We’ve recently begun teaching a course on business models for High School students. We’re big fans of the Business Model Canvas, especially as presented in Business Model Generation by Alexander Osterwalder & Yves Pigneur, which helps you focus on the 9 elements of every business model:
With these 9 elements you can develop a business model for any type of business and we have been focusing our students on understanding the importance of these 9 building blocks. One classification that the book does not make, but which we’ve found helpful is that of the Pipe vs. Platform distinction as discussed by Sangeet Paul Choudar
Pipes have traditionally been the dominant model of business. A pipe model is a business that creates or adds value to something, pushes it out and sells it to customers. This linear flow is much like water flowing through a pipe, hence the name. All consumer goods flow through a pipe model, as do traditional media such as television and radio. This didn’t change completely with the internet; blogs run on a pipe model as do e-commerce providers like Zappos.
However, what the advent of the internet did was enable the platform model. Unlike pipes, platforms do not just create and push stuff out. They allow users to both produce and consume value. This is a massive shift from any form of business we have ever known. A comparison of two seemingly similar models will illustrate this well: television channels work on a pipe model, but YouTube works on a platform model. Another example, Encyclopaedia Britannica worked as a pipe model but Wikipedia is built on a platform model.
While the vast majority of existing companies are based on pipe models, Choudar posits that all new startups need to take a platform approach or risk being disrupted by those that do. A significant problem is that even those businesses that are platform based are using pipe model thinking. This is a recipe for failure.
Each of the nine Business Model Canvas elements needs to be approached differently when you have a platform model. Here are three key differences, as pointed out by Choudar:
1. User aquisition – In a pipe model, you need to focus solely on converting shoppers into buyers. In a platform model, you have to be concerned about attracting producers and consumers and incentivizing producers to produce and consumers to buy. Often, in the run-up, you will need to be more focused on producers than consumers and you might not even be selling anything.
2. Product Design – Pipe models focus solely on offering a product that is attractive to consumers. In a platform model, your product needs to be attractive to both producers and consumers.
3. Monetization – Pipeline monetization is straightforward, determine how much it costs to get the product through the pipleine and charge the consumer enough to cover that and to make profit. In a platform model, you need to make determinations about whether monetization comes from both producers and consumers, whether one subsidizes the other, or whether there is third party revenue source such as advertising or API fees.
The Pipeline vs. Platform distinction is an excellent tool for analyzing your business before taking the deeper dive into a Business Model Canvas.