Platform Economy: The 4 Key Business Models

25/11/2020 |
The Uber business model sketched on a napkin by Travis Kalanick, while he was waiting for a taxi.

Reviewing the most common revenue generation and monetization strategies of digital platforms

Platforms are hot these days and all over people’s mouths.

No alt text provided for this image

It’s clear to everyone that Amazon, Facebook, Uber and all the others above are extremely successful companies. What’s not clear to everyone is that they’re platform companies, what exactly a platform business model is and why it is so powerful.

The world’s 6 most valuable companies by market capitalization (Amazon, Apple, Alibaba, Microsoft, Alphabet, Facebook) and 70% of the $1 billion+ unicorn startups (Didi, Airbnb, Uber) operate digital ecosystems that match buyers & sellers, and gain enormous market share from network effects. McKinsey forecasted that 30% of all global economic activity ($60 trillion) will be mediated by platforms and ecosystems in 10 years time. Yet, only 3% of established companies worldwide have adopted an active marketplace strategy.

Why is that happening? In answering this question, it’s helpful to start by clarifying what platforms are NOT.

Platforms are not just a piece of technology, or a suite of software products. People typically confuse a platform with a mobile app or a website.

This misunderstanding is very common with some SaaS companies, which like to claim they have a complete platform solution for XYZ. In such cases, the word “platform” is just used as a marketing term. These companies are still linear businesses selling stuff.

So, what is a platform?

A business model that creates value by facilitating transactions between buyers and sellers in an ecosystem, with the aim of capturing part of that value.

So, you can sell products on Amazon, services on Upwork, content on YouTube, or apps on the IOS App Store and the platform takes a piece of the pie in the transaction.

In other words, platforms enable people to get what they need from each other!

Platform Economy Business Models

Why are platforms so powerful?

  1. They are asset light, eg airbnb does not own any building like hotels do.
  2. They have nearly zero marginal costs, eg airbnb benefits from external resources (eg their hosts) rather than employing people, and
  3. They benefits from network effects, eg on airbnb the more hosts register on the platform, the more guests register and the other way around.

These 3 arguments above are exemplified in this famous tweet of Brian Chesky, airbnb co-founder.

No alt text provided for this image

And on the chart below you can also understand why platforms are such profitable businesses, why they perform so much better than any other traditional company.

The red line shows the revenues in million of dollars of platform companies compared to all other traditional companies listed on the stock exchange.

No alt text provided for this image

Now, in this post I will present the key platform economy business models using a fictional example of a gym which wants to reinvent itself as a platform, connecting independent fitness trainers with gym users.

No alt text provided for this image

Why am I using this example? Well, because it’s easy — everyone gets it, and to show you that even your local gym nowadays makes much of its money not by what it sells but by facilitating the interactions or transactions of others — just like farmers’ markets or stock exchanges already do since a century.

Now, let’s have deep dive into some of the ways that gyms could experiment with platforms models.

Platform Economy Business Models

First, we start with the linear or Pipeline Model, which is NOT a platform economy business model but a model based on subcontracting.

Here the Gym is a pure and simple intermediary, it hires independent Fitness Trainers and rents them out to Gym Users (pricing them as if they were its own employees) and then adding overheads on top of it. The Gym User is not in direct contact with the Fitness Trainer in the negotiation of the engagement or the price or the service. Usually the Gym User does not even know the Fitness Trainer is an independent service provider.

This model bears one major risk which is called bypassing, also called platform leakage. The Gym Users and Fitness Trainers may decide to circumvent the Gym and its payment system, and make their own arrangements separately. The Gym therefore becomes redundant.

Who’s using this model besides gyms? Think of Boeing, using as many as 13,000 subcontractors who are independent engineers building the smallest pieces of an aircraft. Boeing then sells the aircraft to airline companies which only have to do business with Boeing, not with the engineers. Other large companies doing business in a similar fashion include Walmart or AT&T. Both in the B2B and B2C space.

