Brands and manufacturers are fighting back…
The past two decades the Platform Business Model has had a good run.
Interesting to think over the past few decades everyone at one time or another was trying to move to a ‘platform based model’ in response to competitive threats and changing market conditions… But actually they weren’t. Platforms were the way to disrupt markets from outside and not from within.
A question — are platforms just a fad? Do they really deliver value or are they a bit like Digital Transformation the promise sounds good but the reality is nothing really changes. Yes it sounds good, reads well in the Annual Report and CEOs statement. A Digital Transformation to what exactly? It’s a bit like the ‘emperors new clothes’, will anyone come clean and admit they don’t work. Then let’s look at the concept of a cheaper price when things go wrong, and the often do, you need support to find there is nothing behind the cheap price!
There are different types of platforms of course. Platforms that behave as markets matching buyers and sellers to trade their wears — eBay, AliBaba and Amazon spring to mind. Platforms to promote yourself that offer influence and reach — Instagram. However the bulk seem to be aggregation sites offering price comparison, or make the front end customer on-boarding easier ( a booking engine) and hand off to the manufacturer or supplier, at a discounted price. Then you are on your own, when something goes wrong who you gonna call? It gets worse, because the owner of the product has to pay the platform a fee, commission, they often strip back the product to make room e.g. most types of insurance.
Who wins and loses?
It is worth remembering 95% of the world’s economy is based on making things, designing and creating products, and then manufacturing (and yes we losely include agriculture in this). This model remains dominant today albeit the actual geography of where the manufacturing happens has shifted east. Our civilisation is based on consumption, on things being made, and that is another unsustainable story!
It is also worth remembering in terms of price theory there is only so much of the total pie to compete on. The cost of sourcing materials and turning these into finished products, the cost of warehousing and distribution, and then sales to the end customer, followed by after sales care and customer service. Yes this is the part that is over looked, as the product gets pushed back to the manufacturer, after the platform have made the sale and takes their fee/margin. How many times when you buy something cheaper on a platform you cannot get a refund or compensation when things change, there was a mistake, what was received was not what was ordered? And you find it is doubly expensive to change or update, by going back online.
In every market someone wins and someone loses. But not just competitors fighting it out. Think of where the profit margin goes, how many layers in a market or industry where everyone expects to make a profit, and this is on top of intermediary costs of sales and distribution… And yes you guessed, the customer is expected to pay, but in the case of the platforms, everyone gets squeezed to make room for their business model, for the platform to make a margin. The squeeze goes downstream. Lower prices = often inferior products, poor value and almost no room for after sales support.
Ever tried to get someone on the phone these days to ask for help or complain. Customer services is not being forced onto a website, although millennials may be comfortable with this, I am not. The overwhelming problem with platform business models is its easy to hide, to duck the issue and leave the customer hanging and out in the cold.
OK, granted in some cases this has forced manufacturers to lower costs, to innovate and sort themselves out, but in some industries it's a different story. Think Spotify, their model puts the squeeze on artists who's margins are already thin, offer customers millions of songs and unlitimted plays for $20 a month. Long gone the days when you had to buy an album of you favourite band, or go onto iTunes and pay $0.99cents, the millenials expect to be able to use someone else’s login and get it for free! And why so many bigger artists now go direct to fans.
Platforms Win! But does the Customer really benefit…?
Think of a platform and tell me why you use it? Is it to get a better price right, to see a wider selection of products and services across an entire market, to compare products and services…? Is this the only value add? Are you really happy with what you are offered? Are you making a decision to opurchase on price alone? What about help while consuming and using the product or service? Would you not prefer to deal directly with the manufacturer, talk to the designer and offer feedback,or ensure you can receive after sales service?
I am not sure what is going on these days but the concept of ‘after sales service’ seems to be missing from a lot of industries. In my view this is the primary reason high street retail is losing, because they have given up, without realising, in their fight against platforms (Amazon) some people are willing to pay a higher price for being looked after properly.
