A platform is a business model that creates value by facilitating exchanges between two or more interdependent groups, usually consumers and producers.
In order to make these exchanges happen, platforms harness and create large, scalable networks of users and resources that can be accessed on demand. Platforms create communities and markets with network effects that allow users to interact and transact. 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.
From connections to transactions
A platform also makes it easy for people to transact. For instance, if I get to Amazon, We 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.
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.
Social platforms are the networks in which the core transaction is a double opt-in (friending) model of interaction. They also include social gaming and communication platforms. Facebook, Whatsapp & Twitter are the social networking platforms most of us are already aware of. They aggregate and engage people, they support engagement among people with common interests. They also tend to foster networks of relationships rather than hub-and-spoke interactions. Contrary to aggregation platforms, social platforms usually do not involve the platform owner.
Aggregation platforms bring together a broad array of relevant resources and help users to connect with the most appropriate resources. They are mostly transaction focused, which means You have a need, express the need, get the response, do the deal, and move on. Aggregation platforms tend to operate on a hub-and-spoke model, whereby the platform owner intermediates all of the transactions. They include online product and service marketplace like Amazon, eBay Uber, Ola, AirBnB and so on.
They mobilize people to work together to accomplish something beyond the capabilities of any individual participant. The most common form of these platforms brings together participants in extended business processes like supply networks or distribution operations. They foster longer-term relationships rather than focus on isolated and short-term transactions or tasks. They include social and media content platforms like Upwork. Social content platform’s core transaction focuses on the discovery of and interaction with other people, while media content platform’s core transaction focuses on discovery of and interaction with media.
They facilitate learning by bringing participants together to share insights over time. They foster deep, trust-based relationships, as participants have the opportunity to realize more potential by working together. They also include open, closed or controlled development platforms in which different types of software are built and shared between the participants.
The platform business model is particularly compelling because it converts traditional, linear value chains into multi-dimensional value networks and ecosystems. Platforms are flexible and scalable: it’s a more streamlined approach, not only do businesses save on time, they also reduce the possibility of errors.
Platform business models are becoming the dominant business model for companies with advanced digital transformation strategies. They are expanding in every industry vertical, including manufacturing, finance, public sector, telecom, transportation healthcare, utilities & so on.
Platforms also allow a seamless exchange of data. They provide the possibility so that the gathered data can be aggregated and mined for insights and innovation and to generate incremental revenue streams. By collecting data sets around consumer and industry trends, the platform allows users to analyze and ultimately predict and plan for new products.
The platform economy can benefit transition and developing countries by creating jobs within underperforming markets especially for people facing barriers to employment and or subject to exclusion such as young people, women, persons with disabilities and people living in remote areas. It can offer an alternative to persons who might otherwise migrate offsetting a countries’ ‘brain drain’. The Covid-19 pandemic has reinforced remote work as it suffered less disruption compared to conventional physical businesses.