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Pipes Vs Platforms

Which business model should you be looking at?

5May

Working on your business model is not always an easy task. There are a number of business models available but there are two in particular which are worth looking at in depth. For a long time, one has been a pipe model. The idea behind it is quite straightforward - you create a product, push it out and eventually sell it to the customers. Value is produced upstream and consumed downstream, producing a linear flow, much like water flowing through a pipe. The model used to be dominant and one of the reasons for that is because there is nothing too tricky about it.

Almost every manufacturing and broadcast service we see today runs on the pipe model. It can be applied online as well, so there are multiple advantages of using it. It has been known since the industrial age and possesses two main components for success: unique access to resources or labor and the efficient delivery of the product or service to customers. Technology was, and remains, the essential element of it. In regard to the Internet, blogs run on the pipe model as do e-commerce providers like Zappos.

Even though the model proved itself to be efficient and reliable, models based on some digital platforms have a different approach. Unlike pipes, you don’t just create a product and push it out. Platforms allow you to both produce and consume value. This is a tremendous shift from any form of business we have known. In the construction world, a platform approach is something that lifts you up and on which others can stand. It works in a similar way when applied to business. By building a digital platform, other businesses can easily connect theirs to yours and develop their products and services.

There are be three defined building blocks when talking about a successful platform strategy. First of all, there is a toolbox which creates a connection by making it easy for others to plug into your platform. The second is a magnet which creates a pull that attracts both producers and consumers to the platform with something called social gravity. The last, but not least, is the matchmaker element which fosters the flow of value by making connections between producers and consumers. For instance, Google matches the supply and demand of online content, while eBay, matches relevant buyers to relevant products.

The vast majority of companies use pipe model, although many specialists advise Startup entrepreneurs to build their business on the platform model otherwise they might be disrupted by those that do. However, there is a trap there that you have to be careful of. The most common mistake companies make is being based on a platform model but using a pipe thinking. This is a recipe for failure.

Before choosing one business model over another, we have to be aware of the differences between them. There are three elements which have to be taken into consideration when deciding on your model. The first to bear in mind is user acquisition in both models. In a pipe model, the focus should solely be on converting shoppers into buyers. Whereas in platform thinking, your attention has to be concentrated in attracting consumers and producers, stimulating producers to produce, and consumers to buy.

Referring to product design, platform based enterprises have to make sure that their product is attractive for both producers and consumers. The situation is a bit different in a pipe model where the focus is mainly on offering a product which is attractive to consumers.

One of the crucial strategic elements you need to think about is how monetization works in both case scenarios. It is quite straightfoward in a pipeline, where it is done by determining what the costs are to get the product through the pipeline and charge the consumer enough for that and make a profit. However, in platform, it is a little bit more complicated. We need to determine whether monetization comes from both consumers and producers and whether one subsidize another. Also, consider any third party revenue source such as API fees or advertising.

Platforms and pipes are very different, thus they don't suit all types of enterprises. You shouldn't apply a particular model just because you can. Only ability to distinguish models from each other can help to make the right choice and apply a model to your business canvas.

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