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The Marathon To Acquire Network Effects

Platform businesses have engraved a prominent name for themselves in the business landscape or to say brought about disruption in the business landscape. They hail to connect consumers and sellers via the supreme power of technological advancements. Bolstering consumers with convenience, competitive pricing and meeting their needs and demands. The general new age consumer remains swamped with work and are unable to shop at brick and mortar stores regularly. Platform businesses come to the rescue. They have captivated consumers with the ability to instantly serve their demands just like a genie. In fact, they can be christened genies in today’s age. This phenomenon is not only restricted to B2C businesses but also B2B business to ensure seamless and immaculate operations and deliveries, accelerating their efficiencies. Small businesses are presented with an opportunity to grow, broaden their reach locally, nationally or globally. So a question is raised, will traditional businesses have to pass on their reign to platform businesses or utilize it to attain further growth?

Platform businesses are like bullet trains that are on a mission to create legacy in the business world. They strive to create network effects as the utilization of their platform accelerates via spend on marketing and word of mouth, increasing the value of their platform gradually. Hence having the ability to scale up exponentially. Platform businesses can be considered as facilitators and aggregators, eradicating intermediaries to serve consumers directly without any hassle. Platform businesses bolster businesses to reach their customers directly giving rise to a model akin to D2C model (A model wherein company produces as well distributes its products directly to consumers). Moreover they bring small businesses (SMEs) into mainstream by leveraging their platforms and equipping them with technological capabilities. This brings to light their eminent role in elevating B2C and B2B or D2C businesses. But any platform business can succeed right? So why do some of they emerge market leaders and some fail?

A platform business’s main mission is to capture a large and widespread target market audience (TAM) by producing network effects. Let’s consider some characteristics of successful platform businesses. They have the lion’s share of the pie by creating monopolies with huge network effects. For instance an incredible method to monopolize is via the creation of SuperApps. Amazon is an example of a SuperApp, as it has created itself as a one stop solution for all customer needs, entering new markets, industries (books to groceriesy, consumer goods and electronics to entertainment, offering home services to employing IoT at homes and web services)geographies. Platform businesses benefit from the creation of high entry barriers due to expansion of network effects and its function as a SuperApp. Hence they are successful in creating high switching costs for consumers leading to long term sticky customers.

However there is more to the process towards success. At the initial stage, platform businesses are expected to generatecustomer acquisition at an unprecedented rate leading to high customer acquisition costs (CAC) and almost nil profits. That brings with it massive amounts of costs such a spend onmarketing, advertising, discount offer, promotional offers (to incentivize the consumer) and PR. In addition, once a customer is acquired that doesn’t mean they would loyally use the platform therefore creating customer engagement comes into picture. This takes place using discount offers, loyalty points and promotional offers to create long term sticky customer. Once these stages are achieved businesses focus on the idea of monetization and cost rationalization (neutralizing costs compared to extensive spend previously)

Every network led business eventually tries to deploy SuperApp to create multiple revenue streams, for instance viaallowing third party advertisements on their platform, subscription fees or membership fee. Provision of last mile contact propels almost complete control on the customer as well as direct interface with the customer. The ultimate control and data of consumers establishes itself as their strength, amplifying implementation and execution of a an eventual SuperApp. People overlook that most of the network businesses are making money by following B2B model only and using B2C to create footfall. For instance, Facebook receives a substantial amount of revenue by allowing third party advertisements on their site. Google follows similar revenue strategies.

Whether it be Facebook, Google, Amazon they are the ultimate powerhouses of data leading to efficient data analytics and personalization of their services. Consider a platform like Zomato, it initially started as a food delivery app by collaborating with restaurants across a city. Over the years it has created variable revenue streams via commission from restaurants, delivery fee and subscription fee from customers. During the scaling process another revenue stream was created i.e. advertisements of various restaurants. Now Zomato is heading into new spaces such as collab with cloud kitchens, delivery of ethically sourced local produce to restaurants and organizing food events. It is sure on its path to become a SuperApp in the coming years.

SuperApps have the tendency to enter into new avenues serving an array of convivences, products and services and building up numerous revenue streams to monetize creating profits or at unit level. Later they aim at cost rationalization reducing expenses gradually as and when possible. For instance Zomato hires delivery boys who own a motor cycle reducing costs. Though it may sound a minuscule cost reduction, but if scaled up it would save significant amount of money. The world foresees SuperApps as a consumers’ dream like genies who are ready to command a wish. But wait, where are traditional businesses in this glossy picture? Traditional businesses are here to stay as they harness the network effects of the platforms to grow and scale up, reaching as many consumers possible. Their partnership and synergy will create a new milestone in the business landscape and world

As discussed, the operating system or structure of a platform business has initiated disruption in the traditional world of business, where the existence of distributors and retailers was predominant before customers could finally purchase goods.Similarly, the valuation of a platform business is completely a new school of thought. The success of a platform business relies on the captured target market audience (TAM), customer acquisition costs (CAC), life time vale of customer (LTV) and profit margins or profit creation at unit level. While customer acquisition costs would be higher than normal during initiation of a platform, they would decrease as the business is able to scale up, capture and engage customers permanently (or create high switching costs for consumers). LTV highlight the revenue per customer depending on the duration of using the platform.

Consumer engagement metric would involve daily/monthly active users (DAU, MAU), organic v/s paid subscribers or users, time spent on the site by customers, time spent on different pages of the website, retention rates, bounce rates and the list is endless. Conversion rate is another critical metric to consider as it highlights the monetization as consumers purchases a product from the platform as a result of network effects. Other metrics may be used to delve deeper such as users per region/ geographies, age groups, referral traffic. A holistic approach is imperative to be implemented to corroborate the scenario of the business and value a business. One can’t rely on only a few metrics as they would be misguided. Furthermore, scrutinizing the business from all angles, like the quality of management and their ability to execute and implement correct decisions is essential.

Platform businesses are here to stay and scale up in the future. In foresight introduction of SuperApps is essentially evident. The marathon to create network effects will continue and traditional business and network businesses will co-exist, creating synergies to scale and expand reach in turn benefiting the consumers.


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