What Makes Platforms Different from Traditional Businesses?

The key difference between platforms and most traditional business models is that platforms are multisided. By definition, they cater to multiple user groups. Platforms create value by bringing these people and businesses together and enabling them to exchange value.

This is very different from your typical one-sided business, which caters to just one basic customer group for each product. Think of Toyota, which makes cars and sells them to drivers, or a company like Adidas, which creates clothing and sells it to consumers. These businesses both create value by making a product and then they push that product out to consumers.

Traditional service businesses are very similar. Take your healthcare provider as an example. They provide you a service and you receive it. The same goes for retail banking — the bank lends you money at a specific interest rate. The company provides the service and you receive it. Pretty simple.

In this model, value creation is linear and one way. The path of the product or service from manufacturer to consumer is described pretty well by your traditional, linear supply chain. Value is produced upstream and is consumed downstream.

In contrast, platforms facilitate the exchange of value. They cater to multiple user groups that need each other in some way and who depend on the platform to bring them together. Value creation here isn’t linear, and it isn’t one way — it’s networked and it’s mutual.

As a result, platforms create valuable ecosystems driven by network effects. The more users there are on one side of the platform, the more valuable the platform becomes to other users groups. This dynamic allows platforms to scale in ways that traditional, one-sided businesses can’t. Platforms grow primarily by adding participants to their ecosystem, rather than by adding physical resources or direct labor.

The value platforms provide also scales as they grow. Think back to your one-sided business. They deliver you a product or service and you consume it.

This provides what’s called inherent value — you derive value from your use of the product or service. But platforms add another source of value — networked value. This means that the value you derive from the platform increases as more people use it.

These are just a few examples of what makes platforms different from traditional businesses, but these differences are a core part of why platforms are able to create much more value today.

Filed under: Platform Innovation | Topics: Platform Startup Advisory, platforms, Q&A Videos