Amazon Marketplace

Platform businesses scale differently than traditional businesses. Platforms scale through network effects. In the previous post, we introduced and described a widely used metaphor: pipes vs. platforms. Traditional businesses are pipes. Their value chains are linear. Value is added at sequential stages before a final product or service is delivered to consumers at the end of the pipeline. Platforms do not produce goods or services themselves—they make connections among stakeholders and facilitate value exchange among those stakeholders. Value is created outside the platform. Both pipeline businesses and platform businesses strive to achieve scale—but the type of scale they strive for is vastly different. In this post, we’ll explain how pipeline businesses strive for economies of scale (on the supply side) and how platform businesses scale through network effects (on the demand side).