The marketplace has seen a remarkable shift with the rise of digital platforms—business models that use online infrastructure to facilitate interactions between groups. Data from Persistence Market Research estimates the digital platform market to grow from $9 billion in 2023 to $19 billion by the end of 2030.
Yet, after transitioning to a platform business model comes a crucial step: scaling.
If you’re struggling to build your platform business, here's an overview of how to use economies of scale to achieve long-term growth.
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DOWNLOAD NOWWhat Are Economies of Scale?
Economies of scale occur when the cost of producing a product decreases as production volume increases. They can be internal or external.
- Internal economies of scale occur within your company and include technical, managerial, financial, marketing, and network economies of scale.
- External economies of scale arise from outside factors, such as industry size, skilled labor availability, and technological advancements.
Your industry can influence your economies of scale.
For example, if you work at a car manufacturing company, you might leverage internal economies of scale by investing in advanced robotics to reduce production costs by spreading fixed costs—such as machinery and factory space—across more products.
Alternatively, if your organization is in the technology sector, you can benefit from a concentrated pool of skilled labor and shared infrastructure—reducing costs through collaboration and partnerships.
Growing Your Platform Business with Economies of Scale
Leverage Network Effects
One way to achieve economies of scale and foster your platform’s growth is by leveraging network effects to decrease the cost per user as you gain more users.
Network effects can be:
- Direct/same-side: The value a user receives changes with the number of all users in the same group or side
- Indirect/cross-side: Increased users in one group or side (e.g., sellers) enhance value for those in the other (e.g., buyers) by boosting variety or service quality
According to HBS Associate Professor Chiara Farronato in Winning with Digital Platforms, network effects have helped platform businesses like Facebook and TikTok grow.
“The more users are actually using TikTok or Facebook and creating content—distributing content on those platforms—the more valuable that platform is for every other user who's considering joining it,” Farronato says. “This is a form of direct, or same-side, network effects. The fact that there are many other users like me participating in a platform makes me more willing to participate in that platform.”
Indirect network effects can be just as powerful. Farronato uses ride-sharing platform Uber as an example.
“The more drivers there are on Uber, the more valuable the platform is to any given passenger,” Farronato says. “Why? Because it's going to be easier to find a ride. That ride is probably going to be cheaper, and that ride is probably going to come to you and pick you up much, much faster. That's a type of indirect network effects.”
Invest in Technology
Investing in technology is critical to achieving economies of scale. Beyond spreading fixed technology infrastructure costs over a larger user base, it helps ensure your business is scalable, reliable, and positioned for innovation.
In Winning with Digital Platforms, Farronato shares the story of Telepass, an Italian wireless toll-paying service turned mobility platform that invested in technology to better understand customers’ transportation needs.
“They realized that the mobility services didn't stop at the car, but they actually were much bigger if you went from the car being your customer to the driver being your customer,” Farronato says. “The driver uses their car, for sure, but uses many other mobility services. They may rent another car in a different city. They may rent bikes. They may use public transportation. They may use trains. And so they started expanding the offering of mobility services from just the tolling service to way more that was sort of separate from the car itself.”
To address those needs, Telepass developed comprehensive tools to automate large-scale decision-making and further strengthen its platform's value proposition and operational efficiency.
Investing in technology can allow your platform business to improve and stay competitive. Using advanced technologies—such as artificial intelligence (AI), machine learning, and data analytics—your platform can evolve to meet market demands, enhance user experiences, and expand its features.
Related: Understanding 3 Common Types of Customer Needs
Utilize Data Analytics
Employing digital infrastructure, you can collect vast amounts of valuable data to streamline operations and reduce your platform’s cost per user.
That data can include:
- User behavior
- Transaction patterns
- Customer feedback
With it, you can create powerful data network effects—attracting more users and enhancing your offerings through data generated from user activities—to expand your user base.
For example, streaming service Netflix analyzes users’ viewing habits, search queries, and ratings to optimize its content recommendation system. Data network effects also enable the company to optimize its content strategy. By analyzing user data, Netflix can predict what will be popular and decide what to create.
Tailoring content based on data allows Netflix to spread content creation costs over more users and attain economies of scale.
Optimize Pricing Models
Pursuing economies of scale also requires strategically managing your platform business’s pricing model.
Guaranteeing profitability can be challenging due to fluctuating supply and demand. When demand is low, you can struggle to generate revenue and lose money on costly resources. Alternatively, excess demand can strain your supply chain, leading to financial losses.
One of the best strategies for maintaining a healthy balance between supply and demand is dynamic pricing, in which you adjust prices based on real-time market trends.
By adjusting to market conditions, you can meet high-demand periods with appropriate pricing to maximize resources, reduce idle capacity, and improve efficiency.
Winning with Digital Platforms presents ride-sharing company Fasten as one real-world example of why dynamic pricing is essential to balancing supply and demand.
“If you don't have dynamic pricing, you can't essentially satisfy demand,” says Vlad Christoff, Fasten’s co-founder, in Winning with Digital Platforms. “What dynamic pricing is supposed to do is say, ‘OK, these are the high-traffic areas; these are the high-demand areas.’ And there’s technology that can actually predict this.”
Ultimately, dynamic pricing helps you distribute fixed costs over more transactions—or higher-margin transactions—to achieve economies of scale and optimize performance and customer satisfaction.
Scale Your Platform Business
Building your platform business can be challenging. By leveraging economies of scale, you can achieve long-term, sustainable growth.
One of the best ways to prepare for the process is by enrolling in an online course, such as Winning with Digital Platforms. Through an interactive learning experience, you can gain insight into the benefits of platform businesses and how to launch your own.
Do you want to learn more about launching and scaling a platform business? Explore Winning with Digital Platforms—one of our online entrepreneurship and innovation courses—and download our free entrepreneurship e-book to get started.
