A platform company generates value by enabling interactions, transactions, or relationships. A platform company leverages network effects (direct/same side or indirect). Platform companies are also known as platform business models, given their intrinsic way of creating value for users.
Aspect
Explanation
Definition
A Platform Company is an organization that leverages digital technology and infrastructure to create and manage a platform ecosystem that connects various stakeholders, such as producers, consumers, and third-party developers. These platforms serve as a foundation for enabling interactions, transactions, and the exchange of goods, services, or information. Platform companies often facilitate and benefit from network effects, where the value of the platform increases as more participants join and engage with it. Examples of platform companies include Amazon, Uber, Airbnb, and Facebook.
Key Characteristics
– Ecosystem: Platform companies create an ecosystem where multiple stakeholders, including users, sellers, and developers, can interact and transact. – Network Effects: The value of the platform grows as more users and participants join, creating a positive feedback loop. – Digital Infrastructure: These companies heavily rely on digital technology, cloud computing, data analytics, and connectivity to operate and scale their platforms. – Scalability: Platform companies are designed to scale rapidly, accommodating millions or even billions of users and transactions. – Monetization Strategies: They employ various monetization models, including commission fees, subscription services, advertising, and data monetization.
Examples
– Amazon: Amazon operates a platform that connects buyers and sellers, enabling e-commerce transactions, third-party seller services, and Amazon Web Services (AWS) cloud computing. – Uber: Uber’s platform connects riders and drivers, facilitating on-demand transportation services in multiple countries. – Airbnb: Airbnb provides a platform for hosts to offer short-term lodging services to travelers. – Facebook: Facebook operates a social media platform connecting users, advertisers, and developers.
Impact
– Platform companies have disrupted traditional industries and business models, reshaping how products and services are delivered, consumed, and monetized. – They have the potential to reach a global audience and generate substantial revenue and market capitalization. – Platform ecosystems can foster innovation by allowing third-party developers to create new applications and services on the platform. – However, concerns related to data privacy, market dominance, and regulatory issues have arisen as platform companies have grown in influence.
Challenges
– Competition: Platform companies often face fierce competition from other platforms and traditional businesses. – Regulatory Scrutiny: They may encounter regulatory challenges related to antitrust, data privacy, and market dominance. – Security and Trust: Ensuring the security and trustworthiness of the platform is crucial to maintaining user confidence. – User Data: Managing and protecting user data is a significant responsibility and potential source of risk.
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.
One of the most influential business models of the digital age is the platform business model, which created a paradigm shift.
The platform business model
Linear business models create value by selling products down the supply chain. Platform business models create value by enabling exchanges among consumers.
The platform business model requires a paradigm shift, as you need to think about “how do I sell my product” to “how do I enable others to interact and transact on top of the platform?”
The most crucial aspect of kicking off a platform and scaling it is network effects.
Platforms and 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 can help a platform kick off, scale and maintain its relevance to users as it builds momentum.
Yet, platform business models also require a considerable amount of maintenance, engineering, and understanding of complex dynamics.
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.
In general, negative network effects can be classified in:
Level one: Tech and Digitally-enabled Transformation: At this level, businesses incorporate basic digital technologies but do not fundamentally change their traditional business models.
Level two: Tech-enhanced Transformation: Businesses at this level leverage technology to enhance their existing models and operations, making processes more efficient and effective.
Level three: Platforms and Interactions Transformation: This level involves the adoption of platform business models, focusing on creating value by enabling interactions and exchanges among users.
Level four: Business Ecosystem Transformation: The highest level of digital transformation involves building business platforms or ecosystems like Apple’s, which encompass various interconnected products and services.
Platform Business Models: These models create value by facilitating exchanges among consumers, relying on network effects, control points, and economic/non-economic incentives.
Network Effects: A phenomenon where the value of a platform increases as more users join, creating positive momentum and relevance for users.
Negative Network Effects: In some cases, as the platform grows, it may suffer from congestion or pollution, leading to reduced value for new users.
Apple’s Ecosystem: An example of a business platform/ ecosystem, where various interconnected products and services are offered to users, creating a seamless experience.
Platform Types
Platform Business
Description
Examples
Revenue Models
Distribution Channels
Customer Segments
E-commerce Marketplace
Connects buyers and sellers, facilitating transactions.
Amazon, eBay, Alibaba
Transaction fees, subscriptions, advertising.
Online, Mobile Apps, Partnerships, Affiliates
Consumers, Sellers, Retailers
Ride-Sharing
Connects passengers with drivers for transportation services.
Uber, Lyft, Grab
Commission on rides, surge pricing, ads.
Mobile Apps, Website, Referral Programs
Passengers, Drivers
Social Media
Enables content sharing and community building.
Facebook, Instagram
Advertising, sponsored content, data analytics.
Mobile Apps, Website, API
Users, Advertisers, Businesses, Developers
Crowdfunding
Connects project creators with backers for fundraising.
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 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.
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.
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.
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.
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.
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.
In an asymmetric businessmodel, 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.
In an asymmetric businessmodel, 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.
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 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 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.
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.
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.
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, 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.
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.
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.
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.
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.
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.
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.
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.
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 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.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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