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Solving the chicken and egg problem: All you need to know about Platform Business Models

Amazon, Uber, Airbnb, Facebook and many other big and valuable companies have something in common. They are “platform businesses”. 

In this article, we will explain what platform business models are, give some examples of famous companies that use this model, and provide tips and metrics on how to innovate around platforms. At oneUp, we believe that platform business models have a lot of potential to turn world's significant disruptions into new business opportunities. Most importantly, through the lens of our business modelling experience in fashion, finance and food, we see how platforms generate value for many stakeholders - consumers, companies, creators, society, etc. 

Are you looking to start with your own platform business model? Here are the learnings, tips and tricks that we’ve gained during 8 years of business design and venture building experience at oneUp.

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Is it a platform or not?

To better understand platform models, let's go one step back and start by looking into how they are different from traditional organizations. A traditional product-based business model creates value by transforming raw materials into finished products for sale or by performing a service directly for the consumers. The business is the producer, and consumers are the ones getting the value directly. Examples of this include a restaurant or a fashion brand.

On the other hand, a platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform businesses usually have two sides: supply and demand. Kicking off the interactions between those two sides is one of if not the most crucial element for a platform business model's success. Some examples include ordering food (Thuisbezorgd), booking a place to stay (Airbnb), or getting a taxi (Uber).

Let's take a deeper look at one example: Zalando. Is Zalando a platform? They do not produce clothes themselves, they sell other brands. As a consumer when you go to the Zalando page, you do not interact with the producers of the clothes aka your favorite fashion brands. You communicate with Zalando instead. So in this case, we are rather talking about a traditional value creation between the producer (Zalando) and the consumer (you). Zalando is a classic e-commerce business, not a platform business.

So how do we get started with platform business models? 

The three main elements of any platform business are: 

  • consumers
  • producers
  • interactions

Platform businesses need to have all of these three elements in order to function properly; otherwise, they will likely fail. The first element, consumers, refers to the people who use the platform on a regular basis and consume the value produced. Platform businesses need to have a large number of consumers in order to be successful since it is only through having a large user base that true network effects can be achieved. Producers refer to those who create applications, goods, or services that run on top of the platform (think app developers, content creators, and service providers). Lastly, interactions refer to any value being exchanged on the platform; this can include users downloading an app, consumers watching videos, and riders ordering a cab.

When building a platform business model, it is important to scan and to analyse your ecosystem. Map out the players and actors in your ecosystem to understand the role and value they deliver. Determine which actors (two or three) in this ecosystem you can start the main base of the platform with to deliver more value to your customers. A great example of this is Twitch, which is designed to add value to creators by inviting producers and then attracting consumers.

What should you be aware of when building platform business models? 

The main misconception of a platform is that it is used as an umbrella term for many products and services. A platform doesn’t mean different business models under one name, it is one solution enabling various value creations via interactions. Think of Airbnb. It facilitates interactions between homeowners (producers) and travelers (consumers). At the same time, it provides professional photo shooting services for producers so they can showcase their homes in the best way possible. Airbnb also provides consumers with guides for different local activities so they can have a wholesome experience when traveling. 

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A couple of other misconceptions about platforms that we see in the market are:

  • Only focusing on the consumer and not having a reason for producers to join (switch) to your platform.
  • No strong reason or motivation for consumers and producers to interact with your platform (e.g. no market traction). 
  • Not understanding the market and ecosystem of all players.
  • Not properly leveraging network effects or not having enough scalability potential.

Now that you know all the basics, what's next? 

To move from a linear or traditional business model to a platform business model, it's important to validate the interactions as quickly as possible. You can do that by using Minimum Viable Product (MVP). Keep in mind that platforms are often a chicken-and-egg problem: you need to think about both, consumers and producers, from early on. Compared to linear models, it is not enough to start with the consumer need, you have to make sure that there is a producer need for interactions as well. Therefore it's important to test and iterate quickly to find the right balance.

Once you have your first consumers and producers on your platform, it's important to find ways to keep them engaged and retained. This can be achieved by creating more value for them or by making it easier for them to transact with each other.

Book about Minimum Viable Product

How do you measure the success of your platform business model? 

To measure the success of your platform, it's important to pay attention to the following metrics:

  • % of successful interactions: This metric measures the number of interactions that are successful, such as transactions completed or messages exchanged.
  • Repeated interactions: This metric measures the number of interactions that have taken place multiple times, indicating that users are finding value in the platform and returning to it.
  • Charging for access: This metric measures the percentage of users who are willing to pay for access to the platform, which can be a good indicator of the perceived value of the platform.
Asian girl working on a value proposition canvas
Unsplash

Are you ready to start building your platform business model?

You dont have to do it alone, when working on platform business models there are a few tools that can help you go through the process. At oneUp we often use the following: 

  • Value Proposition Canvas (don't forget to fill it in for both producers and consumers).
  • Ecosystem map (make sure to map all the players and interactions between them. You can use a free format, or choose to go with an Ecosystem canvas). 
  • Customer journey map (don't forget to fill it in for both producers and consumers).

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Need some help?

At oneUp, we help international companies in finance, fashion and food to build their own successful business models. If you're interested in learning more about our company and the work we do, check out our website further or follow us on LinkedIn.

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This article was written with the input from Natasha Amaral, Lead Venture Builder at oneUp. With more than 10 years of experience in design, products and services, and new business models development, Natasha, along with other oneUppers, is one of our experts in platform business innovation.