What exactly is a “Platform business model”? And how does it work?

Platform business models are often discussed, not least in the e-commerce and service sector. But what does the term actually mean? We have made an attempt to clarify the meaning in this blog post.

In essence, a platform business model is a blueprint for businesses that enables interaction between at least two different user groups. These platforms create value by facilitating exchanges between users. Examples of platform businesses include Uber, Airbnb, and Amazon.

Uber, for instance, connects drivers (one user group) with people who need a ride (another user group). Airbnb connects homeowners who want to rent their homes (one user group) with travelers looking for accommodations (another user group). Amazon connects sellers (one user group) with buyers (another user group).

The success of a platform business model largely depends on its ability to attract and maintain a large number of users on both sides of the platform. This concept is often referred to as network effects, where the value of the service increases as more people use it.

Importantly, the platform doesn’t own the means of production— instead, it owns the means of connection. In contrast to traditional business models, where value is created through the production and selling of goods or services, platform businesses create value by building networks and fostering interaction.

By facilitating interactions, platform businesses can scale more efficiently than traditional businesses, as they can add new users with minimal marginal cost. They also tend to have strong defensibility once they reach scale due to the aforementioned network effects.

In a nutshell, a platform business model is about creating ecosystems, enabling interactions, and adding value to all parties involved, typically harnessing technology to do so.

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