Modern Way of Doing Business Without Assets!!
“Uber changed the way business owners think and work in more ways than are instantly noticeable,” says Maria Bellissimo-Magrin, CEO of creative marketing agency Belgrin. Here she examines what business owners can learn from Uber’s actions.
Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate. Something interesting is happening.
Since the Industrial Revolution, the world has developed complex supply chains, from designers to manufacturers, from distributors to importers, wholesalers and retailers, it’s what allowed billions of products to be made, shipped, bought and enjoyed in all corners of the world. In recent times the power of the Internet, especially the mobile phone, has unleashed a movement that’s rapidly destroying these layers and moving power to new places.
The Internet is the most powerful mechanism we can imagine to perfectly match individuals that need something, and people with something to offer. The moment started slowly by reducing complexity and removing the middle layer in the late 1990s. From insurance to early PC makers like Dell to travel agents, this time seemed to be an age where “direct” became a desirable moniker. This time seemed to favour scale and efficiency over service or brand, for commodities like insurance cover or processing power, the overheads of sales, marketing and retail footprint were stripped away.
By 2015 things changed. The balance of power between the different service layers is a jostle for control. Price-comparison sites first seemed to provide welcome traffic to airlines before airlines tried and failed to starve them of their business and promoted their own apps and websites as the preferred route. But it was too late. Services like Ocado once offered a symbiotic relationship with supermarkets, yet now supermarkets fear the power that such companies get when they get closer to the customer. In this age, the customer interface is everything. There are two approaches.
Full Stack Companies :
Full stack companies like Tesla, Warby Parker, BuzzFeed, Nest or Harry’s seek to ensure control by owning all layers. From R&D to marketing, from distribution to sales, these companies do it all. It’s a great way to keep profit in the family, yet it’s harder to scale and build.
The Interface Owners
The new breed of companies are the fastest-growing in history. Uber, Instacart, Alibaba, Airbnb, Seamless, Twitter, WhatsApp, Facebook, Google: These companies are indescribably thin layers that sit on top of vast supply systems ( where the costs are) and interface with a huge number of people ( where the money is). There is no better business to be in. The New York Times needs to write, fact check, buy paper, print and distribute newspapers to get their ad money. Facebook provides a platform for us to write our own content, and Twitter monetizes the front page of newspapers, which happens to now be the Twitter feed.
Our relationships are no longer with the service providers. Our mobile operators seem like dumb data pipes while WhatsApp provides the services we value and can monetize our attention.
The Interface Is Where the Profit Is
The interface layer is where all the value and profit is. Withings scales can cost five times than other weighing solutions because the addition of an app makes it smart health management, not just weight measurement.
Phillips Hue lighting can make 1,000 times more profit than a coloured light bulb because it’s a home emotion system. Sonos beats any other music system I’ve tried because the experience of music while using it is delightful.
The value is in the software interface, not the products. It’s not just the smart home. Uber provides average cars in a premium way; Seamless makes the most disgusting of greasy kebab joints appealing and makes its margin from both sides. iTunes for many years took virtually all the profit made in the entire music industry by being just the thin software between the hard work making tunes and the money selling them.
Big Battles For the Customer Interface
The Internet age means building things is nothing other than code. We’re going to see a non-stop battle to leap ahead of each other. And also get more wide, Twitter may have started out as a microblogging platform, but it’s now aiming to be a way to exploit its audience to distribute TV content. Facebook’s attempts with news content now make it a news channel and thanks to Autoplay video, soon a way to watch TV content. Snapchat’s discovery features turned the IM platform into a way to consume TV content.
In the modern age, having icons on the homepage is the most valuable real estate in the world, and trust is the most important asset. If you have that, you’ve a license to print money until someone pushes you out of the way. So the question becomes, what are you going to do to stay there or get there? And once there, how do you exploit it?
Launched in San Francisco in 2010, Uber quickly became one of the world’s most valued tech companies and widely-known brands and their success is starting to change the way many business owners think.
The ways in which Uber changed the way business owners think and the way we work are crazy when you think about it because it’s taken less than a decade and no-one really seemed to notice it was happening. What Uber did was to completely disrupt a long-established market with a product that no-one knew they needed – that’s insane, right!? And now many say they couldn’t live without Uber and that’s partly why Uber has been such a catalyst for change in business.
