In today's rapidly evolving marketplace, innovative platform companies are increasingly challenging traditional businesses.
“Some of the largest, most valued companies today are platforms,” says Harvard Business School Professor Feng Zhu, who teaches the online course Winning with Digital Platforms, “and you need to know why they’re so successful and how to work with them to stay competitive.”
Before exploring how platform businesses differ from traditional ones, it’s essential to understand their business model.
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DOWNLOAD NOWWhat Is a Platform Business Model?
A platform business model leverages digital infrastructure to facilitate interactions between user groups. It generates value and revenue through transaction fees, advertising, and data monetization.
Examples include:
- Social media channels
- Online marketplaces
- Crowdsourcing websites and apps
“Companies transition to a platform model for many reasons,” Zhu says in Winning with Digital Platforms. “For one, the fact that more and more companies are becoming platforms means that you could lose ground to competitors who’ve capitalized on the benefits of platform transformation if you fail to make the jump.”
If you’re considering transitioning to a platform business model but unsure whether it’s right for your organization, here’s how it differs from traditional approaches.
4 Differences Between Traditional and Platform-Based Business Models
1. Value Creation
Traditional businesses primarily create value by producing goods or services and selling them to customers to optimize efficiency and maximize profits.
In contrast, platform businesses generate value by facilitating interactions between user groups. Rather than producing goods or services, they provide infrastructure that enables and, in some cases, safeguards transactions.
For example, home rental platform Airbnb strives to create a trustworthy experience for hosts who offer accommodations to guests searching for places to stay. It achieves that by implementing robust systems such as verified profiles and secure payment methods.
Reviews are another way the company fosters trust. Guests can leave feedback on their stays to help future visitors make informed decisions and hosts build their reputations.
Related: Digital Platforms: What They Are & How They Create Value
2. Scalability
Traditional business models often face scaling challenges due to the significant investment needed for physical resources.
For example, a manufacturing company must invest in factories, machinery, and labor to increase production capacity, which can be costly and slow to implement.
Platform businesses, however, don’t rely on physical resources to grow. Instead, they increase their value as more users join—a process known as network effects.
Network effects can help your platform business grow by:
- Optimizing the user experience, because satisfied users are more likely to engage with your platform and invite others to join
- Enhancing data sharing to enable personalized experiences, optimize performance, and identify innovation opportunities
- Creating partnerships to expand your network and bring value to users through new or improved services
These scalability differences highlight platform business models’ strategic advantages in a growing digital economy.
Related: How to Leverage Economies of Scale to Grow Your Platform Business
3. Data Utilization
Traditional businesses use data to improve internal processes. For example, marketing professionals can use it to analyze the market, production teams to optimize supply chain processes, and customer relationship managers to improve the consumer experience.
Platform businesses, conversely, use data network effects to facilitate interactions, improve service quality, and increase platform usage while generating more data.
For example, streaming service Spotify leverages data network effects to enhance its user experience. As more users join and listen to music, Spotify collects data on their listening habits, preferences, and trends. It then uses that data to refine algorithms to offer personalized recommendations and more engaging playlists—in turn, attracting additional users.
4. Risk Factors
All businesses face economic, technological, environmental, and competitive risks. But, traditional and platform-based business models have different risk profiles they must manage.
Traditional businesses can face supply chain disruptions, market competition, and regulatory compliance. Platform businesses, meanwhile, can encounter data-related obstacles.
In Winning with Digital Platforms, HBS Associate Professor Chiara Farronato outlines one area of concern for platform businesses like Amazon that collect third-party data.
“I feel like a lot of the insights that Amazon obtains regarding products to launch may risk coming from data of third-party sellers,” Farronato says. “So they know when a product sold by seller X is selling and at what price, but Amazon would have no idea about that if there were no third-party sellers on their platform.”
Using third-party data can create ethical concerns and undermine user trust. By analyzing successful products from third-party sellers, Amazon can introduce similar ones under its brand—posing legal risks related to data use and competition.
When collecting data for your platform business, make it a point to maintain integrity and avoid risky activities.
Learn More About Platform-Based Business Models
Regardless of whether your company adopts a platform-based business model, understanding its opportunities and risks compared to traditional approaches is crucial to competing in today’s digital economy.
If you want to learn more about platform businesses, consider taking an online course like Winning with Digital Platforms. With insights from industry leaders, you can discover how to launch, scale, or work with platform businesses successfully.
Do you want to understand how to navigate the platform business landscape? Jumpstart your educational journey by exploring Winning with Digital Platforms—one of our online entrepreneurship and innovation courses—and downloading our free entrepreneurship e-book.
