The usage of business models is beneficiary for a business of any type as it provides a framework for how it operates and creates value for the clients.
Creating a proper and functional business model gives companies an opportunity to define their target audience, understand their value proposition and establish themselves on the market as a strong and unique competitor.
One of the models that are rising in popularity these days is a platform business model. What is its main purpose, and how can it benefit the development of your business? The working principle of this type of model is fully based on networks.
Typically, it facilitates interactions between different groups of users through an online platform. It’s all about the connection between a supplier of services or products and the demander.
Today, we want to discuss in more detail how this type of business model functions, what are the types of platform business models and learn about some successful examples of its usage. If you’re eager to learn more, keep reading!
The Definition of a Platform Business Model
A platform business model is a type of business model where a company designs a digital platform that connects two or more groups of users in a way that creates value for all of them.
It gives room for intercommunication between users of different backgrounds, creating a network effect that allows the platform to grow and become more valuable over time.
Businesses that operate using this model get their earnings from all the fees and commissions they charge for any transactions that are required in order to use the platform. Another way to earn their revenue is by allowing the usage of value-added services and advertisements and charging the price for it.
Some examples of companies that successfully integrated platform business models in their work are Uber, Airbnb, Amazon, eBay, Google, and Facebook.
These companies all use digital platforms that connect different groups of users, such as drivers and passengers, hosts and travelers, buyers and sellers, and advertisers and users. We’re going to discuss some of them later.
Platform business models have become increasingly popular in recent years due to their scalability and the network effects they can generate. However, they also face challenges related to user privacy, security, and trust, as well as competition from other platform businesses.
The Pros and Cons of Platform Business Models
Even though platform business models are in favor of numerous companies today, like any business model, they have their pros and cons. So, before making a decision whether this form is suitable for your company, it might be reasonable to take them into consideration.
The main advantages of platform business models are:
- Network effects. The appearance of a network effect can significantly benefit a platform-based business. What is this effect exactly? Well, whenever the value of the platform escalates, more and more people start joining it. This can help to create a virtuous cycle that drives growth and increases the profits you gain from the platform;
- Scalability. Platform businesses usually scale really fast. Compared to the earnings that are generated, the costs the company has to spend on various fees, transactions, and attraction of new users are much lower;
- Low capital requirements. This is actually a significant advantage that allows you to invest more in the development of your business. Basically, unlike with all traditional businesses, you will avoid spending your capital on various physical assets, like working space or inventory;
- Data-driven insights. Platform businesses have access to large amounts of data on user behavior, which can be used to improve the platform, personalize user experiences, and drive revenue growth.
Now, let’s look at some of the drawback platform business models have
- Regulation. As many processes are conducted online, platform businesses might have to deal with a number of regulatory issues. They might face problems with the privacy of users and the security of data. Plus, there’s huge competition in the market;
- Trust issues. As these platforms operate on the Internet, they rely on their users’ trust a lot. Without trust, there’s no success. Whenever any issues with privacy occur, it may lead to the loss of these trusting relationships, which results in bad ratings and reputation and a decrease in revenue accordingly;
- Dependence on third-party providers. Platform businesses often rely on third-party providers for key services such as payment processing, hosting, and data storage. Any issues with these providers can disrupt the platform’s operations;
- Competition. This type of business model is relatively new, and the environment around it is super competitive. So, it might be really hard to get to the top and keep your spot. This kind of competition makes it way more difficult to gain new customers and popularize your platform.
Overall, platform business models offer many benefits, but they also come with some challenges that must be managed carefully to ensure long-term success.
Types of Platform Business Models
When it comes to platform business models, there are too many ways to group them. We can classify them depending on how they function, the way they create value, which type of services they offer, etc.
Today, we’re going to focus on a few of those many classifications.
Ways of Interaction
Depending on the type of interaction platform business models generate, they can be divided into two-sided platforms and multi-sided ones.
Two-sided platforms can also be called “exchange platforms.” They’re mostly based on communication between two individuals or groups. They provide a way to connect two different groups of users, such as buyers and sellers, for example, to generate income by conducting transactions and collecting fees for the services.
This type of interaction is usually simpler and smoother as it doesn’t include any third parties. Examples of two-sided platforms include Uber, Airbnb, and eBay.
Multi-sided platforms, or as they’re also called maker platforms, are a more complex mechanism in a way. As you can guess from the name, they connect multiple groups of users.
So, besides buyers and sellers, advertisers might be included in the process as well. These platforms also include social media, as many users can participate in the process and interact with each other.
Now, let’s look at different types of platforms depending on their functionality and purpose.
