Platforms are powerful business models. If you get it right, you can build a significant competitive moat around your business that is difficult to replicate.
Platforms can be a conceptual model of how your business works or it can be actual software platform.
Platforms do two key things:
- The connect parties together.
- They enable compensation for the parties.
More specifically, they facilitate value exchange, they set and enforce rules and standards, and then get out of the way.
Transaction costs between parties are significantly reduced on a platform because of scale, market forces, and less friction.
Platforms have an in-built network effect. The more parties join each side of the platform, the more valuable it becomes for everyone involved.
A lot of businesses claim to have platforms, especially SaaS providers that claim that they have a complete platform for x.
But, in reality, they are just building and shipping software products. There’s nothing wrong with that, but it’s inaccurate to claim that it is a true platform.
There is a whole set of different economics behind a platform play. Non-platform businesses can be called linear businesses, and they typically own their own inventory and it will show up on their balance sheets. You can think of car makers, or even Netflix that has to depreciate the investment they make into their shows.
So building a platform business is not really about the technology; it’s about the business model. Achieving scale in the linear model is about making investments into your own internal resources and infrastructure, while in a platform, scale is achieved by leveraging external networks that are created on top of your business.