Learnings made from the book "Master Disruption" - New Age Business Models

History tells us that disruption comes primarily from outside the current industry ecosystem, and players like Tesla, with its EV-challenging ICE cars and BYD transitioning from cell phone batteries to EV cars, are prime examples. 

When faced with disruption, a business must choose between embracing change and protecting its legacy. With disruption comes a business model change; every business model changes the price value equation in the industry first, and then the profit pool shifts. Many legacy protecting companies start by cutting prices, and their balance sheets are in the red before long. Different types of new business models which have evolved recently are as follows:

The Pipeline Business model is a traditional business model wherein goods are manufactured in bulk and sold through a distributor network, wherein economies of scale are used to reduce cost and increase efficiency.

The Platform Business model is relatively new. Unlike the Pipeline business model, which focuses on delivering a product or service through a linear sequence of activities, the platform business model creates value by facilitating interactions and transactions between multiple groups, such as producers, consumers, and partners. This is made possible through a multisided platform that connects these groups and enables them to exchange value in various forms, such as goods, services, data or even social connections. The platform acts as a mediator, a matchmaker and a value creator, enabling participants to find each other, transact with ease and derive additional value from the interactions. This model is particularly effective in industries that are information-intensive, network-dependent and characterized by fragmented supply and demand. The pipeline business model is useful in industries with high fixed costs and predictable demand. In contrast, the platform business model is useful when demand is uncertain or unpredictable, as platform business models are more agile, innovative, and scalable. However, the Platform business model faces the risk of regulatory challenges and network effects that can lead to monopolistic behaviour. 

The roles are defined in the Pipeline business model, but that is not the case in the platform business model. 

Gatekeepers vs open access: Pipeline models often have gatekeepers who control access to goods or services. In traditional publishing, for example, publishing houses decide which books reach the market. Conversely, platform models tend to promote open access. With Self-publishing platforms like Amazon Kindle Direct Publishing, any author can publish their book and reach a global audience, bypassing the traditional gatekeepers. 

Standardisation vs customisation: Pipeline businesses rely on standardisation for efficiency and scalability. For instance, clothing brands like Zara produce standardised sizes and designs for mass markets. Platform businesses, though, often thrive on customisation. Etsy, a marketplace for handmade goods, allows sellers to offer customised products tailored to individual buyers' needs and preferences. 

Ownership vis-à-vis access: In the Pipeline model, you own the goods you purchase, but in the platform business model, customers are given access to a bundle of products and services. For example, Spotify is a music streaming platform. Users do not own the songs but are granted access to a vast library. This model caters to a sharing economy wherein users value access to diverse resources over owning limited assets. 

Aggregator Business Model: This model consolidates specific services or products and offers them under a single brand. The aggregator doesn't provide the service or product but connects the service provider with the consumer. Ola is an example of this. This model allows quick scaling without owning assets, but needs a substantial user base to succeed; the challenge is that attracting both sides can be difficult. Ensuring continued use of the platform to avoid disintermediation is vital. On-demand businesses can deliver high levels of customer satisfaction due to their convenience. However, they may face logistical challenges and fluctuating demand. The company must always ensure sufficient capacity to fulfil orders, leading to possible underutilization and consequent losses. 

Subscription-based business Model: While subscriptions aren't new, modern businesses have adopted this model for digital products and services. E.g. Hotstar, a digital and mobile entertainment platform, offers a diverse range of TV shows, movies and live sports under a subscription model. This model ensures predictable recurring revenue but may struggle with customer acquisition and retention, as low upfront commitments can lead to high customer turnover. 

D to C business model: Direct-to-consumer business model: In this model, products are sold directly to customers, eliminating the intermediaries, retailers, etc. 

Strength & Weakness: D to C allows higher profit margins and access to better customer data, but necessitates brand-building and logistics management investment. 

D To C Plus Retailer - Hybrid Business Model: This model involves the company selling its products directly to consumers and also selling goods from other popular brands, effectively acting as a retailer. This model leverages the higher profit margins and brand-building benefits of D2C while offering a retail operation's variety and customer reach. The challenges include managing logistics for both models, building and maintaining a brand, and managing potential competition between their products and those of other brands on their platform. The potential cannibalisation of their customer base and confused customer perceptions are distinct challenges. 

