Don’t Let Platforms Commoditize Your Business

Idea in Brief The Problem Sellers of products, services, and content on large digital multisided platforms face fierce price competition, squeezed margins, and a loss of control over customer relationships. The Root Cause With more and more business migrating online, sellers have grown increasingly dependent on the platforms to gain access to vast numbers of customers. The Solution Sellers can employ several strategies to take advantage of platforms while minimizing the risk of commoditization. They can develop and invest in direct channels while using platforms as showrooms to bring in new customers. They can either go deep on a platform, with highly specialized offerings, or go broad, with many different offerings that leverage expertise in specific platform features. And they can wage public relations and lobbying campaigns to take advantage of increased regulatory scrutiny of platforms. Large digital multisided platforms (MSPs) such as Amazon, Alibaba, 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 on them carries significant risks and costs. Sellers are drawn into increasingly intense price competition as MSPs attract more and more of them. 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 in search results. They compete with sellers by imitating their products. They restrict the prices sellers can set elsewhere. And they change their rules and designs in ways that weaken sellers’ relationships with customers. A broad spectrum of enterprises are grappling with these problems, including sellers on Alibaba and Amazon; app developers on Apple’s iOS and Google’s Android; restaurants on DoorDash, Grubhub, and Uber Eats; hotels on Expedia and Booking.com; small businesses on Tencent’s WeChat; and media outlets on Facebook, Google, and Twitter. And antitrust authorities and regulators around the world are investigating some of the largest MSP operators, including Amazon, Apple, Facebook, and Google, for possible abuses of their market power. 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. 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-in-a-box solutions such as Shopify, BigCommerce, Magento, WooCommerce, Mailchimp, Square, Appy Pie, and Wix, creating a fully functional online storefront is increasingly easy and affordable. The key difference between relying on those providers of software tools and relying on an MSP is that the former exert no control over brands’ relationships with their customers. For example, Shopify provides all the digital tools and infrastructure a brand needs to sell online, typically without consumers’ realizing that the brand’s store is powered by it. Part of the reason Shopify is so appealing to online merchants (it has more than one million of them as customers) is that unlike Amazon, Shopify is not a marketplace connecting them with consumers and therefore does not commoditize them. As Shopify’s founder and CEO, Tobias Lütke, has said, “Amazon is trying to build an empire. Shopify is trying to arm the rebels.” Similar business-in-a-box solutions are popping up in other market segments where MSPs are trying to build empires. Consider restaurants. DoorDash, Grubhub, and Uber Eats enable consumers to place takeout orders and arrange for delivery. Because restaurants have become increasingly reliant on them in the past five years, they now charge a 20% to 35% commission. According to some reports, they also engage in questionable practices (for example, Grubhub has allegedly created shadow websites that lead consumers to believe they are ordering from restaurants directly). They stand in contrast to ChowNow and Olo, two fast-growing start-ups providing back-end technology that lets restaurants sell directly online. Restaurants pay those companies subscription fees to power their websites and mobile apps and to provide other services associated with orders, payment, restaurant-specific loyalty programs, and marketing. But each restaurant keeps full control of its customer relationships and its chosen delivery and sales channels. Even if it is impossible to avoid operating on key platforms, sellers should limit their dependence by investing in their own channels to reach and serve customers directly. The downside to business-in-a-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. It partnered with Walmart that June to allow its merchants to easily become third-party sellers on Walmart’s e-commerce marketplace. 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. And the threat to jump ship sometimes keeps an MSP in check, especially if it comes from a strategically important seller. (Disclosures: One of us, Julian, has consulted for Facebook, and HBR publishes content there.) In recent years the “Shopify for X” approach has been applied in more and more sectors, and a variety of firms now help arm the rebels. Dumpling lets people start their own personal-shopping businesses so that they can reduce or eliminate their dependence on MSPs such as Instacart. Lyte provides the technology and tools for venues and event owners to control their ticketing, allowing them to bypass StubHub and Ticketmaster. NearSt lets brick-and-mortar retailers in the United Kingdom make their inventories searchable on Google without listing them on Amazon. (Disclosure: Both of us are investors in NearSt.) 