Every tech/internet company today that has accumulated immense market power seems to have done it using two simple strategies: 1) Leverage a successful core customer base or asset to attack an adjacent market, and 2) Using a loss leader to encourage adoption.
Neither of these strategies are original and have been used effectively by some of the most successful offline businesses before. For example, your favorite retailer or restaurant giving you a coupon for X in hopes that you will buy X + Y with profits coming from Y.
Such strategies have not only been repurposed for the Internet age but empowered through data and personalization. There are a couple of different ways to implement this, and interestingly, people seem to view some implementations as more sustainable than others. I think that all the implementations are effectively equivalent, though, and as a result, there are likely opportunities to capitalize on these different perceptions.
Perhaps the most common implementation by tech companies, this entails taking an established position in one vertical and using it to gain entry to a nearby vertical.
For example, Priceline leveraging their position in airline ticket booking to enter and dominate hotel booking. Airline ticket booking doesn’t make much money (semi loss leader) but Priceline can more than make up for it in the very fragmented and lucrative hotel booking business.
For example, Alibaba leveraging their C2C position through Taobao (semi loss leader) to dominate B2C through TMall and payments through Alipay/Ant Financial.
For example, Microsoft leveraging their position in desktop operating system (not a loss leader at all since it is highly profitable but certainly a core asset) to enter servers and enterprise software market years ago.
These strategies are hard to counter not only because of potentially aggressive promotions through loss leaders, but because companies may be leveraging existing customer relationships and data. This may be a very hard advantage to overcome for new entrants without a similar core asset to leverage off of. If executed successfully, one potential outcome that has shown promise is a “super app”, which dominates much of the Asian landscape.
All of these are backward looking examples…along similar lines of argument, I think it is interesting to consider Uber as a forward-looking example. Is ride hailing going to ever be truly profitable? Is food delivery going to be truly profitable? Important questions, but it must also be considered in the context of whether Uber can leverage those positions as loss leaders to enter more lucrative markets (perhaps financial services). If so, the more relevant question might simply be whether Uber can get to break even in their core businesses.
By Cost Category
A few years ago, Alibaba and Amazon started making some interesting shifts to their businesses. Instead of just leveraging their position to enter new verticals, they started to leverage their position to attack different parts of the cost structure. While I noticed it at the time, there weren’t enough data points to call it a trend, but I think there is now decent evidence that it is a strategy.
For example, Amazon recognizing the cost of delivery/fulfillment and used their existing e-commerce business to attack that cost bucket and turned it into a large business in its own right (Fulfillment by Amazon). Or recognizing the cost of data centers and leveraging that into its own business (AWS).
Note that this is distinctly different from vertical integration where the main purpose is to reduce costs. The goal here seems to be to turn costs into a revenue line.
Alibaba has also pursued similar strategies. In addition to their versions of AWS (Alicloud) and fulfillment (Cainiao), Alibaba has gone further to attack the cost structures of their merchant/platform partners. Not only are they attacking the sales and marketing cost category of their merchants, they are attacking: distribution, labor, rents, product research, product sourcing, etc.
I suspect there are many more examples out there beyond Amazon and Alibaba that I am not aware of. If not, maybe the most interesting question would be why not?
One interesting example I’ve seen starting to emerge is how a lot of internet platforms are starting to move into payments. I think initially the motivation is largely a recognition of the cost associated with payments (potentially up to 3% of the transaction value). But naturally the cost motivation should eventually evolve into a revenue motivation.
This section was really the primary motivation for this post. Increasingly, consumers buy experiences, not things or even services. It is the combination of both things and services that increasingly matter. What continues to surprise me is how few companies try to make that integration of both things and services. There are potentially very valid reasons why this is not common (business models are different and would likely require very good execution), though, but still surprising to me.
In some ways, my thoughts here are an extension of my previous post on Apple. I think many people understand the value of leveraging a core and using loss leaders to expand into adjacent verticals. I think some people understand leveraging a core and using loss leaders to turn cost categories into revenue categories. But it remains interesting to me that very few people believe that controlling an entire experience is a sustainable point of leverage even if the money only comes from one specific part of the experience. In Apple’s case, hardware.
Hopefully I can continue to flesh out these thoughts over time, but this simple chart I drew probably captures the gist of it.
Disclosures: I own shares in Uber and BABA. I have no intention to transact in any company mentioned in the next 48 hours.