Creator Economy Business Model: Creator Economy represents a new economic paradigm where anyone can create, share content online and monetise it thanks to social media platforms. Creators can make money in many ways, including selling physical goods, digital goods, affiliate marketing, brand sponsorships, or subscriptions from followers. For example, YouTube is a video-sharing model that enables users to watch, upload and share videos. 

Consumer-to-consumer business model: The C2C model enables commerce between private individuals, usually facilitated by a third-party platform. eBay provides a platform for individuals to buy and sell goods. This model eliminates the need for a physical storefront, reducing costs and expanding market reach. However, it can face issues with product quality, trust, and other concerns. 

Freemium Business Model: The essential services are free in this model, but advanced services require payment. LinkedIn, for example, is free, but LinkedIn Premium is a subscription-based model. 

Crowdsourcing Business Model: Here, companies solicit ideas, products or services from large groups of online communities. 

Super app Model is a mobile application that provides multiple functions and services within a single app. The advantage is that users can purchase a wide range of products and services, and personalisation can enhance their convenience. However, maintaining this app can be complex since it provides multiple products and services. 

Market Place Plus Private Label: In this model, companies act as online marketplaces, where goods are bought and sold by independent sellers, and the company also sells its private label goods.

Content producer and distributor of other content: This model combines the roles of content producer and distribution. Companies produce their content and distribute content from different producers. Netflix is the best example, as it makes a slew of original content under the Netflix Originals banner while hosting and streaming from other production companies. This model provides control over some of the content, allowing for unique offerings and differentiation while also benefiting from the variety of hosting external content. However, it requires significant investment in content production and faces the challenges of managing content rights and handling competition from other streaming platforms.

Drivers of Growth for Platform Business Model:

Network effects: The Platform business model benefits from increased network effects, wherein the platform's value increases as more users join. This can lead to a self-reinforcing cycle of growth and increased market power. For example, social media platforms like Facebook and Twitter benefit from an increased user base. 

Data-Driven Insights: The Platform can leverage data to study consumer behaviour and improve its products and services, delivering better consumer experiences. Data is generated and captured from browsing history, past purchases, cancellations, shopping cart abandonment, content consumption, and user journey. 

Platform openness: allows third parties to develop on their platform and expand its capabilities. This can lead to increased innovation and a larger ecosystem of users and providers. 

Demand economies of scale in Platform business refer to phenomena where the value of the platform business model increases as the number of customers and users grows. As the platform attracts more users, the value of the network grows, making the platform more attractive to new users and creating a vicious cycle of growth. A notable example is Uber and Ola. As the number of customers and drivers on the platform increases, the network becomes more valuable, enabling faster pick-up, more efficient routing, and lower prices. This increased value attracts even more users to the platform, increasing its value. The drivers also earn money because they have less idle time, faster pick-up, and more business, which attracts more drivers. The vicious cycle continues. For customers, the economies of scale lead to more options and better services. Customers can access a broader range of services with more providers on the platform. They can choose from multiple providers in their locality based on ratings, reviews, availability and prices. As the network grows, the platform becomes more valuable to service providers and customers, creating a positive feedback loop that drives growth and creates value. 

Metrics to Track: Platform business models have different metrics to track the performance of the business. Liquidity is a crucial metric for the success of this business model. It refers to quickly buying goods and services without significantly changing the price. It means there must be enough supplies against demand to keep a balance. If the number of suppliers increases against the demand, it will lead to a decline in price, significantly leading to a loss for any single supplier to earn from this platform. Similarly, if demand increases and suppliers decrease, it will lead to higher prices, which is not beneficial for consumers. So, a perfect balance is required. Uber tracks the time it takes for the driver to respond to customer requests and the average waiting time for the customer. 

Interaction failure rate refers to the percentage of failed interactions between the Producer and consumer. It refers to the number of bookings that passengers cancel in the case of Uber. 

Engagement rate refers to the percentage of active users on the platform. 

Match quality refers to the percentage of the match between the consumer's requirements and the Producer's ability to cater to those requirements. 

Churn rate: It refers to % of users who stop using this platform over time. 

Conversion Rate: Conversion Rate refers to the percentage of users who visited the platform and made a purchase.

Retention Rate: The percentage of users who renew their subscription and remain customers over time. 