In the long run but do you think platforms will win? Personally I do not. The example is Netflix. Their membership has tailed off, as the disintermediator platform they sourced content from others, putting the squeeze on artists guaranteeing distribution reach. However now they make content themselves and a lot of it is rubbish, not that original as they claim. And yes we all like to ‘binge watch’ and most weeks we are left with nothing new to view. Our choice to pay for Amazon, or a TV Licence in UK to access BBC, Channel4, or you pay for Sky, Virgin or a cable provider. It is an entirely fragmented market of platforms competing, all wanting fees and to make a margin, to get access to all platforms is unaffordable for most people. And yet in their fight for content they have squeezed the creators so much, the talented writers and film makers, many have simply found a new profession. The quality overall falls and as consumers, we are all ultimately worse off, although it doesn’t feel that way.
How come platforms became so dominant…?
In the world of large manufacturers and brands throughout the 1980's and 1990’s they sat back, believing they were big and dominant. They believed scale matters, that everyone would keep buying if they brought out a new model or version once in a while. Margins were generally ‘fat’ leaving enough room for distribution and often a direct sales team. They were complacent, leaned on distributors and resellers to bring the market to them, to manage their customers. Then the worm turned. However by the 2000’s they realised they were screwed and the long fight back started.
These large industrial giants, big brands were dominant, often monopolising markets, they were slow, encumbered by layers of management and had no reason to change. They had built inflexible business models that were supported by technologies that prevented change. Centralised tech infrastructure based on old transaction processing principles SAP and Oracle they couldn’t change even if they wanted to. Tied to the tech chair. The door was left open wide. They were inviting disintermediation and that is exactly what happened.
The Fight Back has started — the big brands want their customers back
The signs are there is a fight back going on, as the big brands, manufacturers want their customers back. They have discovered new technologies that will help them take the fight to the competition, the platform providers. The epiphany was Big Data, they had nothing to analyse. The brands soon discovered they didn’t own the customer data, not even ‘meta data’ of the customers which were owned by social media and the telcos in terms of geolocation and “check ins”. They discovered they really knew very little about their end customers, and the end retailers and platforms were not going to let them have it, the data that is…
In consumer products the brands have been completely dis-intermediated, often with their help and encouragement. As we know people like brands and loyalty is actually relevant, people can be lazy, loyalty can be encouraged and rewarded. In every industry products are sold through layers of agents, third parties and sales channels and they all make margins, they all expect to be paid rewards and commissions. Look at Financial products sold by IFAs and Brokers, Airline seats sold through Online Travel Agents, Cars sold by Dealerships, White and Brown Goods sold through electrical chains, Drugs and Pharmaceuticals sold through retail Chemists, think of almost any product and it is sold via someone else.
Maybe it was me but I thought the entire purpose of a producer (includes financial proucts creators) and manufacturer going ‘digital’ (going through Digital Transformation) was to adjust their operating model to be able to sell products directly to customers? The entire purpose of Digital Transformation was to engineer a new operating model for the company to compete more effectively in a market and industry, by removing layers and strip back counter parties, absorb the front end ‘dealing with the customer’ back into the fold? The reality is not much happens and costs and structures often remain the same. It feels and looks good apparently, ticks the we’ve done something in the ‘digital’ strategy box.
The brands have realised they are missing out on several fronts and the tech is available to help them get the upper hand and win back the customer. Transformational technologies are cheap and easy to deploy. Brands are looking to talk to the consumer in real time leading up to, during and after purchase. They have learned there are opportunities to influence behaviours, to up and cross sell, but also collect and use ‘meta data’ as patterns to predict what the customer might want/need days and weeks before the purchase.
This revelation is called Non Linear Reasoning where for the first time algorithms and computing processing can consider all data at once, combining structured and unstructured data — speech, pictures, maps, objects, geo-location, check-ins, social patterns…to second guess or even ‘nudge’ customers into buying something better or something else. Offering an immediate discount at point of purchase, to reward loyalty when the customer is faced with choice. And yes, receive authentic feedback from real customers.
My experience of Booking.com is worth a mention here. I have used it extensively and apparently get extra discount and priviledges, but I am not sure I really do. So let’s dig deeper shall we. I cannot confirm I get a cheaper room as sometimes I go direct and the hotel will beat their price. the other issue is they don’t represent the entire market, there are many hotels not listed. My experience is generally ok until I want to complain, when the room purchased was not the one delivered, when the hotel changes the deal, or the experience is poor. There is not much you can do as Booking.com are not geared up to speak to customers. They take the position the hotel is delivering the service so deal with them. Yet they sold it to you?