- Marketplace platforms are based on the buyer-seller relationship, and they carry out transactions, often by providing tools for pricing, bidding, and negotiation. Examples of marketplace platforms include Etsy, Amazon, and Alibaba;
- Sharing economy platforms enable users to share or rent assets such as homes, cars, or equipment, often on a peer-to-peer basis. Examples of sharing economy platforms include Airbnb, Uber, and Turo;
- Collaborative platforms give users a perfect space for teamwork and collaboration. They are equipped with tools such as project management software, messaging apps, and file-sharing platforms. Examples of collaborative platforms include Slack, Asana, and Dropbox;
- Aggregator platforms collect information from multiple sources and present it to users in a compressed format. Examples of aggregator platforms include news apps, job search engines, and comparison shopping websites.
Network effects are a phenomenon that occurs when the value of products and services rises as more people use them. In the context of platform business models, network effects are particularly important because they can create a self-reinforcing cycle of growth.
The value of any platform-based business depends on the amount and quality of the users’ interactions. For example, the value of a social media platform comes from the interactions between users and the content they create, share, and consume.
The value of an e-commerce platform comes from the interactions between buyers and sellers.
When a platform has strong network effects, its value starts to increase as more users join. It happens because new people mean additional content or products to the platform, which, in turn, makes it more attractive to other users.
As the platform becomes more valuable, more users join, which creates even more value. It’s a neverending process, in a way.
Also, by having strong network effects, you secure yourself from your competitors. When a user invested a lot into your platform and created a working network with a high value, they wouldn’t want to switch to another platform and start it all over again. This will allow you to keep your top position in the market.
Examples of Platform Business Models
Above, we’ve already mentioned a bunch of businesses that use platform models in their work. Now, let’s discuss some of the most successful ones and define why this model is particularly suitable for them.
One of the biggest and most successful examples of a platform-based business we’re all familiar with is Amazon. The company started as an online bookseller, but over time, it has evolved into a massive e-commerce platform with millions of users from all over the world.
Amazon’s platform business model is built around the concept of the “everything store.” And it definitely fully meets the purpose of that concept, as you can find anything on Amazon, starting from clothing, books, and devices to groceries. It is available in the form of an app, and you can access it through a website as well.
Amazon also provides a range of services, including cloud computing, streaming video, and music, among others.
One of the key features of Amazon’s platform is its third-party marketplace. If you’re a seller, you can use Amazon to access a massive customer base, find your clients, and use all the logistics features. In exchange, Amazon takes a commission on each sale.
Airbnb is another great example of a platform business model. The main purpose of this platform is to provide accommodation – property owners can present their houses and apartments there, and travelers can find places to rent.
The main concept on which the work of Airbnb is based is sharing economy. By allowing property owners to monetize their unused space, Airbnb provides a more affordable and unique lodging option for travelers while also giving hosts a new source of income.
This platform has a review system that is really helpful in building trusting relationships, as customers can share their own experiences and learn more about others.
Airbnb also offers a range of services and tools to hosts, including a secure payment system, insurance protection, and a messaging platform for communication with guests.
One of the platform-based businesses in the transportation industry is Uber. This company has an online platform that connects riders with drivers, providing a convenient and cost-effective alternative to traditional taxi services.
The main concept of Uber is that drivers use their personal cars for transportation, which gives them more flexibility and convenience. It gives them the possibility to earn some extra money.
Uber has a feature of real-time matching. Basically, when a person needs a ride, the system matches them with an available driver nearby based on factors like location, availability, and ratings.
These services help ensure that drivers have a positive experience on the platform and are incentivized to provide high-quality service.
The food industry is getting really invested in platform business models. One of the most popular and widely used platforms is DoorDash. It became especially useful in the period of the pandemic, as many people started using delivery services.
One of the biggest benefits of this system is the possibility of tracking orders. When a customer places an order through the DoorDash app, they can track the progress of their order in real-time, from preparation to delivery.
This allows customers to have more visibility and control over their orders and helps ensure a smooth and timely delivery experience.
Restaurants can benefit from using this platform as well, as it provides a lot of space for advertising and promotion.
Social media are a great example of using multi-sided business platforms. LinkedIn is one of the best platforms for professional socializing and job search.
LinkedIn’s platform business model is built around the concept of professional networking. By providing a platform where professionals can connect with each other, LinkedIn helps individuals expand their networks, build their personal brands, and find new career opportunities.
It can be used for recruiters, business owners, students, job seekers, etc.
Just like any other type of business model, the usage of platforms has its own pros and cons. However, it’ll be safe to say that this model can be integrated into various industries, and it can strongly benefit many businesses.
Properly organized and managed platform-based businesses have a solid customer base and a strong network system. The main feature of businesses of that type is the fact that the more the value increases, the more customers are willing to join.