#102 Platform Business Models
02/18/2023
Do you know that five of the top 10 companies by market capitalization - Apple, Microsoft, Amazon, Alphabet (Google), Facebook are platforms. It is clear that Platform businesses are flourishing. So what is a PLATFORM?
A Platform is simply an entity that facilitates any exchange between two interdependent groups, namely producers and consumers. A platform makes it possible to connect tools, teams, data, and processes under one digital roof using networking effects. Platform businesses facilitate transactions between two parties without creating, manufacturing, or owning inventory. Uber doesn't own any cars, Zomato doesn't own any restaurant, Amazon doesn't have their own inventory, similarly for all the platform businesses. What are the advantages?
(i) Platform businesses are easy to scale. Since such businesses do not own their own inventory, investment into the assets is negligible. Their growth isn’t contingent upon resources or capital. Uber doesn't need to buy new cars if the demand goes up.
(ii) Solve connection and efficiency issues. Consider the example of Bumble. If you are looking for people to date - it feels awkward to go directly & ask for age and other things that you wanna know. Enters a platform Bumble- which gives you all the details of the person and makes the communication easier. And platforms do this by feedback, stars, ratings etc. Uber, Zomato, Airbnb all have a feedback system.
(iii) This model builds a reciprocal, self-sufficient community The model enjoys “two-sided network effects". Demand is created from the supply of both buyers and sellers, providers and users, or creators and consumers. This leads to fewer advertising costs.
What problems do Platforms face? Platforms have to increase the 'Multi Homing Cost' & the 'Switching Cost'. Platforms do this to make sure customers stick to them because they are their source of revenue. For example: If I am a frequent traveler and book cabs for it frequently, I will not install 5-6 apps for the same. I have storage limitations on my phone. I can, at max, have 2 apps.
Therefore Platforms need to increase multi homing costs so that the users stick with them.
Similarly for the switching costs. Platforms can charge subscription fees to increase the switching costs for the same reason - to increase their user base. Platforms go all in with the idea of 'Winner gets all'. It is also necessary to incentivise the loyalty of users. Platforms business have revolutionized the economy and how other companies conduct business. Not only do they bring together consumers and producers and create a valuable network, but they also solve countless connection and efficiency issues.
See you next Saturday, have a great weekend :)
Cheers!
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