A platform business model unlocks value for its end users and consumers by enabling them to interact and transact smoothly with the other side of the transaction, be it another consumer or a producer.
Therefore, a platform business model won’t own assets, but it will make it possible to its end users to exchange things. In short, platform business models take their value from network effects. This means the platform business model scales way more efficiently than a linear business model because it’s able to reduce its transaction costs also as the scale reached is massive.
In other words, where linear business models hardly scale to the total size of the market, platform business models not only might scale to the size of the market; but they might actually expand these markets altogether.
A linear business model creates value by selling products or services down the supply chain. Thus, its value starts by controlling the supply chain.
This concept is critical to understand as a linear business model would start from the assumption that the value is in the supply chain, and as it grows it can grab more market shares, by controlling more pieces of it. Also, a linear business model that scales will want to own more assets; thus, it will require more capital to be managed.
Also, a linear business model has to be closed and controlled by definition, as this is the way value can be captured. Those logics do not apply to platform business models;
The key difference between platforms and most traditional business models is that platforms are multisided. By definition, they cater to multiple user groups. Platforms create value by bringing these people and businesses together and enabling them to exchange value.
This is very different from your typical one-sided business, which caters to just one basic customer group for each product. Think of Toyota, which makes cars and sells them to drivers, or a company like Adidas, which creates clothing and sells it to consumers. These businesses both create value by making a product and then they push that product out to consumers.
Traditional service businesses are very similar. Take your healthcare provider as an example. They provide you a service and you receive it. The same goes for retail banking the bank lends you money at a specific interest rate. The company provides the service and you receive it. Pretty simple.
In this model, value creation is linear and one way. The path of the product or service from manufacturer to consumer is described pretty well by your traditional, linear supply chain. Value is produced upstream and is consumed downstream.
In contrast, platforms facilitate the exchange of value. They cater to multiple user groups that need each other in some way and who depend on the platform to bring them together. Value creation here isn’t linear, and it isn’t one way it’s networked and it’s mutual.
As a result, platforms create valuable ecosystems driven by network effects. The more users there are on one side of the platform, the more valuable the platform becomes to other users groups. This dynamic allows platforms to scale in ways that traditional, one-sided businesses can’t. Platforms grow primarily by adding participants to their ecosystem, rather than by adding physical resources or direct labor.
The value platforms provide also scales as they grow. Think back to your one-sided business. They deliver you a product or service and you consume it.
The Hybrid Approach
Not every platform company takes a pure platform approach, and not all aspects of products and services are best served through a platform. Some companies like Apple and Amazon take a hybrid approach that combines linear and platform business models. Combining these two business models can be tremendously effective and lucrative allowing a business to capitalize on the strengths of each business model.