Customer Lifetime Value: This refers to the estimated customer value over the customer's lifetime on the platform. 

Net Promoter score refers to % of customers ready to refer the platform to others. 

Customer acquisition cost: This refers to the cost of acquiring new customers. 

Lifetime value: Value of goods purchased by the customer from the platform during the customer's entire lifetime on the platform. 

CAC: Customer acquisition cost. 

Annual Recurring Revenue -ARR- This metric is used in a subscription-based model. 

Viral coefficient: This shows the rate at which the platform is recommended to others by the existing customers. 

Activation Rate: This shows the users who signed in or did the initial registration. 

User-generated content: This refers to the amount of content users have generated on the platform by giving ratings, comments and recommendations. 

Adverse Network effects refer to a phenomenon wherein the platform's value decreases as more users join. This happens when customers do not get proper service due to a massive increase in users. Overcrowding, spam, poor user experience, etc. 

Leverage the infrastructure of your business to earn additional revenue: 

Determinants of LTV-Long-term Profitability value: LTV hinges on three core factors: Customer lifespan, Average order value, and profit margin. 

Customer Lifespan: This element is closely tied to customer retention, which inversely correlates with churn. Enhancing customer retention through efficient onboarding, excellent customer service, and continuous product improvements can substantially increase LTV. 

Average order Value: Companies can elevate this through strategic upselling and cross-selling. 

Profit Margin: This can be improved through optimised sourcing, cost reductions and automation.

Significance of LTV: LTV is the lens through which businesses can view and understand the long-term profitability of their models, particularly for subscription-based services. 

Customer Retention Focus: It underscores the importance of nurturing long-term customer relationships. 

Strategic Decision-Making: LTV aids in determining investment levels in customer acquisition and retention. 

Applying LTV in Business Strategy

Resource Allocation: LTV guides investment decisions in customer acquisition and retention.

Pricing Strategies: It informs pricing to balance profit and customer loyalty. 

Customer Segmentation: Identifying high LTV segments leads to more targeted marketing.

Product and Service Development: LTV insights shape product evolution to boost customer satisfaction and retention. 

It is not only essential to acquire new customers but also to retain them. Incentives should be provided to new customers to encourage them to continue shopping on the e-commerce portal. 

Customer referrals play a significant role in bringing new customers. Hence, if existing customers are incentivised to get new customers, new customers can be added very quickly. ARPU (Average Revenue per User) serves as a crucial benchmark for assessing whether a company is well-positioned to retain customers through repeat purchases and understanding the average purchase value of these customers.

If the e-commerce company can offer shipping costs at a minimum level, waive any introduction fees, and share in sales made by sellers through the portal, then sellers can offer competitive prices and increase their sales through the portal. Furthermore, if the Ecommerce company can expand its reach by providing services in Tier II and III cities or remote locations, it can increase its customer base. If the ecommerce platform delivers goods the same day, which helps keep prices competitive, and the customer is willing to wait one day, it becomes a win-win situation for all parties. If the e-commerce Platform does not sell its Private label goods, this is a good sign for the seller, as the platform will not differentiate between its private label goods and those offered by the seller, which gives the seller comfort. The settlement cycle, which involves paying the seller after goods are sold, should be as short as possible, as this helps sellers reduce their working capital requirements in the business. The seller must advertise on the platform initially, ensuring their goods appear in the first 50 search results, which increases the likelihood of their goods being sold. If the seller tries to sell goods through his website or other social media platforms, it is difficult to attract serious buyers, as most users who visit these platforms are not serious buyers. However, visitors to the websites of e-commerce platforms are typically the most serious buyers.   

Key metrics include engagement rate, click-through rate, Page views, number of app downloads, social media followers, and Comments on social media.

A low engagement rate indicates that followers are present on social media or a website but are either inactive or uninterested in the content.

Ineffective Marketing Campaign: Despite high impression numbers, there was no corresponding increase in clicks or sales, indicating that the target audience was not effectively targeted. 

Misunderstood Audience Sentiments: Analysing audience sentiments is crucial to determine the effectiveness of the campaign. 

While website traffic, page views, unique visitors and download counts are essential but above actional metrics and others such as average time on page, bounce rate, number of returning visitors, lead generation, content-driven sales conversions, customer lifetime value and NPS are relevant to see whether the sales is happening, and customers are happy with content. 