What Uber did:
Uber is cheaper than traditional taxis, sure, but that’s not what endeared them to millions of users. The greatest advantage Uber had when attempting (and ultimately succeeding) to disrupt an established market was how they looked at the market and their business model.
What Uber did was to simplify a system that didn’t think it could or needed to change. Their strength was understanding the modern consumer’s expectations for a market that some might say took the customer for granted.
The old system was oddly skewed in the favour of the supplier rather than the demander. Let’s paint a picture of getting a cab before Uber:
Depending on your city, you either hailed a cab (hoping they stop), called a local company you knew or, if in a bar or unfamiliar place, asked the barkeep (or someone else) to call one for you. Now here’s where the power transferred to the supplier because if the taxi company said the wait was 40 minutes then you waited 40 minutes or wasted 20 searching for a quicker pickup. And then you best hope to heaven that you had enough cash or a driver patient enough to stop at an ATM – not always a pleasant conversation especially if you’ve been partying hard.
Uber simplified the ordering process, removed the uncertainty of when the taxi would arrive, increased safety for users with driver names and car models, made it a cashless service and ensured a single app would work across cities and nations. And in doing so they created a service that everyone loved but no-one knew they needed.
How it is changing us:
Uber has also succeeded in disrupting the wider economy, not just the taxi market. During their inception Uber looked at two problems in underutilised assets and ease of access to the traditional taxi service and sought to apply a thoroughly modern solution.
Uber created software that fixed the latter problem and engaged car-owners looking to make some extra money to address the former – thus causing a huge boom in the supply and demand of gig economy style jobs.
The effect of ‘Uberisation’ is two-fold; firstly, it has increased people’s appetite for the sharing economy as an alternative to traditional markets which is ironically becoming quite mainstream and secondly, it normalised the idea of working as and hiring short-term contractors.
Now we have people in their millions using AirBnB instead of hotels, Uber instead of taxis and hundreds of other sharing companies from parking spaces to grocery shopping (if you’re already heading to the shops why not pick up someone else’s groceries too and get paid for it right?)
What it means for business :
You might think traditional small businesses fear on-demand services that are changing the economy as they know it but enterprise thrives on change.
Many owners have found that disruptors are more beneficial than threats as they find smart ways to increase the bottom line by conveniently using gig contractors to reduce overheads or to cope with flux.
Businesses are now thinking about how they can disrupt their own markets and simplify their propositions to their customers. So, rather than being put out of business they become their industry’s Uber. And that shift in thinking will pay dividends as customers search for better consumer experiences.
Platforms help to sell products or services, to generate content and so on. But the platform owner as such does not manufacture the products that get sold (e.g. eBay, Alibaba).
They do not provide the services that get offered on their platform (e.g. Freelancer, TaskRabbit, Uber, Airbnb).
They do not create the content that gets generated each day (Facebook, Twitter, YouTube).
So, how do they create value? Some say they are modern middlemen. But that is far from complete. They need to add additional value to the overall exchange – and still be able to extract value – in order to be relevant. Many platforms have been struggling because they have not been able to do this. Here are some examples how platforms create value for their participants and capture value for themselves:
1. Asset sharing platforms (e.g. Airbnb) create value :
§ Help the supply side (home owners/hosts): to increase utilisation of their existing assets (unit/room/house) in order to generate additional income or to get more yield out of those than through other ways.
§ Help the demand side (travellers): find cheaper, more individual, less “clinical” accommodation. And to find accommodation at peak times (e.g. when special events are on) when all hotels are booked out.
§ Airbnb captures value by charging a percentage on each booking. On the surface, they are being compared to the large hotel chains but on their balance sheet, they look much more similar to an online travel portal. They don’t need to worry about financing their lodging inventory. By comparison, hotels chains design, build and own a large amount of their real estate. Not only are they subject to the whims of the commercial real estate cycles but also does it take much longer and more capital to ramp up their supply (and write-offs/impairments in downturns). (Though in good times, commercial real estate opens a lot of financial engineering opportunities because it is excellent collateral.)
2. Social, media and content platforms (e.g. Facebook) :
Encourage exchange with friends through the creation of user-generated content:
§ The supply side: From a monetisation perspective, the supply side are the users (you, me and 1.5b others). We are creating user-generated content. Facebook doesn’t charge their users anything. But they use this content to analyse it and place (targeted) advertisements. By comparison, traditional media outlets, such as newspapers, hire journalists to create content among which they place their ads. You and I (and 1.5b other users) create the content for Facebook.
