In this post I will review and discuss the article ‘Pipelines, Platforms, and the new rules of strategy’ published in Harvard business review April issue of 2016.

 In the introduction of the article the success of the Apple iPhone is highlighted. When the iPhone was first released in 2007 Apple was a very small player in the phone manufacturing industry, but by 2015 the iPhone was singlehandedly generating 92% of all the profits in the industry. The authors attribute this success to Apple’s intelligent view of what a mobile phone is. While other phone manufacturers saw mobile phones as just products with a certain amount of features that may or may not be innovative, Apple considered the iPhone to be a platform and focused on building a community around it instead.

The iPhone was used by Apple to create a two sided platform, bringing producers and consumers together in one place. Enabling Apple to take advantage of network effects. By doing so platform business models can be a destructive force to traditional, or as the authors of this paper prefer to call them, pipeline business models. When we consider disruptive platform businesses we tend to quickly think about disruptive startups such as Airbnb and Uber. However, the Apple iPhone was just as disruptive to the phone manufacturing industry as Airbnb and Uber were to their respective industries.

The authors identify three key shifts a successful platform has to make from a traditional business model. First platforms need to identify that its most valuable resources are likely not tangible assets, but intangible assets. The network, consisting of the community of producers and consumers and all the assets they bring to the table, is the platform’s most valuable asset. Second, this means that facilitating interactions between the consumers and producers should be your number one priority. Internal optimization of processes, which is key for pipeline businesses, becomes less important. Persuading new participants to become part of the ecosystem and governing said ecosystem is an essential part of running a successful platform business. Last, Platforms do not need to worry about maximizing customer value because they rarely engage in transactions with customers themselves. Instead, platforms should focus on maximizing the value of the ecosystem by utilizing network effects.

The authors then go on by discussing the strategic implications the platform business model has for businesses. They argue that the optimal strategy for pipeline businesses can be determined by looking at the competitive forces as described in the the five forces model, introduced by Micheal Porter in 1979. (Porter, 1979) However, they then go on by saying the five forces model is not fully applicable to platform businesses as the model does not take into account network effects. I believe this to be a powerful observation. Platforms do not only compete against other producers, but also compete against other platforms. The stability regarding the other four competitive forces is also disrupted. Platform participants can be suppliers and buyers, but a participant does not need to play one of these roles exclusively. Successful platforms are often the ultimate substitute threat to an industry.

The final important factor for platforms to take advantage of strategically are the positive spillover effects that emerge from a platform ecosystem. Positive spillover effects in platform ecosystems exist mainly in the form of user data. It is important that platform bulginesses capture as much of this data as possible, as it can be used to improve the core user interactions by generating more helpful matchmaking recommendations and pricing policies. The usefulness of a data set increases with its size. Platform businesses should therefore be worried about increasing the size of its ecosystem and volume of its its facilitated interactions. Standard metrics to measure a business’s success do not necessarily apply to platforms, as expansion and size are more valuable to platforms due to network effects. Sadly network effects also work in reverse. If a platform is managed poorly, and negative instead of positive feedback loops emerge, network effects can reduce the value of a platform rapidly.

 

References:

W. van Alstyne, M., Parker, G. and Chaudary S. (2016). Pipelines, Platforms, and the New Rules of Strategy. Harvard Business Review, (April), pp.54 – 62.

Porter, M. (1979). How competitive forces shape strategy. Harvard Business Review, March-April.

 

 

Subscription based business models have been around for ages. Newspapers and magazines pioneered the business model and have been relying on it ever since. However, in recent times the subscription model has seen a resurgence in an unexpected manner. A subscription model makes sense for a newspaper due its perishability and the recurring nature of its demand. Products such as shaving products, food and household products are increasingly more often sold on a subscription basis. Dollar shave club, an American men’s razor company that pioneered the selling of razor blades on a subscription basis, was acquired by Unilever in 2016 for a billion dollars.

