain Business Model according to the FourWeekMBA framework is made of four main components: Value Model (Core Philosophy, Core Values and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics/incentives through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.

Therefore, this new monster, which is the giant business-tech platform that becomes the sole decision-maker of where the whole ecosystem should go, might be the largest failure and most dangerous aspect for society overall. 

It’s important to stress out that the Blockchain (intended as the set of protocols and applications that in the coming decades will form a “whole” just like the Web did) might become a new layer built on top of the Internet, which embraces everything from money to governance!

However, just like the web turned out to be eventually centralized by a few key players, the main risk for the Blockchain Ecosystem is to end up as a centralized entity.

That is why it’s critical to follow its evolution, as any technology at scale follows a sort of balance and push and pull from centralization and decentralization. 

web-3-0

When I use the term “Blockchain” out of the context of a single protocol, I’m referring to the set of protocols and applications that will form the whole ecosystem and that will be an additional layer on top of the Web. This layer will bring three major forces centered around decentralization at scale to form decentralized autonomous organizations, and decentralized autonomous applications to disintermediate decision-making at scale. Those might embrace anything from information to payments and governance. Thus, its use case won’t just be potentially a few trillion-dollar, but in the order of magnitude of quadrillions. 

web-3.0

Platform business models case studies

Amazon Business Model

amazon-business-model
Amazon has a diversified business model. In 2019 Amazon posted over $280 billion in revenues and over $11.5 billion in net profits. Online stores contributed to over 50% of Amazon revenues, followed by Physical Stores, Amazon AWS, Subscription Services, Third-party Seller Services, and Advertising revenues.

Airbnb Business Model

how-much-does-airbnb-take
Airbnb’s take rates, also called fees, that the platform charges to hosts range between 15-20%. In Q3 2022, Airbnb’s take rate was around 18.5%, compared to 18.8% in 2021 on almost a hundred million nights booked over the platform. Airbnb’s gross booking value per night was $156.44 in Q3 2022, and the total gross booking value was $15.6 billion.

Apple Business Model

apple-business-model
Apple has a business model that is divided into products and services. Apple generated over $394 billion in revenues in 2022, of which $205.5 came from iPhone sales, $40 billion came from Mac sales, over $41 billion came from accessories and wearables (AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch, and accessories), $29.3 billion came from iPad sales, and $78.13 billion came from services.

Doordash Business Model

how-does-doordash-make-money
DoorDash is a platform business model that enables restaurants to set up at no cost delivery operations. At the same time, customers get their food at home and dashers (delivery people) earn some extra money. DoorDash makes money by markup prices through delivery fees, memberships, and advertising for restaurants on the marketplace.

Etsy Marketplace Business Model

etsy-business-model
Etsy is a two-sided marketplace for unique and creative goods. As a marketplace, it makes money via transaction fees on the items sold on the platform. Etsy’s key partner is comprised of sellers providing unique listings, and a wide organic reach across several marketing channels.

Uber Two-Sided Business Model

uber-business-model
Uber is a is two-sided marketplace, a platform business model that connects drivers and riders, with an interface that has elements of gamification, that makes it easy for two sides to connect and transact. Uber makes money by collecting fees from the platform’s gross bookings.

Uber Eats Three-Sided Business Model

uber-eats-business-model
Uber Eats is a three-sided marketplace connecting a driver, a restaurant owner and a customer with Uber Eats platform at the center. The three-sided marketplace moves around three players: Restaurants pay commission on the orders to Uber Eats; Customers pay the small delivery charges, and at times, cancellation fee; Drivers earn through making reliable deliveries on time.

LinkedIn Multi-Sided Platform Business Model

linkedin-business-model
LinkedIn is a two-sided platform running on a freemium model, where to unlock unlimited search and other features, you need to switch to a paid account. In addition, LinkedIn is the most successful B2B advertising platform. In fact, by 2022, with over 850 million members, LinkedIn generated over $6 billion in revenues through its Talent Solutions and over $5 billion through its Marketing Solutions (B2B advertising platform). Acquired by Microsoft for $27 billion in 2016, LinkedIn might now be worth anywhere between $100-150 billion.

What are examples of platform businesses?

Companies like Amazon, Uber, and Airbnb are all platform business models, meaning they primarily empower an ecosystem made by two or more parties that, by interacting and transacting, enable the platform to thrive and, as an effect of that thriving ecosystem, collect a tax (fee) on top of each transaction.

What are the benefits of a platform business model?

A platform business model is highly scalable as it enables it to be the foundation for a business ecosystem. For that reason, platform business models are extremely hard to build and maintain as they require the shift from developing products to developing and maintaining business ecosystems.

How does a platform business make money?

Platform business models mostly make money by charging a transaction fee, or a tax, on each transaction happening through the platform. In other words, as the platform enables a business ecosystem, as a side effect of enabling it, it’ll be able to collect a tax on each transaction. That tax, called the take rate, will vary depending on the industry and underlying business ecosystem.

