Platform Economy: The 4 Key Business Models

01/11/2018 |

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

It’s clear to everyone that Amazon, Airbnb and Uber 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 global economic activity ($60 trillion) will be mediated by platforms and ecosystems in 10 years time. Yet, only 3% of established companies have adopted an active marketplace strategy.

Why is that? In answering this questions, 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. Rather, it’s a holistic business model that creates value by bringing together consumers and producers, allowing them to interact and transact.

This misunderstanding is very common with some SaaS companies, which like to claim they have a complete platform 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.

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

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In this post I will use a fictional example of a gym which wants to reinvent itself and reshape its value chain as a platform with independent fitness trainers and gym users.

Why am I using this example? To demonstrate that even your local health centre nowadays makes much of its money not by what it sells but by facilitating the interactions of others — just like farmers’ markets or stock exchanges already do.

Now, let’s have a look at some of the ways that gyms could experiment with platforms models.

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First, we start with the Linear or Pipeline model. The majority of gyms which use independent fitness trainers usually operate with this model, which is based on subcontracting.

Here the gym is an intermediary, it hires trainers and rents them out to the gym users (pricing them as if they were its own senior staff) adding overheads on top of it. The customer, the gym user, is not negotiating the engagement nor in direct contact with the trainer. Most of the times, the user does not even know the trainer is an independent service provider of the gym.

This model bears one major risk which is called bypassing. The user and trainer may decide to circumvent the gym’s payment and fees system, and make their own arrangements, separately. The gym here becomes redundant.

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

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Now let’s have a look at the Transitional or Concierge model. This is a hybrid model where gyms are beginning to experiment with the platform economy (risk free).

Here the gym gets out of the way: trainers and gym users are in direct contact, choosing prices, negotiating engagements and setting conditions. This model is no longer based on fixed costs set by the gym, but on variable costs set by trainers.

The gym charges the user a service fee for the matching. The gym facilitates the exchange between user and trainer (hence it becomes facilitator), and acts as a helpful concierge, like in hotels. The gym manually guides users to trainers and the other way around, usually without the need of an algorithm matching, or payment system and without allowing trainers to bid.

Examples of this model? Timma, a platform to help consumers compare and choose among hairdressers salons and Jamifind, a platform that helps you to find members for your band, exchange instruments and make music. Both in the B2C and C2C space.

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This is the 2-Sided Platform Model, a fully developed platform model where the gym becomes the enabler, allowing gym users to set project costs, and trainers to bid for projects.

The gym does not own any inventory but owns the platform, as it sets rules regarding openness, governance, logistics and pricing. Trainers and users are in direct contact with each other, before the project starts, setting conditions about their engagement. The gym collects the trainer fee from the user, and then releases the money to the trainer once the job is done, charging the trainer a commission fee from the transaction or sometimes the commission is split between user and trainer. Usually, platforms should charge the side, that needs the other side the most, in this case the trainers.

Notable examples of this model include: Uber, Airbnb, Upwork (B2C, C2C and B2B).

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

In this model the gym becomes what I call the orchestrator because it deals with multiple distinct entities at once. This model is the same as the previous ones with the only difference that more entities in the ecosystem are participating in the transactions. In our example here, these parties are gym equipment suppliers. They lend their equipment to trainers for free and receive the payment from the gym minus the commission it has raised.

Best example of this model are Deliveroo or Foodora. They charge the ones who order food and then release the money to both the riders and the restaurants, taking a commission from the transaction. Other examples include: Apple IOS and Amazon (both B2B and B2C).

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Finally, this is the most advanced platform model: the Subscription or Membership Based Model.

This model works best once the number of trainers increases on the platform. Here the gym charges users per month or per year according to the subscription plan chosen based on frequency of usage, on specific trainers services or number of trainers requested. The basic plan is usually free, which is the so called freemium model that combines well with the subscription.

The gym again acts as the enabler. It collects the subscription fee from users and then release the money to the trainers without a commission. In this model the customer, so the gym user, is usually charged and not the trainers. However, there are also subscription models where the provider is charged (e.g. freelancer.com).

Other examples: On Netflix you can choose different subscription plans depending on the size and frequency of digital content you want to consume. This is also the business model of Linkedin (B2C) or Tinder (C2C).

Takeaways

There are many other revenue generation models implemented by platforms, such as: 1-Sided Model, Re-Sale, Crowdsourcing, White Label, Freemium, Listing Fee, Lead Fee, Flat Membership, Membership Plus, Platform Cooperative, API Monetization, Third Party Ads, and Token Based.

The common denominators among them are:

  1. You (or the gym, using our fictional example) should at first aim for high liquidity (transactions taking place on the platform) and to generate network effect, rather than high monetisation.
  2. You should help customers set the right project costs by providing them with pricing ranges for specific services of the providers and help providers set the right bids/quotes for projects.
  3. You should use flexibility in charging fees, i.e. lower fees for larger transactions and for power users, those that generate most transactions, or for early adopter users.
  4. You should be prepared to change and combine several revenue models at once during the lifecycle of the platform.

These 10 signs may indicate that you are ready to adopt a platform strategy in your sector.

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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!

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You can view the full presentation on the 4 Key Platform Economy Business Models 👉 here

Thanks for reading 🙌

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