What are platform business models?
A platform or platform business model is a business model by which a business creates significant value through the acquisition, matching and connection of two or more customer groups to enable them to transact. For example, Uber and Amazon are high profile and fast growth platforms.
The challenge of platform business models: the chicken-and-egg problem
Platforms face one main challenge: the chicken-and-egg problem. The value of platforms lies in both users and providers being present in the platform. The chicken-and-egg problem refers to when one side of the platform will only join it when the other side is there, too. Let’s look at an example.
Uber acts as a platform in acquiring its customers – both riders and drivers. It finds the drivers around the riders and connects them. Platforms like Uber are consistently managing the “chicken-or-egg problem”. A platform like Uber cannot attract drivers unless it has a large base of riders. Meanwhile, a large base of riders is unlikely to join Uber unless it has a large quantity and variety of drivers that riders find valuable. Neither side will join the Uber platform without the other. Not addressing the chicken-or-egg problem is guaranteed to break a platform even before it has a chance of taking off.
To elaborate on this “chicken-or-egg” problem further, let’s look at Amazon. The Amazon online bookstore, launched in 1995, has been a highly successful platform. Amazon specializes in onboarding the authors and their books from all over the world. Books are not printed by Amazon until they are paid for. In the old distribution model, only bestsellers were published, because the books had to be printed and placed on limited shelf space in physical stores before any reader paid for that book.
In contrast, in the platform model, the writers are reaching into lots of niche markets of readers and producing specialist titles with a global reach. The collaboration is expanding the size of the market because many of these titles would not have reached the global market at all without Amazon. In every decision made about its online bookstore, Amazon has had to consider how to strike the right balance between readers and writers, solving the “chicken-or-egg” problem.
What are digital ecosystems?
Related to platforms, we have the concept of ecosystems and, in particular, digital ecosystems. According to the World Economic Forum, a digital ecosystem is a design where "organisations come together by co-specialising with each other, creating bonds that engender collaboration, without excluding competition.”
Let’s come back to Amazon as an example. Amazon’s business model began as a platform focused with readers on one side and writers on the other side. Now it has become an entire digital ecosystem. The variety of books attracted loyal customers, which also encouraged them to buy other products on the Amazon site. Each new business that starts selling on Amazon can attract new customers and attract other businesses that wish to compete with them. As a result, Amazon can see which products are selling well and in which markets sales are increasing. With such insights, all the businesses that use the Amazon platform know that Amazon could take actions at any time to increase or decrease their sales. Here, in the Amazon ecosystem, organisations come together by co-specialising with each other, creating bonds that engender collaboration, without excluding competition.
What are the benefits of platforms and digital ecosystems?
These are the main benefits of platforms and digital ecosystems:
- First, ecosystems increase business model resilience. Amazon, for example, has an ecosystem that increases Amazon’s business model resilience. Amazon can offer customers rapid access to a diverse variety of products and services. This feature increases the value of Amazon to both existing and prospective customers. Once established, an ecosystem can be very difficult to dislodge because rival platform providers would have to both deliver a better price-performance experience to customers and rally an ecosystem around it.
- Second, ecosystems enable the sharing of innovation risks and costs. In the case of Amazon, the suppliers using the Amazon platform bear most of the financial risk in pursuing the ideas that leverage the Amazon platform. Amazon’s fixed costs of developing and maintaining the platform can be spread across many suppliers using its marketplace.
- Lastly, ecosystems also enable a focus on the platform’s core while innovating for customized solutions. By mobilizing an ecosystem of suppliers for its marketplace, Amazon can remain focused on its core activities while helping its ecosystem meet complex and diverse demands for specialized and customized products and services for customers.