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The Danger of Defaulting to Low-Cost Strategies in Platform Businesses: Navigating the Choice between Differentiation and Cost Leadership
Platform businesses have disrupted traditional industries and transformed the business landscape, becoming some of the most valuable companies in the world. These businesses connect users with producers or service providers, creating a two-sided market that benefits both parties. One of the keys to their success is the ability to lower transaction costs and enhance user experience through digital technologies. However, the danger of defaulting to low-cost strategies can pose a significant risk to the long-term success of platform businesses.
Many platform businesses start as differentiators, creating a unique user experience and building a loyal customer base. However, as they grow and become more established, the pressure to compete on price increases. This is especially true for platform businesses that rely on network effects to generate revenue. As more users join the platform, the cost of acquiring new customers decreases, leading to lower prices for existing users. The result is a race to the bottom, with platform businesses competing on price rather than innovation or user experience.
The problem with this approach is that it can erode the company’s competitive advantage and lead to…