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 business-in-a-box solutions, sellers can use MSPs mainly as funnels for obtaining new customers. This approach gives them more control over their customer relationships, including customer data, enabling them to better tailor their offerings and differentiate themselves. Essentially, it lets them use MSPs as showrooms. 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 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 in their direct channels. Some do so with Amazon: They use the platform to obtain a first order (possibly for a loss-leader product), 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. Of course, a powerful way to induce consumers to switch to a direct channel is to charge lower prices there. Some MSP contracts forbid that. For example, Booking.com and Expedia prohibit hotel websites from posting room rates that are lower than the ones they offer. Many hotel chains have responded by giving customers loyalty rewards and additional perks, such as the ability to choose specific rooms and to access upgrades, when they book through the hotel’s own channel. Go Deep or Go Broad Doing business on MSPs forces sellers to choose one of two means of building competitive advantage and withstanding the threat of commoditization: They 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—and it’s even more important for sellers operating 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 very 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. Thus, highly specialized sellers can build a sustainable competitive advantage over time. Ori Toor Take Anker, a Chinese company specializing in computer and mobile-phone peripherals such as chargers and power banks. With a market value of about $11 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,” founder Steven Yang has said. Initially only on Amazon, Anker now sells through many channels, including offline ones such as Best Buy, Target, and Walmart. Examples in other contexts include unique and hyperspecialized content providers on YouTube (such as 5-Minute Crafts, Dude Perfect, and MrBeast), Facebook (Bored Panda), and Instagram (9GAG). The more views and likes they obtain, the higher their revenues, which they can invest in producing more and better content, leading to ever-larger audiences. 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, allowing them to resell products from smaller merchants who lack 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 unicorn status (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 (more than 40 in that time, and another 50 by the end 0f 2020) and leveraging its operations, marketing, and search expertise to grow their sales. The economies of scope it exploits come from sharing best practices about how and what to sell in terms of pricing, advertising, product, and listing design across the more than 10,000 products it offers (from pet-odor eliminators to socks and kitchenware) and from cross-selling those products. It also benefits from economies of scale in shipping and ad spending for placement on Amazon. Other firms adopting a so-called rollup strategy on Amazon include Boosted Commerce, Heyday, and Perch, all of which have raised significant venture funding. A version of this strategy is employed by Wave.tv, a rapidly growing start-up that publishes offbeat sports content on social media MSPs, including Instagram, Facebook, Snapchat, TikTok, and YouTube. Wave.tv acquires or licenses content from many sources and leverages its technology and data analytics to repackage it under more than 15 brands, including BenchMob, Haymakers, and Buckets, increasing the content’s reach on the many MSPs on which it operates. 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. That’s an especially good option if the current sellers of those products are underperforming. Choosing the optimal strategy. Deep specialization is the best strategy for small “native” sellers—ones that started out on an MSP. In fact, one of the most important ways in which the platforms create value is by generating unprecedented opportunities for niche products or services to succeed. Going deep is also likely to be the best option for sellers (small or large) with established businesses outside the MSP in question. Because they already have a successful offering, they can more easily adapt it to the MSP than build expertise around specific MSP features that they could leverage horizontally—an area where “non-native” sellers have no comparative advantage. Still, they should recognize that succeeding on an MSP may require much more specialization than they needed on their own. Going broad is a natural move for native MSP players that have succeeded with a specialized offering but run out of room to grow in that niche. They can leverage the deep expertise acquired while selling that offering through an MSP to expand horizontally to other products or services. Going broad is also increasingly the preferred approach for sellers, such as Thrasio, that were created and capitalized specifically to take advantage of the economies of scope available on large MSPs. Sometimes exogenous capacity constraints limit what can be achieved by going deep. This is true of hosts on Airbnb (who face physical occupancy constraints) and restaurants on DoorDash and Grubhub (who have staffing and time constraints). That’s not to say that all Airbnb hosts should rush to acquire more apartments or that all restaurants should start operating so-called cloud kitchens (shared facilities optimized for food delivery). Given that they have limited resources and have already carved out a niche, many will be better off doubling down on what makes them unique. 