The Best Business Model for Tech Entrepreneurs and Startups

In today’s rising digital economy, founding a tech startup is the way to make it big in just a short amount of time. With the help of new technology and other related advances, entrepreneurs have been innovating unique business ideas that help improve and satisfy the demands of society. While conducting a startup can lead to immense success, 50% of startups fail within 4 years of operation. So how did companies like Uber, Snapchat, and Tinder stay above that 50% line and generate viral, worldwide success? The answer is simple: platforms.

platform business model

What is a platform? A platform is a business model that creates value by facilitating exchanges between consumers and producers. Platforms can be divided into many specific categories based on the core value that is being exchanged. For example, Facebook can be further classified as a social content platform because its core transaction focuses primarily on the interaction with other people. While platforms may differ in their core value, every platform can identify with one of these two categories: Maker or Exchange.

What is a Platform?
A Maker Platform creates its value by enabling producers to create content and broadcast it out to an audience. In contrast, an Exchange Platform creates value primarily by facilitating direct exchanges between consumers and producers. Because the two types of platforms have vast differences, the strategy between Exchange and Maker Platforms varies as well. This is especially the case when cultivating their producer ecosystems.

There are four primary functions that every business model must have to be considered a platform: matchmaking, building liquidity, setting rules and standards, and providing functionality. If your company can manage all four functions well enough, your platform will be able to facilitate its core transaction and in turn, your business will generate profit and success.

Because platforms involve the exchange between two parties, it is important to match up producers with consumers to the business’s best ability. In order to determine how to maximize the value provided, a platform needs to be able to understand its users and analyze all possible data provided. Building liquidity and solving the chicken and egg problem is a recurring issue that a platform needs to solve at every stage of the company’s growth. Without producers, a platform cannot generate more consumers. Without consumers, there will be no desire for producers to join the platform. In order to get both sides of a user network to engage in a platform’s ecosystem, the platform needs to subsidize an appropriate amount of value. Platform businesses use technology to curate access and usage between multiple user groups. The platform should consider itself as a governor of its network that creates rules to help improve the value of exchange within the platform. Once the major functions of the business model have been determined, a platform can then focus on creating technology that encourages enough value can be created and exchanged through a platform’s product. Finding the right balance of the technology to be built and product features implies the understanding of all of the four core functions holistically.
Uber is a prime example of a platform company that carries out all functions of a platform successfully. It can be further classified as a service marketplace platform. Within its platform, Uber provides algorithmic matching that connects consumers with drivers based on location and availability. It also provides incentives for people (i.e. Uber’s recent deal with Toyota) to become an Uber driver, as well as incentives for consumers to use the Uber app, which overall generates marketplace liquidity. There are regulations that exist on Uber regarding payment policies, surge pricing, and general conduct expectations. Lastly, Uber has created a product that brings all of its platform’s functions together in an easy-to-use application that can be downloaded on Android and iOS phones.

Uber’s success can be largely attributed to its carefully crafted platform design, and is only one of the numerous companies that have become successful due to the platform business model. One of the most fundamental parts of being human is exchange. Successful platforms can facilitate these exchanges by enabling externalized innovation or reducing transaction costs. As a result, platforms also create ecosystems and leverage their inherent network effects. With the uprising of connected technology, platforms now can facilitate exchanges produced by decentralized networks of individuals. These environments allow for platforms to scale in ways that traditional linear businesses cannot. This is why in today’s Connected Revolution, entrepreneurs that create tech business with the platform model built will create the most value and see the most success.

Filed under: Platform Innovation | Topics: business model, enterprise hacks, entrepreneur, platform, startup

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