Yes you might get a voucher after the event, for you next booking, if you make a fuss. But trying to talk to someone when you are at Check In, or as you enter a different room isn’t going to happen. They become invisible. Many times I also don’t receive the exact room rate the hotel forced to offer. Instead you sense resentment, and the hotel then looks to charge you for every extra they can, because they have been bent over and their occupancy yes is higher, but margins remain thin. Why do you think breakfast, a few eggs and a bit of toast is typically £20.00 a head. That using the gym is often extra. All meals are expensive inside the hotel and there no hotel services such as buses to pick up and drop off from the airports like their used to be.
The Next Shift…
All markets remain largely inefficient. They attract platforms because they are easy and fast to set up, require simply software engineering and can be launched quickly enough. Change is coming however through the likes of Decentralised Operating Models that can cover everything, not just the front end. Complete markets are being collapsed and re-invented because Blockchain delivers the perfect conditions to create fast, efficient, transparent propositions that can scale at pace. The platforms will be disintermediated by new decentralised business models that look like a platform delivering transparency, openness and trust, and rewarding participation for all. Whilst this is not an advert for Blockchains, it is clear platforms place pressure on markets, specifically downstream components until they collapse.
Multiple layers in any industry cannot be sustained, and they are unnecessary, as pressure on pricing continues, either from inflation, increased competition. Customers are more aware of how value is associated with the price they pay, often through bad experiences. If the platforms want to survive they have to offer to customer services, be transparent, be available and want to talk to the customer in their time of need. I for one would like to think most people would agree. But have we been blinded by price and ignore poor service?
Think of the objectionable fees and charges banks and financial services companies take to manage our money, savings, a simple retail account, credit, wealth management, insurance premiums, for managing pensions are all under scrutiny. Why? Because they continually have been mis-sold (in the UK) and why additional pressures from Policy makers and Regulators try to close the loopholes that allow anyone to sell a complex and often regulated product.
Business case: Airlines
There are several guaranteed ways to lose money in business, own a Formula One or Polo team, or start an Airline. Airlines are low margin businesses, often strangled by unions, have to deploy huge capital for infrastructure and planes and are wide open to changes in fuel prices and customer behaviours and trends (and the odd pandemic or terrorist attack).
Airlines have lost out to the Online Travel Agents (OTC) who seized the opportunity even before low cost carriers arrived to deliver a different customer experience. Simple aggregation comparing prices rather than logging into several airline websites. Airlines created the disintermediation for themselves despite the major reservation systems being owned by their industry, along with frequent flyer programmes run by third parties. Sounds familiar. They managed to hand over the crown jewels. Give their value away.
Imagine this scenario. We have a capital intensive industry, open to fluctuations on macro economics with low margins and little control over the customer until they sell a ticket via an OTC or in some cases direct. Price is checked against the market which demands low prices. Airlines have no way of making money from the traveller others than a ‘bums on seats’.
They play with insurance, making you pay for extra bags or a better seat, hoping you won't notice the price has gone up from the original offer. The entire industry does it. This makes it harder for price comparison. Airlines don’t benefit from the other stages of the travellers journey (the drive from home, taxis, parking, food and news papers) sometimes they get a trickle of income from hotel bookings and car hire, yet they take all the risk.
Airlines even discriminate against infrequent travellers, offering no incentive to fly again with them. Treated as Cattle and put in cattle class they are not looking ahead for repeat business or the network effect of friends and family. They convince themselves they need to put all their effort into Frequent Flyers, because they pay a higher price, but do they. As the ticket is paid for by travellers businesses through expenses.
So how do airlines claw back lost margins, get to know and engage with customers? The simple answer be easy to deal with, offer products and services that cover the entire needs of the traveler. Have their own new platforms such as those built by East2. To focus on all customers, to predict needs, offer solutions and when things don’t go to plan step in, something the OTA cannot and will not do. Reward loyalty for every dollar spent for everyone. Beat them at the customer service game.
How does any brand, product or company recover their relationship with customers? The answer is of course go direct! Deploy technology that forges closer links with customers. Own the platform. Build one don’t buy. If you don’t know what these are then you are farther behind than everyone else.
Authors: Nick Ayton
Deep Tech board advisor, Blockchain, Quantum and AI specialist.