Neglecting actionable metrics results in high traffic on the website but low sales, low customer engagement, a poor conversion rate from leads to sales, and poor content that fails to engage customers. 

While actionable metrics are relevant in the initial stage of business, when the website company or portal needs to generate revenue, as the business grows, the focus should shift to traditional ratios such as GP margin, NP margin, EBTIDA, growth rate, Return on Capital employed, etc. 

Vanity metrics, such as page views or app downloads, may appear impressive, but ultimately, actionable metrics, including customer acquisition, customer lifetime value, and customer retention rates, are crucial. 

Transitioning from Traditional to Modern business metrics is essential. A balanced approach will be to monitor both categories of metrics. Modern metrics include contribution margin, activation rate, etc. 

AARRR: Acquisition, Activation, Retention, Referral & Revenue are essential drivers to gauge performance. 

Unlike a traditional marketplace, a digital market leverages data analytics to provide personalised services to customers. 

What is Marketplace? It is a Digital platform where discovery, matching, and transaction happen, and disputes are resolved. Marketplace companies typically do not own any stock directly. Three aspects differentiate the marketplace. There are as follows:

1. Scalability: Since the marketplace merely facilitates transactions between suppliers and customers, it can scale easily with minimal investment.   

2. Network effects: Achieving scale will lead to more sellers, which in turn will increase the variety of goods available at competitive prices. This will encourage buyers to purchase more goods and attract additional buyers. Hence, exponential growth is possible in this business after achieving a particular scale. There is very little further investment required to grow the buyer or seller side of the marketplace. 

3. Capital efficiency: Since the marketplace does not require much additional investment to grow its business, it is capital efficient. 

4. Transaction vis-à-vis Platform marketplaces: In transaction marketplaces, the company is responsible for the completion of transactions and is involved in cases of return of goods. In the case of Platform marketplaces, the portal simply helps the customer and seller meet, but the transaction is done offline, and the marketplace company is not responsible in cases where goods are to be returned or if the customer is not happy with the service.   

5. There are three types of marketplaces: B2B marketplace, B2C marketplace, and Peer-to-Peer marketplace. B2B marketplaces are complex, and transactions involve high volumes. B2B platforms help businesses reach global markets. B2B transactions would involve multiple people, and transactions may happen face-to-face to establish trust. The company primarily generates revenue through a subscription model, charging sellers subscription fees. Shop Kirana is a unique marketplace that acts as an intermediary between manufacturers of branded products and small retailers. They consolidate the procurement of small retailers and then place one big order with branded products. The advantage to the small retailers is that they need not stock such branded items. 

6. The role of the Marketplace company is to ensure that the balance between demand and supply is maintained, and controls are put in place to provide the best service to both customers and sellers. Marketplace acts as a digital bridge between demand and supply. 

Sources of Revenue for Marketplace Company:

1. Commission-based: A commission is charged on every transaction that takes place through the marketplace. 

2. Gross Merchandise Value (GMV is the transaction value on which commission is charged. Take rate is the commission charged on GMV. 

3. Listing fee is another source of revenue for the Marketplace company. 

4. Lead fee model: Some marketplace companies charge a lead fee for providing leads to sellers. 

5. Subscription-based model: Some marketplaces charge a subscription fee for either the demand or supply of services. 

6. Charging for displaying advertisements to sellers is another source of revenue for the marketplace.

7. Growth Strategy: As the marketplace expands to include more suppliers in response to increasing customer demand, suppliers have the opportunity to secure more business. As more suppliers join the platform with a variety of goods, customers are likely to make more purchases. Hence, it becomes an exponential growth. When the marketplace is experiencing tremendous growth, they are said to have reached optimal liquidity. Liquidity is a measure of how effectively the marketplace is enabling transactions between buyers and sellers. A liquid market allows buyers to find what they need efficiently, as measured by the search-to-fill rate, and sellers to sell their products reliably, as measured by the supply utilisation rate. Marketplace needs to build a critical mass of demand so that it can attract enough supply to get the desired growth. Second, it needs to build up a critical mass of supply so that the demand it has attracted can be served, and lastly, it needs to enable effective matching between demand and supply. 

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