[#1] The Platform Arbitrage
We all have given into the Platform Arbitrage - some realize it, most don't.
Some of the largest technology companies in the world derive a bulk of their wealth by being platforms. In simple terms, a platform facilitates interactions or transactions between parties. Platforms are increasingly becoming more valuable than the companies in the same industry which restrict their offerings to products or services. Think transportation (Uber v/s Others) or hospitality (Airbnb v/s Marriott).
Over the course of this article, we will try and explore why platforms are slowly but steadily becoming “the” business model of the future and then brainstorm on if the supply can sustain on the platform in the long run.
Enough of basics now. Let’s dive right in.
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This post originally appeared here.
Why brands, especially the Direct to Consumer ones, want to work with platforms?
A first glance makes perfect sense for using platforms as your distribution channel.
The results confirm your beliefs — even with minimum initial investments, you see a tremendous increase in revenue. Better still, you get to ride the convenience wave of the internet which has consumed everyone. You don’t need to master complex logistics processes or build your own shelf life or worry about differential pricing.
You don’t need to worry about building different applications for Andriod and iOS users, manage themes, host servers, hire an engineering team for debugging or worry about a thousand other challenges of building and then maintaining a platform on the internet. The platforms do the dirty work for you and make the experience almost seamless for you to start selling your products/services on them.
The sales team will pay attention to every detail to help you in the onboarding process. Some platforms also help you to secure loans for stocking the initial inventory and after the setup, you get access to their unlimited supply of customers which they have managed to acquire through capital intensive discounts. Everything just seems perfect and you would be cursing yourself for having ignored that platform.
After all, Zomato does 38 million orders per month while there are 14 million trips daily on Uber.
Where do they go wrong?
A lot of these platforms are technology companies at heart. They have tens of thousands of engineers employed who optimize every part of the website/application and measure every possible metric from your behavior on them. This provides a delightful experience for most users and ends up attracting huge organic traffic. This organic traffic makes it easier for brands to reach out to customers right away.
Platforms are often an industry on big, Barry Bonds style steroids — a Zomato would be food on steroids while a Flipkart would be retail on steroids. This translates into a drug for many brands that aren’t capable of ramping up their capabilities in the digital age. The up-front costs and initial capital investments are less and the short term experience is great but the long term implications can be more painful than twisting a knife in your gut.
Platforms might operate in an industry vertical but aren’t typically bound by the rules of the industry. A typical FMCG company is used to working with grocery stores and wholesalers with margins smaller than the size of the bhel — your favorite summertime snack. Such FMCG companies have a trained army of distributors so ruthless that Napolean would have been proud. Every day these associates march into stores to restock shelves, and if they can undermine their competitor by stealing that extra inch on the shelf, they claim the bragging rights. Life is a bit tough if you look at transportation. Here the individuals are the typical brands and albeit similar, their struggle is a bit more difficult. They need to wake up early in the morning and be the first to arrive at that hotspot to be the first one in the queue to get that chance to pitch themselves first to the customer.
Transactions on a platform, however, is a whole new ball game and hence have a different set of rules. Instead of fighting tooth and nail for the shelf space or being the first in the queue, the supply fights for better reviews and keyword rankings. This is because you can simply go live in a matter of minutes without actually having to be there physically. This way you can be faster than Flash when it comes to offering to chauffeur someone in any part of the city.
However, not many suppliers understand the new rules that well and shockingly, are also reluctant to learn them as well. Once you start offering your product/service on a platform, you have limited control over pricing and most platforms would give you limited access to consumer information. Hence, the costs of operating as a platform model are as real as the benefits.
The push for “owned commerce”
The internet has shifted the power from the supply to the demand and whoever manages the demand better would have the last laugh. Owned commerce is launching, acquiring, or licensing entirely new brands, with the same target demographics.
Name. Email. Birthday. Anniversary — you get nothing of these if you are the “supply” on a platform. There’s a virtual wall between you and your customers. You cannot communicate directly with them let alone thinking of building a community around it. If you’re a production house and have licensed your content on Netflix, chances are that you’ve already lost the war.
Platforms are entering into the era of owned commerce. They build beautiful technology capabilities to attract and retain customers on it. Then use it to promote other companies’ products and building a likable brand, collect data on user behavior, and build audience intelligence around it. Towards the end of the pipeline is using the audience's intelligence to build their own products. These products can be then sold to the existing audience with continuous improvements and iterations.
This is a very Netflix-eque approach with which it created the world’s most expensive real-estate — their home page. It not only controls it but doesn’t even rent it to anyone making it proprietary & it reaches millions more than any ad placements.
Can brands build a sustainable brand on these platforms?
The key to building a sustainable brand on platforms lies in owning as much of the critical infrastructure as possible. Investing and creating a site that you own, even if the up-front costs of creating one are steep, has real long-term benefits. These benefits are generally worth the up-front investment, if only because creating a memorable brand experience reduces competition, raises your margins, and accelerates data collection/access to high-velocity data.
The allure of platforms is real and it’s hard to ignore their benefits of a pre-made platform with a large number of customers. But sacrificing first-party data, which is worth more than gold, for short term fat numbers isn’t just worth it.
Also, retargeting a pool of existing audience is easier than finding new ones. But if you are able to find one successfully, the playing field is leveled. The ones with more data and capabilities to use it more effectively will be the ones who will win in the long term. With proper digital capabilities in place, they can use it for precise targeting. When done properly, this lowers customer acquisition costs — a card from Vistara’s playbook. Brands can exploit large treasure troves of data to guide customers to highly relevant articles. Instead of driving traffic to the landing page of a platform, brands can lead people to the sites owned and managed by them which will drive down the cost of completing a transaction.
Interestingly, the sellers on the platform are also more likely to advertise there which will help the platforms eke out advertising revenues, simultaneously helping their core business (which is often based on thin margins) grow faster.
However, it sounds easier than done. Managing a website/application gives you access to high-velocity data which is valuable but its true value can be harnessed only with teams capable of using analytics for performance marketing and predictive analytics. The data translates into a lot of value only after analytics is applied at scale to it to identify hidden patterns like customer demographics and customer psychographics. The benefit is higher customer lifetime values and getting complete control over the customer journey from discovery to purchase.
Lesson 101: If you wish to sell on a platform, never put all your resources on one. Have your presence on multiple platforms.
Lesson 102: Despite all the liabilities, you cannot and shouldn’t ignore platforms.
A few more lessons and maybe then you can earn your Bachelor’s in Business Administration.
Concluding notes
Brands need to revamp their digital capabilities and shouldn’t depend too much on one platform. They should try and become self-sufficient. Enroute to their self-sufficiency, they need to build their own site/applications, try and control the customer experience and own the end-to-end customer journey from discovery of the sale.
That being said, let us know what you think in the comments.
Views expressed here are our own and don’t reflect the views of any of our employers, present or past.
In case we haven’t met, I’m Pratyush Choudhury.
Thank you for reading. We hope it was worth the while and left you better than it found you! :)
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