Launching a digital platform business is an exciting opportunity if you’re an entrepreneur. By using online infrastructure to connect different groups, you can transition from a traditional business model to one better suited to the digital age.
With 80 percent of business-to-business sales projected to occur on digital channels over the next several years, online platforms’ growing importance is evident.
To succeed in the modern economy, it's crucial to understand what starting and scaling a platform business requires. Here are five steps.
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DOWNLOAD NOW5 Steps to Starting a Platform Business
1. Create Value
The first step in starting a platform business is determining how to create value by focusing on customer needs.
Trust, for example, is a prominent user pain point. According to a PwC report, 44 percent of customers stop buying from companies due to a lack of it.
“Many platforms ensure trust among strangers,” says Harvard Business School Professor Feng Zhu, who teaches the online course Winning with Digital Platforms. “Platforms facilitate exchanges that require trust, and they offer multiple ways to build trust.”
To build trust, you can:
- Conduct background checks on users
- Allow buyers and sellers to rate each other
- Offer insurance to protect users
In Winning with Digital Platforms, Lulu Chen, a journalist at Bloomberg News, discusses the trust concerns wholesale marketplace company Alibaba addressed with its platform business, Alipay.
“Alipay was created out of the huge demand for trading necessities,” Chen says. “In the early days, buyers weren’t very trusting of the sellers. And very often, people didn't know if they would get their merchandise.”
To overcome that issue, Alipay implemented an escrow account to safeguard transactions. The move helped ensure legitimate transactions and credible partners by mandating Alipay accounts for all users. By identifying and devising a solution to a market challenge, Alibaba not only created significant value for users but bolstered its success.
Related: 3 Effective Methods for Assessing Customer Needs
2. Choose the Right Model
Selecting the right business model influences how you streamline user interactions, reduce costs, and enhance customer satisfaction.
A good place to start is by using algorithms to link users based on their needs and preferences. This is known as matching design, and there are two types:
- Centralized matching design: Automatically matching users with a seller according to your platform’s algorithm
- Decentralized matching design: Offering multiple options to users who search all options before choosing based on their preferences
For example, Amazon uses a centralized matching design to make recommendations based on customer data, while eBay uses a decentralized matching design to allow sellers and buyers to connect directly with little to no interference.
You must also consider your pricing model. With a centralized pricing model, you set prices based on comprehensive information; with a decentralized pricing model, individual sellers or bargaining determine pricing.
“Pricing decisions almost always go hand in hand with search and matching,” Zhu says in Winning with Digital Platforms. “If a platform has a centralized matching model, they’ll have a centralized pricing model. And if they have a decentralized matching model, they’ll often use a decentralized pricing model.”
However, there are exceptions. For example, ride-sharing company Uber pairs centralized matching design with dynamic pricing—setting flexible prices based on current market demand.
While aligning your design and pricing model can help ensure your platform operates efficiently and meets user expectations, try to be flexible and cater to market needs.
3. Attract Users
Attracting users is a major challenge when starting a platform business, often referred to as the chicken-or-egg problem. Since users may be reluctant to join a platform with few participants, growing your business can be difficult.
One effective approach is gaining users with subsidies, which come in several types:
- Fixed subsidies: Set payments to network participants based on general affiliation with the platform
- Variable subsidies: Proportionate payments made to participants based on their contributions to the platform
- User subsidies: Direct payments made to users to join the platform
- Per-transaction subsidies: Payments made to users for each instance they use the platform
In your platform’s early stages, you might offer fixed subsidies to attract a critical mass of initial users. Once you establish a sufficient user base, transitioning to variable subsidies can help maintain and grow user engagement.
Leveraging network effects—which occur when your service’s value increases as more users join—is vital to attracting new customers and enhancing your potential for success.
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
In Winning with Digital Platforms, HBS Associate Professor Chiara Farronato describes how network effects have contributed to the growth of social media companies like TikTok and Facebook.
“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.”
Much like social media platforms, if you strategically employ subsidies and network effects, you can attract users and expand your platform.
4. Build a Technology Base
Building a robust technology base can help ensure your business is scalable, reliable, and safe.
In Winning with Digital Platforms, Farronato shares the story of Telepass, an Italian company that transitioned from a wireless toll-paying service to a personalized mobility platform. Beyond significant investment in technology and skilled personnel, the shift required a revamped understanding of 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 expanded needs, Telepass developed an AI factory, a comprehensive set of tools to automate decision-making on a large scale through data collection, integration, and analysis. One advantage of the transition was the data network effects it created. The customer data the company collected improved its services’ quality—increasing platform usage and generating even more data. That cycle further strengthened the platform's value proposition and operational efficiency.
Building a strong technology base isn’t just about handling current operations but also creating a foundation for innovation. By leveraging advanced technologies, your platform business can evolve, adapt to market changes, and better meet user needs.
5. Scale
As your platform grows, you’ll likely face various obstacles and opportunities, such as multi-homing, where users or suppliers engage with multiple platforms simultaneously.
Multi-homing’s challenges include:
- Increased competition: Constantly competing for users who engage with multiple platforms
- Diluted network effects: Users split their activity across several platforms, weakening network effects’ positive feedback loop
- Lower user retention: Users who divide their time among multiple platforms are less likely to develop strong loyalty to any single platform
Addressing such challenges requires continuously innovating to enhance your platform and attract and retain customers. You can also offer unique features and services that competitors can’t easily replicate, making it more attractive for users to stay.
For example, Spotify leverages machine learning to create custom playlists, such as "Discover Weekly," and integrates exclusive podcast content to enhance the user experience and establish a competitive edge in the streaming industry.
By investing in technology, marketing, and customer support as you scale, you can better serve your expanding user base, drive sustained growth and market dominance, and overcome multi-homing challenges.
Start Your Platform Business
Starting a platform business offers opportunities to disrupt industries and stay on the cutting edge. Although companies like Uber and Lyft started small, they quickly became industry giants.
If you’re ready to navigate the platform landscape but unsure how, consider taking an online course like Winning with Digital Platforms. Through real-world cases featuring industry-leading entrepreneurs, you can determine the best approach for launching your platform business.
Do you want to learn how to launch and scale a successful platform business and compete against others in the same space? Explore Winning with Digital Platforms and download our free entrepreneurship e-book to get started.
