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 Frameworks

AI Supply Chains

data-supply-chain
A classic supply chain moves from upstream to downstream, where the raw material is transformed into products, moved through logistics and distributed to final customers. A data supply chain moves in the opposite direction. The raw data is “sourced” from the customer/user. As it moves downstream, it gets processed and refined by proprietary algorithms and stored in data centers.

Bullwhip Effect

bullwhip-effect
The bullwhip effect describes the increasing fluctuations in inventory in response to changing consumer demand as one moves up the supply chain. Observing, analyzing, and understanding how the bullwhip effect influences the whole supply chain can unlock important insights into various parts of it.

Supply Chain

supply-chain
The supply chain is the set of steps between the sourcing, manufacturing, distribution of a product up to the steps it takes to reach the final customer. It’s the set of step it takes to bring a product from raw material (for physical products) to final customers and how companies manage those processes.

Data Supply Chains

data-supply-chain
In a data supply chain the closer the data to the customer the more we’re moving downstream. For instance, when Google produced its own physical devices. While it moved upstream the physical supply chain (it became a manufacturer) it moved downstream the data supply chain as it got closer to consumers using those devices, so it could gather data directly from the market, without intermediaries.

Last Mile Delivery

last-mile-delivery
Last-mile delivery consists of the set of activities in a supply chain that will bring the service and product to the final customer. The name “last mile” derives from the fact that indeed this usually refers to the final part of the supply chain journey, and yet this is extremely important, as it’s the most exposed, consumer-facing part.

Backward Chaining

backward-chaining
Backward chaining, also called backward integration, describes a process where a company expands to fulfill roles previously held by other businesses further up the supply chain. It is a form of vertical integration where a company owns or controls its suppliers, distributors, or retail locations.

Revenue Modeling

revenue-model-patterns
Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall business model.

Pricing Strategies

pricing-strategies
A pricing strategy or model helps companies find the pricing formula in fit with their business models. Thus aligning the customer needs with the product type while trying to enable profitability for the company. A good pricing strategy aligns the customer with the company’s long term financial sustainability to build a solid business model.

Dynamic Pricing

static-vs-dynamic-pricing

Price Sensitivity

price-sensitivity
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.

Price Ceiling

price-ceiling
A price ceiling is a price control or limit on how high a price can be charged for a product, service, or commodity. Price ceilings are limits imposed on the price of a product, service, or commodity to protect consumers from prohibitively expensive items. These limits are usually imposed by the government but can also be set in the resale price maintenance (RPM) agreement between a product manufacturer and its distributors. 

Price Elasticity

price-elasticity
Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It can be described as elastic, where consumers are responsive to price changes, or inelastic, where consumers are less responsive to price changes. Price elasticity, therefore, is a measure of how consumers react to the price of products and services.

Economies of Scale

economies-of-scale
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

diseconomies-of-scale
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.

Network Effects

network-effects
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.

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. 

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