§ The demand side: are advertisers (from a monetisation perspective). They are able to run more targeted ad campaigns compared to traditional media. They get access to an audience that is highly engaged because of the updates from friends and family that they care about.
§ Facebook extracts value by giving advertisers the possibility for highly targeted ads (and for getting access to the Facebook audience in general). By voluntarily sharing our posts, our data and our likes, we give Facebook around 2000 data points about us (demographics, income, education, interests and many other things). Facebook’s advertisers can thus use their money to advertise in a more targeted ways than traditional (broadcast) channels allow.
3. Facilitate the exchange of goods and services (e.g. eBay):
§ The supply side (sellers, online merchants): are composed of individuals that sell pre-owned stuff, online merchants, small businesses, etc. They derive value from getting started easily, save on advertising, be able to use eBay’s legal and commercial framework and their payments platform PayPal.
§ The demand side (buyers): can buy comfortably, have one starting point for their shopping queries, know they get things cheaply as many sellers don’t have the overhead of brick-and-mortar stores, have a buyer protection framework by eBay and so on.
§ eBay extracts value by charging by transaction. The benefits they offer to both sides allows them to do so (though they also face the problem that participants may take their transaction outside of the platform). They do all this at much lower capex and overhead costs. They don’t hold any inventory themselves, let alone develop/manufacture any products. Like malls, they offer agglomeration benefits. And they don’t face location-specific risks that have turned a large amount of malls into (well-documented) dead malls.
§ Airbnb –
Helps home/apartment owners utilise their (idle/excess) real estate. Airbnb has helped these people to offer their accommodation as bed & breakfast (BnB). But they have helped grow the size of this market significantly by reducing search and transaction costs for hosts. Some of this new supply takes away demand from hotels. But another part is also the creation of new demand due to lower prices and more options. Some of the transaction costs that Airbnb has helped reduce for individual accommodation hosts are:
§ Search by location, dates, type of accommodation,
§ booking management,
§ communication between host and guest,
§ secure payment transaction,
§ affordable insurance,
§ servicing (in some locations),
§ safety of transaction via identification,
§ reviews of accommodation
§ and more
Uber – has reduced search costs for both drivers and passengers significantly. They have reduced transaction costs in multiple ways. But they have taken the next step which is helping interested drivers get a loan to buy a vehicle. This reduces barriers to entry for those who would like to become an Uber driver but don’t have an appropriate vehicle and potentially are at the edge with their credit rating. Uber can help their case with future anticipated earnings.
Alibaba is great at connecting small sellers to other markets (local and global). Jack Ma lists in Alibaba’s, the characteristics that were prevalent for small Chinese seller prior to Alibaba:
1. Limitations to form relationships beyond their local market,
2. fragmentation of buyers and sellers,
3. limited communication channels to promote their product/service and find new markets,
4. relatively small operations to invest heavily into marketing,
5. and absence of mechanisms to evaluate the trustworthiness of trading partners.
These are all some form of search and transaction costs. Alibaba is helping small businesses to overcome these on their two B2C platforms. TMall specialises in branded and often more upscale products. Taobao is for small merchants. Both combined feature a staggering 350 million storefronts (more than the US population).
Has started as a network connecting students on the Harvard campus. This is a fairly limited network. But Mark Zuckerberg sensed there is a need for being connected better on their campus. It allowed users to interact better than by phone or email. And it had the benefit that you knew you are on the same network as similar people (overcoming trustworthiness issues).
From there, they expanded to other campuses. Once they were established on campuses, they opened their network further. I have described the benefits of getting to critical mass using this approach last time.
Like many platforms, Facebook didn’t know what their monetisation strategy would be. They started with getting users onboard. In the early days, they also attracted a lot of traffic with games (remember “Farmville”?). And who knows what would have happened if they had decided to fully focus on apps. Maybe they would have been the biggest app store in the world by now. But they focussed on advertising (and they are doing extremely well).
In any case, building on a limited, under-served network is another strategy to get started. The idea is to initially get users on board and pivot as required.
Shweta Upreti MBA
Manager HR (Internship InCharge)
Aircrews Aviation Pvt Ltd
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