Platform Economy: The 4 Key Business Models

01/11/2018 |

Platform-Economy-Business-Models

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

However, 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 business model?

A business model that creates value by facilitating exchanges between two or more interdependent groups, usually consumers and producers.

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.

This example can be applied to any other digital marketplace dealing with professional service providers, mostly in the B2C space, e.g. hairdressers, translators, nurses, consultants etc.

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

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 gym 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 gym user and trainer may decide to circumvent the gym’s payment and fees system, and make their own arrangements, separately. The gym 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. Then 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.

Now let’s have a look at the Transitional or Concierge model. This is a hybrid model where gyms are beginning to enter the platform economy.

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 gym user and then releases the money to the trainer once the job is done. The gym facilitates the exchange between gym user and trainer (hence it becomes facilitator), and acts as a payment provider. The gym manually guides gym users to trainers and the other way around, usually without the need of an algorithm matching.

Examples of this model? Freecycle, a recycling platform and Jamifind, a platform that helps you to find members for your band, exchange instruments and make music. Both in the C2C space.

This is the 2-Sides (or 2-Sided) Platform Model, a fully developed platform model where the gym becomes the enabler, allowing the parties to interact and transact, authorizing bids from trainers and screening both trainers and gym users.

The gym does not own any inventory but becomes the controller of the platform, as it sets rules regarding openness, governance, logistics and pricing.

Trainers and gym users are in direct contact with each other. The gym collects the trainer’s fee from the gym user, keeps it in escrow and then releases the money to the trainer once the job is done, charging the trainer a commission fee from the transaction. Sometimes the commission may also be split between gym 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).

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

In this model the gym becomes the orchestrator because it deals with multiple sides at once. This model is the same as the previous one except that more parties in the ecosystem are participating in the value exchange. In this case these parties are gym equipment suppliers. They lend their equipment to trainers and receive the gym’s payment from the commission the gym has raised from gym users.

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).

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 gym users per month or per year according to a subscription model based on frequency, on specific trainers’ services or the number of trainers requested. The basic plan is usually free, which is called freemium, and which combines well with the subscription model.

The gym again acts as the enabler. It collects the subscription fee from the gym user and releases the money to the trainer without a commission. In this model it is the customer, so the gym user, who is charged and not the trainer.

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: Crowdsourcing, White Label, Freemium, Listing Fee, Lead Fee, Flat Membership, Membership Plus, and Token Based (Blockchain).

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.

Join us on November 21 in Helsinki, Finland for our masterclass on Platform Strategies for Business ☝️☝️☝️ to learn more about these business models and how you can design, launch and monetize in the platform economy.


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.

This post is the transcript of a webinar I’ve run on The 4 Key Platform Economy Business Models on October 30 with Kimmo Karhu of Fourkind. You can view the recording and slideshow here 👇