Platform businesses are revolutionizing how the world interacts, trades, and innovates. By leveraging digital infrastructures, platforms can drive significant value and growth.
According to market intelligence provider International Data Corporation, digital transformation spending will reach $3.9 trillion by 2027, with a five-year compound annual growth rate of about 16 percent.
“Platform companies have become increasingly important to the global economy and are some of the largest and most valued companies today,” says Harvard Business School Professor Feng Zhu, who teaches the online course Winning with Digital Platforms.
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DOWNLOAD NOWWhat Is a Platform Business?
A platform business uses a digital platform to facilitate interactions between user groups, generating revenue through transaction fees, advertising, or data monetization.
Platform businesses are prevalent across industries. For instance, social media platforms like Facebook and YouTube connect billions of users, while online marketplaces like Amazon facilitate millions of transactions.
If you want to thrive in the age of digital platforms, here are five notable benefits you can expect from adopting or transitioning to a platform business model.
5 Benefits of Platform Business Models
1. Improved Customer Engagement
Platform businesses can engage customers through personalized, community-driven experiences, making them feel like they’re perceived as people rather than numbers. Research by cloud-based software company Salesforce shows that’s crucial to winning their business.
For example, Netflix uses sophisticated algorithms to create personalized recommendations—increasing user engagement in a highly competitive video streaming industry. According to software development company AtliQ Technologies, Netflix’s recommendation system influences 80 percent of the content customers view.
Moreover, Netflix uses social features to sustain engagement. Users can share their viewing activities with friends and family via Teleparty, fostering a sense of community and strengthening connections within the platform.
Adopting these strategies can significantly enhance user satisfaction and loyalty, driving long-term success.
Related: 3 Engagement Strategies You Can Use to Retain Customers
2. Enhanced Scalability
Platform businesses can scale faster than companies with traditional business models. That’s because digital infrastructure enables them to expand operations without a proportional cost increase.
A key factor is network effects, where value increases as more users join and attract more participants, spurring business growth.
According to Winning with Digital Platforms, network effects include:
- Direct/same-side network effects: The value the user receives changes with the number of all users in the same group or side
- Indirect/cross-side network effects: 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
- Data network effects: Data generated from user activities improves your platform's services, attracting more users and creating a reinforcing cycle that enhances your offerings
One example of a platform that’s benefited from network effects is property-rental company Airbnb. Although it initially faced challenges attracting hosts and travelers, network effects helped it scale as more users joined. An increase in hosts attracted more travelers and, in turn, encouraged more property owners to list accommodations. Airbnb now has over 150 million users, making it one of the leading platform businesses in the travel industry.
3. Flexibility to Innovate
Platform businesses have the flexibility to innovate and quickly adapt to market changes. Unlike traditional businesses—which can struggle with innovation due to rigid structures—those using digital platforms can continuously improve by collecting large amounts of user data.
For example, digital music streaming service Spotify tracks user preferences, listening habits, and engagement to generate data network effects, information from its growing customer base that machine learning algorithms analyze to create personalized playlists and enhance the platform.
Traditional competitors, like radio stations, struggle to match that level of customization due to limited user data and real-time processing capabilities. As a result, Spotify can better adapt to its target audience's needs and challenges.
Related: Product Innovation: What Business Leaders Need to Know
4. Cost Efficiency
Platform businesses can significantly reduce operational costs by utilizing digital infrastructure to streamline functions.
Ride-sharing company Uber, for instance, connects independent drivers with passengers. By leveraging independent contractors—unlike traditional taxi companies—the company decreases capital expenditures and maintenance costs.
As the number of Uber users and drivers increases, the cost of maintaining and improving the platform spreads over many transactions, reducing the average cost of each. This is an example of economies of scale, situations in which the cost of producing a unit of a product decreases as that product’s production volume increases.
Economies of scale can be:
- Internal economies of scale: Occur within the company and include technical, managerial, financial, marketing, and network economies of scale
- External economies of scale: Arise from external factors, such as industry size, availability of skilled labor, and technological advancements
Platform businesses can also use dynamic pricing to achieve cost effectiveness, employing predictive analytics to anticipate demand fluctuations and adjust prices accordingly. This strategy has enabled companies like Uber to optimize rates based on routes’ time and distance, traffic, and rider-to-driver ratio while maintaining profitability.
5. Access to New Markets
A major benefit of employing a platform business model is accessing new markets through strategic partnerships.
In Winning with Digital Platforms, Rodolfo Chung, CEO of beverage delivery service Zé Delivery, shares how the company expanded into new markets during the COVID-19 pandemic with the support of its parent company, AB InBev, achieving growth that would’ve taken months otherwise.
“With tapping through the InBev ecosystem, we did it in a matter of weeks,” Chung says. “In less than a month, we were able to have the sales team explaining, expanding the ecosystem, gathering new partners in over 300 cities throughout Brazil because you already had people in all those locations.”
Zé Delivery’s success enabled it to partner with hundreds of fast-moving consumer goods companies to generate value for its partners through increased market reach, enhanced delivery efficiency, and improved customer satisfaction—especially smaller companies lacking delivery infrastructure.
“[Our partners] don't see us as just a retailer as any other,” Chung says in Winning with Digital Platforms. “They see us as the operator, enabler of their direct-to-consumer, of their commerce. That's how I like them to perceive us, and that's how we create more value for them, and they’ll be able and willing to pay for that.”
Take the First Step Toward Creating a Platform Business
A platform business model offers several benefits. However, it’s important to understand its intricacies to navigate challenges such as increased market competition and the need for continuous innovation.
One of the best ways to gain that knowledge is by enrolling in an online course, such as Winning with Digital Platforms. Through interactive learning exercises and real-world cases, you can prepare to launch, scale, maintain, or work with a successful platform business.
Do you want to learn more about digital platforms? Explore Winning with Digital Platforms—one of our online entrepreneurship and innovation courses—and download our free entrepreneurship e-book to get started.
