The Power of the Platform Business Model for Startup Companies

One of the most interesting concepts I’ve studied at ThePowerMBA was the Platform Business Model. Many of the most successful companies today are based on platforms:

  • Amazon is a platform in which consumers are able to purchase almost anything.
  • Facebook is a platform in which users generate and share content with other users.
  • Uber is a platform in which clients get easy access to transportation almost anywhere.
  • AirBnB is a platform in which guests can rent rooms from private hosts.
  • WhatsApp is a platform in which users send instant messages to each other.
  • YouTube is a platform in which users can share videos with their followers.
  • PayPal is a platform that enables eCommerce websites to easily receive payments from users.

Of course all social networks are also platforms: Twitter, Instagram, LinkedIn, Pinterest, Snapchat, TikTok.

There are also many platforms for content sharing: Medium, WordPress, Blogger, Slideshare, Reddit, Pocket, Vimeo.

In the same way, all online marketplaces are platforms: Alibaba, eBay, Etsy.

The graph below, from the Innovation Tactics article “The Complete Guide to the Revolutionary Platform Business Model” shows examples of platforms organized by categories:

It is obvious by now that all these different platforms together have had a profound impact in our lives. They have changed the way we buy products; they have extended our ability to communicate with our family and friends; they have disrupted traditional industries; they have enabled us to become content creators and build a follower base.

Thus, I think it would be very interesting to analyze the main attributes of the Platform Business Model, and identify its strengths and challenges.

Strengths of the Platform Business Model

The main attribute of the Platform Business Model is that it enables users to create value for other users. In general the platform is not directly responsible for creating content or selling products and services that are consumed by the users. In the case of platforms, the users themselves are responsible for content generation and the provision of products and services.

In one-sided platforms all the users are of the same type, and they can be both producers and consumers at the same time. This is the case of most social networks like Facebook, in which users are active both posting and interacting with the posts of their friends.

In two-sided platforms there are different types of users, and some of them are producers while others are consumers. This is the case of marketplaces in which there are buyers and sellers and content-sharing platforms in which there are bloggers and readers.

But in all kinds of platforms there is a network effect: the bigger the number of users, the higher the value that is being generated for these users. In other words, as the number of users increases, the value for these users also increases.

This network effect creates a virtuous circle:

  • The growth in users creates a growth in value.
  • The growth in value brings new users.

This network effect is one of the reasons that the platform business model is so attractive for startup companies. If a startup is able to create the virtuous circle, it can actually grow exponentially. There are many startup companies that have experienced such explosive growth, and a recent example is the innovative social network Clubhouse, which reached millions of users in a short period of time.

Many platforms try to create this phenomenon of viral growth by motivating their current users to invite their friends to join the platform. This is the case of Clubhouse, which adopted successfully the policy of being invite-only. This kind of viral growth strategy may also drastically reduce the average user acquisition cost.

Very often the exponential growth also creates a winner-takes-all effect: only a few platforms reach the scale that enables them to operate efficiently and become profitable. As a consequence, each one of the few successful competitors dominates a significant share of the market. In some cases these few competitors may operate in practice like an oligopoly.

Another consequence of these effects is the creation of high entry barriers for new competitors. In a market in which there are already a few platforms operating successfully, and each one of these platforms has a significant share of the market, it is very difficult for a new competitor to penetrate this market.

Challenges of the Platform Business Model

The Platform Business Model also presents many challenges to entrepreneurs. Unfortunately, it is very common for the founders of platform-based startup companies to underestimate these challenges. In particular, founders without a business background fail to understand the main obstacles because these challenges are not related to the product features or its technology, they are related to the execution of the go-to-market strategy.

First of all, it is clear that a platform must reach a critical mass before it becomes really valuable for its users. For example, a messaging app like WhatsApp or Telegram is only useful for us if most of our friends are also using the same app. The platform as a product may have amazing features and it may be based on advanced technology, but if there are not enough active users in the platform it will not provide any value.

For this reason we commonly observe that the adoption of specific platforms follows geographic boundaries. In some cases a platform may be very popular in one state but have relatively few users in a different state. The map below shows the most popular messaging platforms by country in 2018:

In the case of two-sided platforms, this creates the well-known  chicken-and-egg problem. When a startup is trying to create a two-sided platform, it has a dilemma: which kind of user should we acquire first? The producers or the consumers? For example, in the case of marketplaces, there is no value for the sellers if there are no buyers, and there is no value for the buyers if there are no sellers.

Thus, in the case of two-sided platforms the challenges are even bigger, because they must reach a critical mass for both types of users. They also must make sure that the growth of their user base is always balanced: the platform will not be able to scale if the number of producers is growing much faster than the number of consumers, or the opposite.

One of the main consequences of this need to reach a critical mass is that platform-based startups also need more funding. If the startup founders are not able to obtain a considerable initial investment, they will not have the resources to implement their user acquisition strategy.

In Summary

A startup based on a Platform Business Model may benefit from network effects and grow virally and exponentially. If successful, this startup will dominate a significant market share and enjoy the protection of high entry barriers against potential competitors.

However, there are many challenges, in particular the need to reach critical mass before the platform delivers real value to its users. In general a startup company will only succeed in reaching this critical mass if it is able to raise considerable investments.

The insights in this blog post were inspired by the materials I learned during my studies at ThePowerMBA. Please let me know in the comments below if this post was useful for you and which other startup-related topics would you like to explore.

About Hayim Makabee

Veteran software developer, enthusiastic programmer, author of a book on Object-Oriented Programming, co-founder and CEO at KashKlik, an innovative Influencer Marketing platform.
This entry was posted in MBA, Social Networks, Startups, ThePowerMBA and tagged , , , . Bookmark the permalink.

3 Responses to The Power of the Platform Business Model for Startup Companies

  1. scott Mark says:

    Platforms win at the end of the day because it’s much more difficult to uproot them because so many parts of a job or personal activity are done there. There will always be better products available, but if you do 5 things and they only do 1. That’s how you win. Here are two examples: All of the biggest software companies are platforms; though none started that way (nor should they). Salesforce does sales, support, marketing, and now Slack. Zendesk started with support and now expanded to sales and moving forward.

    Notion – You can do task management, project management, product management, documentation/wiki, CRM, and much more. Wunderlist may be a better task mgt app. Monday a better project mgt tool, and Trello a better product mgt tool. Why pay for multiple tools that don’t communicate together (for a single source of truth?)

    Facebook – Snap allowed you to create a self-destructing message. Tiktok, does well I don’t know what they really offer of value, and foursquare let you check in to locations. FB’s strategy of simply replicating the above functionality has been brilliant. Why? Why use 10 different apps, when in FB I upload pictures, chat with friends, check-in, and so much more.

  2. Pingback: The Power of the Platform Business Model for Startup Companies — Effective Software Design – Articles & thoughts from Framework Marketing

  3. Pingback: The Power of the Platform Business Model for Startup Companies – Kanpur Business Updates

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