The roaring success of Uber, Airbnb, Etsy and other similar services makes us think about why they have become so popular – and how to build a product that can be equally bright.
In this article, we’ll focus on the new type of online marketplace typified by Uber, Airbnb, and Etsy. But first, let's see what differentiates these businesses from the "traditional" business model.
From pipes to platforms
There are different business models for startups. “Traditional” businesses are built on a so-called “pipe” basis. This approach has long been a hallmark of the industrial economy. Businesses are called pipes, according to this model, because they gain value linearly. “Value” is produced by an owner at the top of the pipe and consumed by consumers at the bottom.
Well-known producers of goods and services use this pipe approach. In order to produce a product or service, the manufacturer must first own certain material resources.
Adidas, for example, had to buy or lease physical office and warehouse space, find suppliers for raw materials, obtain equipment, hire staff, and so on. CNN, to start broadcasting, had to buy equipment, register with the FCC (Federal Communications Commission), hire journalists, and deal with many other details. Their value is created through the combination of all these resources.
But as technology has improved, a completely new business model has emerged: the “platform” (Sangeet Paul Choudary, Platform Scale). Platforms are an emerging business model wherein a business’s value is created by – and consumed by – users.
Platforms connect producers who provide value with consumers who consume value. Airbnb business model is about connecting those who have space to rent to those who need a place to stay. Facebook connects users to content. Ebay connects sellers to buyers.
The main difference between pipe strategy and platform strategy, therefore, is that pipes create value and deliver that value directly to consumers, while platforms create suitable conditions for the production and consumption of value.
How much money can you make with a platform business model?
These new marketplace businesses, platforms, don’t own the products they sell and don’t have many employees. However, they’re often much more valuable than traditional businesses and quite often make more money. Etsy’s income in 2015 was $273.5 million and its valuation is $3.5 billion. According to a recent report from the Wall Street Journal, Uber is the most highly valued startup at around $68 billion. Airbnb comes in fourth with a valuation of $25.5 billion.
These figures motivate a lot of startups to build platforms. In 2016, many new platforms emerged, some of which have already become popular. Among them are TraffickCam, which helps catch sex traffickers, and BandLab Music Community, which helps you record audio and share it with other users of the app.
How do I build a platform?
Building a platform may sound simple, but it’s actually quite challenging. To build a successful online service marketplace, you need to do the following three things:
- Inspire your potential user base – get people excited about your platform.
- Build an infrastructure that will let users exchange value.
- Connect users with each other, and also with goods, services or content created on the platform.
To design a platform that works, you need to start with a well-designed architecture.
Designing a three-tier business architecture
A platform’s architecture consists of three basic layers: network-marketplace-community, infrastructure, and data.
Each of these layers is important for the platform’s architecture design, but their configurations may vary depending on the type of platform you build. In other words, for some types of platforms, the dominant layer will be the network-community-marketplace, while for others the infrastructure layer or the data layer may play the most important role.
#1 Network-Marketplace-Community layer
The network-marketplace-community layer consists of a platform’s users and the relationships among them. TaskRabbit, for example, regularly matches taskers and customers, allowing them to interact on the platform. Upwork matches freelancers with businesses, allowing them to work together. Interactions between those who create value and those who consume value happen in the network layer.
For platforms, where the network-community-marketplace layer plays a dominant role, the community itself is the main source of value for the platform. Platforms that rely on this configuration include:
Sharing economy platforms like TaskRabbit
Social networks like Facebook
Online communities like Dribbble
Content platforms like Instagram
#2 Infrastructure layer
The infrastructure layer consists of tools, rules, and services that allow users to create and consume value. In other words, the infrastructure layer makes the platform work. Shopify, for example, provides users with tools to help them create their own online marketplaces. Airbnb lets hosts create beautiful listings that help them attract guests to their accommodations.
Platforms, where the infrastructure layer is dominant derive most of their value from the unique infrastructure they offer Shopify, attracts users by offering a wide range of tools for building ecommerce platforms; tools including themes, SEO (Search Engine Optimization) features, convenient payment options, and many others.
#3 Data layer
As you can see, the first two layers let platforms engage users, structure interactions among them, and create value. But how can they deliver this value and help users find the right content, products, or services? To do this, we need the final layer – the data layer.
The data layer is comprised, as its name suggests, of data used by the platform. It conveys value from the producer to the consumer. In other words, the data layer ensures that a particular user finds the value they’re looking for, whether that’s content, services, or products.
Platforms, where the data layer dominates, are less common than the previous two types. But we can still identify several examples. Let’s take in-store offline analytics tools as an example. Placed Insights collects data about shop visitors from 1 billion retailers every day. It uses these data to help merchants learn about consumers behavior and movements. Thus, retailers can use these data to attract more clients to their brick-and-mortar shops.
To understand which layer should be dominant for your platform, you need to determine the main source of value for your platform: does its value lie in its community, its infrastructure, or its data? Your answer to this question will help you determine what monetization model will be most successful for your platform.
How can you make money from a platform?
So how to start an online marketplace that can become profitable? Your platform’s source of value – its dominant layer – greatly influences which monetization model will work for you.
# 1 Monetization strategy for Network-Marketplace-Community platforms
Most sharing economy platforms such as TaskRabbit, Airbnb, and Uber take transaction fees. TaskRabbit’s transaction fee is 30 percent for each payment. Airbnb takes a 3% service fee from hosts and 6-12 from guests, depending on the accommodation. Uber’s commission for drivers is 25% for each ride.
Each payment for services provided on a platform like Airbnb happens within the platform. This means that clients don’t pay contractors directly, but rather through the platform. Creating a safe and trustworthy environment is how platforms justify their transaction fees.
Charging a transaction fee is a good choice for marketplaces that have a dominant network-marketplace-community layer.
# 2 Monetization strategy for Infrastructure platforms
A registration fee is the most popular way for Infrastructure platforms to make money. For example, the Android platform takes in $25 per year from each registered developer. But on Google Play, the network and data layers are dominant. So Google Play charges 30 percent of every in-app transaction made through their platform.
Shopify is another platform where the infrastructure layer is dominant. There are two ways that Shopify makes money:
1. Subscriptions. They offer three main types of plans (Basic Shopify, Shopify, and Advanced Shopify) that cost from $29 to $299 per month. There are also additional plans (Shopify Lite, Retail Package, Shopify Plus) for $9 and up. Subscriptions bring in more than 60 percent of Shopify’s total yearly revenue.
2. Merchants. Shopify provides various options for transaction fees, referral fees for partners, and sales of POS (Point of Sale) hardware. Fees differ depending on the type of plan.
# 3 Monetization strategy for Data platforms
Data platforms monetize... their data! For example, LinkedIn makes 23% of total revenue, which comes out to around $90 million, by selling advertising. LinkedIn’s user data is highly valuable to advertisers. LinkedIn offers two types of ad packages. The first is a self-service solution where advertisers create and place ads directly on prominent pages, and the second is a service where LinkedIn creates and posts ads on an advertiser’s behalf.
All successful businesses require elaborate architectures. Understanding the layers that make up a platform can help you determine where your platform’s value lies and how to build an online marketplace effectively