Is your business model a pipe or a platform

It may sound a bit confusing, especially in the context of a business model, but hear me out.

Think about this this way — In the pipe business model, you create stuff, push them in the market, and sell to the customer. The value (and your product) has a linear flow like water flowing through a pipe. In the platform business model you do not just create and push stuff out. This business model creates value for the consumer, by other consumer’s and users. Instead of a linear flow of value (or product/service), there is a network-effect flow.

So think about this — while the taxi medallion business is a pipe business model (taking a rider from place A to place B), Uber is a platform business model (creating value by users for consumers). While a step counter device is a pipe business model, FitBit brought it to the digital era and created a platform business model by incorporating applications and user communities. The content on the cable channels on your TV is a pipe model, but the user generated content on YouTube is a Platform model. You get the point.

With that in mind — The apple business model with its App store, while now might seem as the obvious way to go, was pure genius at its time.

So what really differentiates a pipe business model from a platform business model. Adopted from the Harvard Business Review article on Pipeline & Platform strategy, here is a short summary of the key differences:

Users : In the Pipe model, the goal is to acquire users and get them to transact. In the platform model, the first few users have no value. The goal is to have the users create value for other users — but at scale.

Profit : In the pipe model, is it simply calculated by adding a pre-determined margin to the cost of the product. In the platform model, it is complex, because profit could come from the users with in the platform (as they pay to play) or from outside the platform (third party via API access).

Competitive differentiation : In the pipe model, it comes from controlling the resources that go into making the product — the assets, the IP, the distribution etc. In the platform model, it comes from value the consumers and producers are able to create.

Customer value : In the pipe model, the focus is on maximizing the numbers number and value of the transactions with the individual customer. In the platform model, the focus is on maximizing the value of the expanding ecosystem in a circular & iterative way.

Take a minute to think about some of the biggest brand names that come to mind. In reality, it might be a bit harder to separate the pipe and platform model of these enterprises. Is Microsoft X-box a product under the pipe model, or is its gaming enterprise a platform model? Is Amazon selling you books under a pipe model, or is its review/recommendation a platform model? Is Google providing you with just search results (and ads) under a pipe model, or is its Andriod operating system the real platform model?

As a small online retailer selling foldable flats, Fit In Clouds is a definitely a pipe model. However, with every feedback collected, with every Facebook fan added, with every tweet generated — we think every day on how we will evolve to a platform business model! Its a journey, not a destination.