Dollar shave club was founded in January of 2011 and grew to its billion dollar valuation in merely 5,5 years. This goes to show how disruptive subscription models can be to traditional brick and mortar and click and mortar dominated industries. Part of the success of the subscription business model in industries like the shaving industry is because of the predictable and recurring demand patterns products like razors have. Established companies that sell products with similar demand patterns are quick to adapt to the disrupting trend, offering subscriptions next to their individual sales. Amazon for example sells household products on a subscription basis, and even offer a discount for those who subscribe. Gillette started its own shave club as a response to the disruptive dollar shave club, offering its range of products on a subscription basis. The big brands respond in an attempt to preserve their market share.

One major advantage of the subscription business model is the elimination of the middle man. Which, in theory, allows for undercutting the competition. Companies that have managed to sell directly to consumers have traditionally been able to offer a better value proposition to the consumer. A noteworthy example of this is computer manufacturer Dell that started selling their personal computers directly to consumers around 2007, eliminating the need for retail stores.

By subscribing a customer effectively declares intention to buy a certain product on certain dates. This makes it very easy for the supplying company to forecast demand, resulting in a lower carrying costs of inventory and, in case of a highly perishable product such as food, a lower cost due to deterioration. Predictability of demand may not sound like a noteworthy advantage, but for a company like amazon that generates close to 200 billion dollars in revenue per year inventory management is one of the biggest business challenges.

Not only does the subscription model provide predictability of demand, it also provides an increased payment safety. Many subscription services require direct debit payments. This results in a more stable and more reliable cash flow for the company. Whereas large retail companies have to devote a substantial amount of resources to the collection of revenue, sometimes going as far as establishing debt collection departments. Collecting revenue from customers that haven not paid their bill not only takes time and effort, sometimes businesses are forced to settle for less than the original amount or to completely absolve a bill. With a subscription based business model this problem is less likely to occur and the costs associated with this problem are likely less severe.

 

Subscription boxes with a return policy is the subscription business model 2.0?

Subscription models that offer a themed box of products with changing contents on a predetermined schedule have been around for a while. This business model has many of the same advantages for consumers as the traditional subscription business model, with the added benefit of being exposed to new products that you otherwise would have missed out on. For the subscription box provider the added benefit is that companies might be willing to provide free of highly discounted promotional products to put into the subscription box. Subscription boxes are a new but growing business. Ipsy, a beauty related subscription box has over 2.5 million paying subscribers that are paying a monthly fee to receive beauty related products.

These subscription box services operate in a very similar way as the previously mentioned subscription based services. But recently subscription box providers in the fashion industry have been offering ways to personalize the content of subscription boxes, and have been offering refund policies. The personalization of subscription boxes is an interesting development that also seems to occur outside of the fashion industry. Vinebox for example offers a questionnaire that allows customers to discover their taste in wine, and adjusts the content of the subscription box to the taste of the customer. Trunk club offers the assistance of a personal stylist to pick out fashionable clothes that fit your style and body. These attempts to personalize the subscription boxes require the cooperation and attention of the customer, the customer needs to invest time into the customization. In return there is an increased chance that the customer enjoys the content of the box.

Trunkclub also offers a return policy, that allows customers to ship back unwanted items from their subscription box. This is odd because a return policy might eliminate one if the main advantage of the subscription based business model, namely the predictability of demand. This trend is most prevalent among the fashion themed subscription boxes, which is not surprising. Trunkclub for example is owned by Nordstrom, a large retail company in the fashion industry. Returned items could potentially be sold through the retail branch of the parent company before they go out of fashion.

 

Sources:

https://www.fastcompany.com/3068822/beauty-subscriptions-are-a-tough-racket-but-ipsy-is-sitting-pretty

https://www.reforge.com/blog/ipsy-content-influencer-growth

http://www.trunkclub.com

https://www.bloomberg.com/news/articles/2016-07-20/why-unilever-really-bought-dollar-shave-club