• Arne

Why are platform business models so successful?

Have you ever wondered why companies like Google, Apple, Facebook, Airbnb and Microsoft are more successful than others? The answer lies within their platform based business models. The following article provides a summary on the key elements of a platform business model.

Speaking about a traditional company's value chain all steps are sequential. That being said, you start with the research and development of a product or services, then procure raw materials, followed by production, marketing and (after)-sales. This is called classical pipeline business model:

On the other hand, a platform business model does not follow sequential steps. Instead, the platform enables its users and other third-parties to exchange goods, services or information. Unfortunately, even the biggest companies still often misunderstand a platform as something where you make upload and downloads and exchange something.

Why are platforms so successful?

A platform develops its full potential only when you allow value creation on the platform not only by the users, but also by allowing external developers. For instance, LinkedIn is a platform that provides value to its users because of the content offered by the users themselves. The more users interact, the more valuable the platform. Still, in addition, LinkedIn provides APIs to external developers so they can integrate LinkedIn features with for, e.g., external sales engines to gain leads.

A very strong and scalable platform even manages to turn customers into suppliers and vice versa. For instance, you can be a host at Airbnb and at the same time use the platform to find a nice Finca for your next vacation. An Uber driver can also use the platform to get home after spending a nice evening in the restaurant with friends and wine. Hence, the company which owns, i.e., manages, the platform must not exclusively be responsible for the content. In fact, it would even limit the scalability of the platform.

The critical factors of an innovative platform strategy

It all starts with a clear vision and mission not only for the platform itself but for the whole business. From there, you can formulate the strategical key elements in the traditional way. Never forget that a good strategy needs to have trade-offs, i.e., to define what your platform will not do. It helps to keep focus.

Too many companies care about monetization already from the very beginning. Instead, they should rather rely on the growth and quality of the platform first and only discuss monetization afterwards. That being said, a successful platform strategy also abandons classical KPIs that are more relevant for the pipeline. Better focus on customer centric metrics such as growth of active users.

I already stressed the greatness of a platform to be the scalability by having customers and externals creating content for themselves. However, as a platform provider (manager) you need to set ensure the platform still offers qualitative content to its users. That is, you need to ensure a positive network effect. For instance, Tinder needs to ensure the platform growth to be equally shared between girls and men. Suppose women on Tinder would get too many inappropriate messages. They would quickly abandon the platform and cause negative network effects to occur. On the other hand, if men would never find attractive women on Tinder at all, they would also abandon the platform and cause negative network effects, too. Thus, Tinder - as being the platform manager - needs to balance the growth of the platform and ensure its quality for all users.

To summarize, an innovative platform business model with a great strategy is capable to transform a whole industry.