Platform Economy Business Models

Now let’s have a look at the first model where gyms can start dipping their toes in the platform economy, the Listing Fee Model (the business model of eBay, Alibaba and Amazon).

What’s important about this model is that (unlike the one before) the Gym gets out of the way and Fitness Trainers and Gym Users are in more direct contact, choosing prices, and negotiating the terms of engagement with each other. This model (unlike the one before) is no longer based on fixed costs set by the Gym, but on variable costs set by Fitness Trainers.

Here the platform charges a fee from suppliers when they post new listings or when they want to promote their listings (the so called featured listing model). The value proposition is really simple: the platform aggregates a large volume of listings to a single online destination, guarantees visibility for certain listings and ensures quality control. In this model platforms typically only facilitate the discovery of Fitness Trainers for Gym Users without establishing complex payment gateways or offering logistics support or allowing bidding.

Examples of this listing fee model:

Timma, a platform to help consumers compare and choose among hairdressers saloons which takes a listing fee from hairdressers.

Jamifind, a platform that for a listing fee helps musicians find members for their band, exchange instruments and make music together.

Tori, a marketplace where one can find pretty much everything and where if you want to promote or renew your listing you’ll have to pay a fee.

Platform Economy Business Models

Now let’s have a look at the second platform economy business model, the 2-Sided Platform Model.

This is the business model of uber. It is the fully developed platform model which displays potential for network effect and for becoming extremely defensible. Here the Gym becomes the enabler, allowing Gym Users to set project costs, and Fitness Trainers to bid for projects on the basis of their own rates. The Gym does not own any inventory but owns the platform, as it sets rules regarding openness, governance, logistics and pricing. Fitness Trainers and Gym Users are in direct contact with each other, before the project starts.

The Gym collects the Fitness Trainer’s fee from the Gym User, and then releases the money to the Fitness Trainer once the job is done, charging the Fitness Trainer a commission fee from the transaction, or sometimes the commission is split between the two parties (the business model of airbnb, where both guests and hosts are charged for a transaction). Remember — typically you should charge the side that needs the other one more. The fee taken varies across platforms (from 5% to 40%) depending on the value of the transaction and the support services provided.

Notable examples of this 2-sided platform model include:

Bloxcar, where you can rent a car directly from your neighbour. The platform takes a transaction fee from each booking.

– You don’t know where to leave your cat during the holidays? host my pet finds someone to take care of it. Again, the platform takes a transaction fee from each booking.

– You can’t find a parking space in your busy town? Moovy matches you with a parking space provider and takes a transaction fee from the cost of the parking.

Platform Economy Business Models

Now, this is a variation of the platform economy business model before. It’s called the Multi-Sided Platform Model.

In this model the Gym becomes the orchestrator because it deals with multiple entities in the ecosystem who are participating in the transactions. In this case these additional entities are Gym Equipment Suppliers who lend their equipment to Fitness Trainers for free and receive the payment from the Gym which is split with the Fitness Trainers, minus the commission it has raised. Also this model displays potential for a full scale network effect, although it may take longer to scale as it is more complex to work out.

Best example of this model are:

Wolt and other food courier platforms, which charge the ones who order food and then release the money to both the couriers and the restaurants taking a split commission from the transaction.

– Getting married anyone? You know that getting married is a very complex experience. Say you need a dress, a photographer, a caterer, someone to put flowers in the church? Häätori finds and puts all these people together for you.

Toristy, a SaaS platform which pairs tourists with tour guides, but also with travel companies like cruise ships or holiday resorts.

Platform Economy Business Models

The final platform economy business model is the Subscription / Membership Fee Model.

This is the business model of netflix. This model works best once the number of Fitness Trainers increases on the platform. Here the Gym charges Gym Users either a flat or a variable fee per month or per year according to a subscription plan based on frequency of use, on specific Fitness Trainers’ services or number of Fitness Trainers requested.