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—publisher of the wildly popular Fortnite—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 released a parody of Apple’s iconic 1984 commercial, which riffed on George Orwell’s dystopian novel as it introduced the Macintosh personal computer, to enlist support for its cause. It also filed an antitrust suit and, with Spotify, Match Group, and other Android and iOS developers, created the Coalition for App Fairness to lobby regulators. Those efforts caused Apple to relent on some policies—for example, by streamlining the process for approving app updates. In November 2020 it also announced that it would halve its commission for app developers with annual revenues below $1 million. The intriguing possibility exists that some sellers could turn the tables on their platforms and at least partly commoditize them. And consider restaurants in New Delhi, which in August 2019 mounted a coordinated public campaign against the large food-delivery MSPs they depend on: Zomato, Swiggy, and Uber Eats. The protest, headlined on Twitter with the hashtag #Logout, was aimed at forcing the platforms to reduce the deep discounts offered to consumers, the cost of which was borne by restaurants. The pressure forced Zomato’s CEO to publicly apologize and to accede to some of the demands. Going forward, it may be useful for sellers to know which MSP practices are likely to raise regulatory and antitrust concerns; that knowledge can point them toward the types of complaints that are most likely to succeed. Today, the easiest targets are restrictions on what sellers can do outside the MSPs they’re on. Those include requirements we mentioned earlier, such as the ones Apple has used to prevent developers from bypassing its App Store, along with exclusivity clauses that prohibit sellers from operating on other platforms. Alibaba is under investigation in China for its exclusivity clauses, and Grab has been banned from imposing them on drivers in Singapore. Other promising targets include the contract restrictions we’ve described—so-called price-parity and most-favored-nation clauses—that are widely used by hotel-booking and other price-comparison MSPs to prevent sellers from setting lower prices in competing channels. Some of those restrictions have been lifted in Europe in response to regulatory pressure, and Amazon quietly removed its most-favored-nation clause from contracts with third-party sellers in the United States in 2019 (as it had done in Europe six years earlier). Sellers can also push back against unfair competition from MSPs. Some platforms have used proprietary data generated by third-party sellers to launch competing products (both Amazon and Apple have been accused of doing so), and some engage in “self-preferencing,” treating their own offerings more favorably in search and ranking algorithms than those of third-party sellers (as Amazon and Google have been accused of). The recent Digital Markets Act in Europe provides further guidance on which MSP practices are likely to raise regulatory concerns. Most relevant to sellers, in addition to the practices just described, are attempts to prevent them from promoting their offerings directly to users obtained through the MSP, attempts to make them purchase services linked to the MSP’s core offering, and restrictions on their ability to access and port the data they generate through the MSP. . . . As new tools and technologies enable sellers of all sizes 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, as Anker and Thrasio did with Amazon. And the intriguing possibility exists that some sellers could turn the tables on their MSPs and at least partly commoditize them. For instance, the legal battle between Epic and Apple might well result in Apple’s losing its ability to exclude rival app stores and payment systems from the iPhone. If that happens, some developers will almost certainly offer their own specialized app stores; it’s not hard to imagine an Epic store for games or a Spotify store for music. More generally, we expect the emergence of new sellers that will create new types of platforms on top of iOS and Android platforms. The large MSPs of tomorrow could well be built by the MSP sellers of today. Editor’s note: The authors gratefully acknowledge research funding from the Singapore Ministry of Education Social Science Research Thematic Grant. Any opinions, findings, and conclusions or recommendations expressed in this article are those of the authors and do not reflect the views of the Singapore Ministry of Education or the Singapore government.

Don’t Let Platforms Commoditize Your Business

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