A Platform Business Model Explained

Platform Business Model August 21, 2020

Lauren Christiansen

Writer

Due to the evolving technologies, there are many new opportunities to generate revenue online. The internet has offered a different way to facilitate transactions and foster relationships between groups of people with similar interests. Under the platform business model, the owner serves as a type of passive bystander who fosters a culture of collaboration and transactional exchanges.

To understand why platforms are changing the way business is conducted, it's important to know how it works, why it's important, and how each different platform expedites connectivity.

What is a Platform Business Model?

A platform based-model is a type of business model that facilitates interactions among a wide range of participants. Interactions can take the form of short-term transactions, such as connecting buyers to sellers, or longer-term interactivities, such as collaborating on a project to achieve a shared set of objectives.

Regardless of whether the interactions are short or long-term, the interdependent groups tend to be either consumers or producers. The main objective of utilizing a platform business model is to create communities and markets where users can interact with one another. Real-life examples of established companies who utilize platform-based models include-

Airbnb
Social mediums
Uber
Apple
Amazon
Google

Exchanges of information, be they transactional or social, aren't directly controlled by the people who own the business. Instead, a marketplace is created within the digital platform where users can conduct their transactions. Businesses with platform models don't own the means of production or inventory but create the means of connection.

It's important to remember that platforms are a business model and not the literal technology itself. Rather, it is simply a method of doing business by facilitating connectivity among various groups of individuals.

Platform Businesses & The Economy

In the past, brick and mortars were often used to facilitate exchanges. For example, a shopping mall is a type of platform business model that connects buyers and sellers in one space. In the 21st century, interactive technology in the form of smartphones and computers have caused an increase in the number of platform business models because connectivity can occur at any time, in any location.

As a result, today's platform business models can facilitate exchanges at an unparalleled rate. To illustrate-

More than 30% of the global economic activity is projected to be mediated by digital platforms within 6 years
As of 2020, Forbes' top most valuable brands all utilized platform business models
4 out of 5 companies that experienced the biggest value percentage gain from 2019-2020 were platform business models

The Anatomy of a Platform Business

The core transaction is how the platform manufacturers value for its users by turning potential interactions into transactions. The most important part of platform design is implementing the core transaction because the model generates revenue if connections are made that lead to transactions. For example-

Core Transaction = Connectivity + Exchanges

Though the platform allows for exchanges to occur, it does not directly control users' behavior or purchasing decisions. Platform business models have a unique challenge in that they need to facilitate interactions while remaining passive. To encourage this process, the business must engage in-

Audience building
Encouraging the interaction process through matchmaking
Providing technology and services to facilitate transactions
Establishing rules to maintain quality and security

4 Types of Business Platform Models

Some platforms have a bigger potential to trigger more core transactions and marginalize other forms of platforms. These 4 categories are becoming more prominent in the business world and can facilitate exchanges and interactions more effectively-

1. Aggregation Platforms
These are platforms that collect data from multiple sources across the internet and then place that information in one place where users can access it. Transaction and task-focused in nature, they encourage users to find what they need from another user, receive a response, conduct a transaction, and leave. Popular aggregation platforms include Shopify, Etsy, or Amazon.

2. Social Platforms
These platforms also aggregate people together into one collective space to facilitate interactions, but their primary purpose is not to support the completion of a transaction or task. Rather, they exist to encourage connections between people who have common interests. Though there are ways to conduct transactions within social platforms, such as Facebook Marketplace, it is not the platform's primary purpose.

3. Mobilization Platforms
These platforms focus on mobilizing participants in a type of collaborative effort that will take a considerable amount of time to complete. In a business context, mobilization platforms bring participants into extended business processes such as supply networks or distribution centers that manage interactions over a long period.

A company that utilizes a mobilization platform is Li & Fung, which connects thousands of suppliers and vendors with leading brands and retailers. Most platforms that support social movements or political movements are also mobilization platforms.

4. Learning Platforms
This is a platform filled with educational content and/or live instruction on a variety of topics. It helps to foster long-term relationships between groups of people who want to learn about a specific subject. Udemy, ABC Mouse, PBS Kids, and virtual summer camps are all forms of learning platforms.