The Gym again acts as the enabler. It collects the subscription fee from Gym Users and then release the money to the Fitness Trainers without a commission. Pay attention that unlike the previous models, in this one it’s the demand side, so the Gym Users, who is usually charged and not the Fitness Trainers.

Examples:

Treamer, a work platform. Say you need 3 people to clean your apartment once a month or a babysitter once a week. You get on a subscription plan and Treamer helps you find them.

Oppia, a platform for professional trainers. With a subscription plan you can participate to as many trainings as you want per month or year among those listed on the platform.

Slurp, a platform that matches independent coffee brewers with both retailers or consumers. With a subscription you can get delivered at home as many coffee brands as you like within a certain time limit.

Other Platform Business Models

There are many other platform economy business models and some platforms even combine several revenue models at once, which is what you should also do as well when your platform scales. Let’s have a look at them.

Lead Fee: Customer posts a request on the platform, and suppliers pay to bid for the job/project e.g. Upwork.

White Label: Sell/license a platform that a company can customize and us e.g. getable.

Freemium: Basic offering is free, but after users get hooked, platform offers paid value-adding features e.g. Linkedin.

1-Sided Model: Platform where suppliers are also customers and the other way around e.g. Tinder.

Re-Sale: Buy unwanted good and re-sell them at higher value e.g. second hand or recycling platforms.

Third Party Ads: Charge advertisers to publish their ads on the platform e.g. reddit.

Affiliates & Referrals: Let third parties promote your platform or let existing members refer new members to your platform e.g. foodora.

API Monetization: Charge customers for the use of one’s own API e.g. Google Maps.

Token Based: Decentralised platforms with crypto payments and a blockchain infrastructure e.g. Open Bazaar.

Platform Cooperative: Financial value of the platform is own and distributed among its users and workers e.g. Fairbnb.

After reading about all these examples you may wonder: what are the common denominators in monetizing a platform? Here below are some indicators that should tell you that you may be ready to develop platform economy business models.

No alt text provided for this image

Let’s have a look at some of these points.

Fragmented value chain. Think how many different suppliers are out there who can potentially be put together in a platform, where there is a lot of inefficiency, manual labour and opportunities to digitalise and optimize processes. For instance think of the construction or retail industry with complex value chains and millions of independent suppliers.

How much it’s regulated. Remember, you do not create a platform on pacemakers or nuclear power plants! If you want third parties to develop new products and services for you, the question is, how much can you experiment and open the process, so third parties can deliver that value?

Homogeneous supply. This happens where one supplier’s services are indistinguishable from another’s and demand doesn’t care which ones they receive as long as it is above the standard that the platform sets. For instance with Uber, the customer does not have to search for an offer, the platform and matching algorithm solve the problem for her.

Takeaways

When it comes to platform economy business models, there’s no “one size fits all” approach.

But there are some rules I’ve listed below. I think the common denominator here is decentralization which is key in the shift from pipelines to platforms: let go production of value to third parties and let them transact freely in an ecosystem. It’s the realization that you can’t always own all the resources and control everything.

No alt text provided for this image

Now ask yourself, it’s 2020, can you really afford not having a platform strategy considering that the 6 most valuable companies in the world are platforms? You don’t have to be the next Amazon (that ship has long sailed), but without a platform strategy, you could be left behind.

The key winners today are vertical and B2B platforms which operate in niches and which then expand in other adjacent sectors.

Platforms are beginning tochange the dynamics of entire industries. So, remember, whatever your business is, you are or you will compete with or build on top of existing platforms. But this game needs to be played with platform rules!

No alt text provided for this image

You can view the full presentation on the 4 Key Platform Economy Business Models 👉 here with examples from platform companies in Finland.

No alt text provided for this image

Thanks for reading 🙌

If you are also working at the intersection of service design, platform economy business models and technology, I’d like to know you. Get in touch at @MarcoTorreg or about.me/marcotorregrossa or in the comments below.

And if you are interested to dig deeper into platforms, we are offering workshops that address various stages of platform development like the ones here below. Get in touch with us to find out more.

No alt text provided for this image