What are the key aspects of a platform business?

Some of the critical elements of a platform business model are:

  • Network effects.
  • Viral loops.
  • Incentives and disincentives.
  • Business ecosystems.

In short, platforms grow due to network effects (as the platform has more members joining, it becomes more valuable for those joining afterward). And its foundation lies in the ability to enable a business ecosystem.

What is an advantage of a platform?

Platform business models are not easy to start or maintain. First, it’s hard to kick off network effects. Second, when they kick off, it’s not easy to maintain them unless they reach a critical mass. Yet, if you manage to do so, platforms are among the most scalable business models, as they grow as side-effects of a business ecosystem underlying them.

Connected Business Model Types And Frameworks

What’s A Business Model

fourweekmba-business-model-framework
An effective business model has to focus on two dimensions: the people dimension and the financial dimension. The people dimension will allow you to build a product or service that is 10X better than existing ones and a solid brand. The financial dimension will help you develop proper distribution channels by identifying the people that are willing to pay for your product or service and make it financially sustainable in the long run.

Business Model Innovation

business-model-innovation
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.

Level of Digitalization

stages-of-digital-transformation
Digital and tech business models can be classified according to four levels of transformation into digitally-enabled, digitally-enhanced, tech or platform business models, and business platforms/ecosystems.

Digital Business Model

digital-business-models
A digital business model might be defined as a model that leverages digital technologies to improve several aspects of an organization. From how the company acquires customers, to what product/service it provides. A digital business model is such when digital technology helps enhance its value proposition.

Tech Business Model

business-model-template
A tech business model is made of four main components: value model (value propositions, mission, vision), technological model (R&D management), distribution model (sales and marketing organizational structure), and financial model (revenue modeling, cost structure, profitability and cash generation/management). Those elements coming together can serve as the basis to build a solid tech business model.

Platform Business Model

platform-business-models
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.

AI Business Model

ai-business-models

Blockchain Business Model

blockchain-business-models
A Blockchain Business Model is made of four main components: Value Model (Core Philosophy, Core Value and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.

Asymmetric Business Models

asymmetric-business-models
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.

Attention Merchant Business Model

attention-business-models-compared
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.

Open-Core Business Model

open-core
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.

Cloud Business Models

cloud-business-models
Cloud business models are all built on top of cloud computing, a concept that took over around 2006 when former Google’s CEO Eric Schmit mentioned it. Most cloud-based business models can be classified as IaaS (Infrastructure as a Service), PaaS (Platform as a Service), or SaaS (Software as a Service). While those models are primarily monetized via subscriptions, they are monetized via pay-as-you-go revenue models and hybrid models (subscriptions + pay-as-you-go).

Open Source Business Model

open-source-business-model
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.

Freemium Business Model

freemium-business-model
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.

Freeterprise Business Model

freeterprise-business-model
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.

Marketplace Business Models

marketplace-business-models
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.

B2B vs B2C Business Model

b2b-vs-b2c
B2B, which stands for business-to-business, is a process for selling products or services to other businesses. On the other hand, a B2C sells directly to its consumers.

B2B2C Business Model

b2b2c
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.

D2C Business Model

direct-to-consumer
Direct-to-consumer (D2C) is a business model where companies sell their products directly to the consumer without the assistance of a third-party wholesaler or retailer. In this way, the company can cut through intermediaries and increase its margins. However, to be successful the direct-to-consumers company needs to build its own distribution, which in the short term can be more expensive. Yet in the long-term creates a competitive advantage.

C2C Business Model

C2C-business-model
The C2C business model describes a market environment where one customer purchases from another on a third-party platform that may also handle the transaction. Under the C2C model, both the seller and the buyer are considered consumers. Customer to customer (C2C) is, therefore, a business model where consumers buy and sell directly between themselves. Consumer-to-consumer has become a prevalent business model especially as the web helped disintermediate various industries.

Retail Business Model

retail-business-model
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.

Wholesale Business Model

wholesale-business-model
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.

Crowdsourcing Business Model

crowdsourcing
The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.

Franchising Business Model

franchained-business-model
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.

Brokerage Business Model

brokerage-business
Businesses employing the brokerage business model make money via brokerage services. This means they are involved with the facilitation, negotiation, or arbitration of a transaction between a buyer and a seller. The brokerage business model involves a business connecting buyers with sellers to collect a commission on the resultant transaction. Therefore, acting as a middleman within a transaction.

Dropshipping Business Model

dropshipping-business-model
Dropshipping is a retail business model where the dropshipper externalizes the manufacturing and logistics and focuses only on distribution and customer acquisition. Therefore, the dropshipper collects final customers’ sales orders, sending them over to third-party suppliers, who ship directly to those customers. In this way, through dropshipping, it is possible to run a business without operational costs and logistics management.

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