BusinessDay
NigeriaDecides2023

Don’t let platforms commoditize your business

Large digital multisided platforms, or MSPS, such as Amazon.com and Apple’s App Store, have made it much easier for sellers to reach new customers. But as thousands of companies large and small have discovered, conducting business that way carries significant risks and costs. The platforms sometimes exploit sellers’ dependency in subtle and not-so-subtle ways. They raise fees. They change their recommendation algorithms to put more emphasis on price. They require sellers to advertise if they want to maintain visibility. They compete with sellers by imitating their products.

But all is not lost. Sellers can employ a number of strategies and tactics to avoid being exploited and commoditized. We have grouped those measures into four categories.

1. DEVELOP AND INVEST IN YOUR DIRECT CHANNEL

Even if it is impossible to avoid operating on key MSPS, sellers should limit their dependence by investing in their own channels, such as branded websites and apps, to reach and serve customers directly. Given the widespread availability of business-ina-box solutions such as Shopify, Mailchimp and Wix, creating a fully functional online storefront is increasingly easy. For example, Shopify provides all the digital tools and infrastructure a brand needs to sell online.

The downside to business-ina-box solutions, of course, is that sellers must figure out how to get customers to their sites. The solutions providers can help to some extent through partnerships. For instance, Shopify partnered with Facebook in May 2020 to allow its merchants to create storefronts on Facebook and Instagram. And by “multihoming,” or listing on multiple MSPS, sellers become less reliant on any one platform. That means they can more easily delist from a platform that pushes unfavorable terms. The threat to jump ship sometimes keeps an MSP in check, especially if it comes from a strategically important seller.

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2. USE MSPS AS SHOWROOMS

Few sellers can become completely independent of MSPS, given the huge numbers of buyers the platforms attract. But by taking advantage of businessin-a-box solutions, sellers can use MSPS mainly as funnels for obtaining new customers. One tactic for doing so is to offer deals and directions to the seller’s own channel when filling orders through an MSP. For example, restaurants can drop coupons into the bags picked up by food-delivery platforms, steering customers to their own websites and offering discounts on the next direct order.

Sellers should also consider limiting their offerings on MSPS by presenting a broader variety of products, services and loyalty rewards on their direct channels. Some do so with Amazon: They use the platform to obtain a first order, and when filling it they include a coupon aimed at attracting the consumer to their own channel for repeat orders, sales of other products and subscriptions.

3. GO DEEP OR GO BROAD Doing business on MSPS forces businesses to choose one of two means of building competitive advantage and withstanding the threat of commoditization: Sellers can go deep, by offering a highly specific product or service and leveraging MSPS’ economies of scale, or they can go broad, by offering many different products or services and leveraging economies of scope.

— GOING DEEP: Specializing in a product or service is generally a good strategy for achieving competitive advantage on MSPS. Digital platforms usually make it easy for consumers to compare many offerings and find their ideal product. And by breaking down geographic barriers and accumulating large user bases, they greatly increase a seller’s reach. Taken together, those qualities mean that becoming the highest-quality or lowest-cost provider in a narrowly defined product or service category is significantly more valuable for sellers who conduct business on MSPS.

Deep specialization on an MSP can create a self-reinforcing cycle. The more a product aligns with what consumers are searching for, the higher its ratings will be, increasing the chances that the platform’s algorithms will drive target customers to it. That means more people will buy and rate the product, further heightening its advantage. Take Anker, a Chinese company specializing in computer and mobile-phone peripherals such as chargers and power banks. With a market value of nearly $73 billion, it is one of the most successful third-party sellers on Amazon. com. “Amazon reviews are the single most important input to our new-product development process,” Steven Yang, the company’s founder, has said.

— GOING BROAD: Alternatively, sellers can build expertise around specific MSP features, which they can then leverage across multiple products and services to take advantage of economies of scope. Some third-party sellers on Amazon’s marketplace have developed highly efficient processes for listing, marketing and selling products, which in turn has allowed them to resell products from smaller merchants lacking comparable expertise.

One of the most successful adopters of this strategy is Thrasio, a third-party seller on Amazon. Founded in July 2018, it achieved a market value of more than $1 billion in just two years — a record. It did so by aggressively acquiring other Amazon third-party sellers and leveraging its operations, marketing and search expertise to grow sales.

Although the go-broad strategy ideally involves aggregating a large number of products or services, even small to medium-size sellers can consider it. For them, the idea is to develop processes that take advantage of certain MSP features to create economies of scope across just a handful of products.

4. WAGE PUBLIC RELATIONS AND LOBBYING CAMPAIGNS

The intense scrutiny and criticism of large MSPS by regulators, researchers and the media creates opportunities for sellers large and small to drum up public support for their causes and to push back against practices that commoditize their businesses.

Sellers can employ numerous tactics to that end, including negotiating more aggressively, taking to social media, bringing complaints to antitrust authorities or the courts, and joining with other participants to fight specific MSP practices. Epic Games has made good use of all those tactics in its ongoing dispute with Apple. The disagreement is mainly over Apple’s requirement that payments for purchases of digital items within IOS games go through its App Store so that it can collect a 30% commission. In addition to demanding lower fees, Epic filed an antitrust suit and, with other Android and IOS developers, created the Coalition for App Fairness to lobby regulators.

As new tools and technologies enable businesses to take more control of their destinies, and as new regulations reduce the risk of being held up by large MSPS, sellers can build powerful businesses on top of those platforms with greater confidence. We will see more of them leverage MSPS to reach large scale and financial success.

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