From The Freemium Business Model To An Aggregation Business: How To Focus On Service And Capture Value?

From The Freemium Business Model To An Aggregation Business: How To Focus On Service And Capture Value?
From The Freemium Business Model To An Aggregation Business: How To Focus On Service And Capture Value?

More and more startups are popping up, offering customers new services and products that save them money. And while their offerings are attractive, they have one shortfall: They don’t capture value for the company.

Fortunately, there is a strategic model that startups can follow that allows them to focus on service and capture value at the same time – double play. Building double play into a startup operation means that a startup understands the current positioning it has and then find ways to capture extra value in that process. In double play, there is a high level of dependency within the business units, making it possible to create a virtuoso circle of value capture within a symbiotic relationship. There are three core phases in creating double play: discovering the best product your business can offer, identifying value points in your company, and then monetizing that value.

From the freemium business model to an aggregation business model, the 21st century digital economy has shown that serving customers well may not necessarily provide sustainability for a company unless the firms actively find ways to capture value in the process. It sounds obvious, but many media and e-commerce companies have gone bankrupt, despite improving customer experiences through digital channels, simply because they neglected to capture value.

For instance, many startups emerged and provided cheaper or completely free means of making national and international calls via the web, but later collapsed when they struggled to capture value. A direct 30-minute traditional phone call from Lagos to New York may cost $10, but using an app, the same call may cost an equivalent of $1, where that dollar is the cost of mobile internet services spent on the call. If the app is free (and most are), it has destroyed a value of $9 for the traditional phone operator, even though the app maker has not captured any for itself.

This illustration is typical in many sectors where startups are providing services to customers to save them money, but are then unable to capture value for themselves, both in the short and long term. The overriding motivation is capturing market share, but much of the time the path to profitability becomes convoluted and the sustainability of the business is threatened.

Some companies, however, manage to pull it off. Looking at these examples, we can see how they are capturing value in what I will call double play. Double play posits that firms mix market positioning of products to maximize strategic competitiveness: A company could be delivering service in one sector while capturing value in another. And most times, what is helping the firm to thrive goes beyond what many people associate with it. If Amazon decimates many brick-and-mortar stores via low margin retail sales, it would capture value as many retailers go digital, by selling to them cloud computing services via its Amazon Web Services (AWS). The profit margin from Amazon AWS, well ahead of the e-commerce business, is a critical component of Amazon’s high market capitalization. Yet, without the e-commerce unit, Amazon would not have built the massive cloud computing infrastructure required for AWS in the first place.

Startups, too, are using this playbook as they build and grow. In Africa, many generations of e-commerce companies have struggled, starting with the first clone of Amazon called Kalahari. Most of these companies focused exclusively on e-commerce, and with competition from open markets and other alternatives, most went bankrupt. But recently, players are adopting the double-play model. That model is repositioning some of them like Jumia, an e-commerce company, which launched Jumia Pay and a gaming service, and Konga which also launched Konga Pay. Largely, through the fintech operations, they can monetize the immense low-margin transactions which happen on their platforms via payment-processing commissions captured in the fintech unit.

Building a double play into a startup operation should not necessarily be dependent on the availability of funds and resources. The most important thing is for a startup to understand the current positioning it has – for example, processing many e-commerce transactions, as Jumia does – and then find ways to capture extra value in that process. For a company that was building warehouses, distribution networks, and buying vehicles, adding a payment layer on its operation is certainly not out of order, financially. In double play, there is a high level of dependency within the business units, making it possible to create a virtuoso circle of value capture within a symbiotic relationship. Simply, it goes beyond having multiple revenue streams in a business.

There are different variants of capturing value. Transportation startup ORide in West Africa was known to be undercutting its competitors on pricing. Many customers flocked to its platform because of the massively discounted rates. But what many did not know was that ORide had built its own payment layer, making it possible to take a commission from any transaction that was passing through its network. Competitors which matched its transportation rates, but without the fintech unit to capture the processing commissions, were nearly imperiled.

In the automobile industry, Africa’s largest indigenous automobile manufacturing company, Innoson Motors, has launched a ride-hailing unit, as it works to grow market share from dominant brands like Honda and Toyota. Many expect this ride-hailing unit to be a loss-making business. But what Innoson Motors is doing is a strategic part of the double play-model: It can lose money on the ride-hailing hire purchase agreements with many of its independent drivers, but it would capture value as the ubiquity of the vehicles on the roads will stimulate people to consider its brands. In other words, even if it loses money on the ride-hailing, value is captured through extra sales of its vehicles.

In these companies, one thing is evident: There is an investment which anchors the capturing of value through other ways. In my small family fund, which has invested in more than 30 startups in Africa, Germany, United Kingdom, and United States, we use the double play in our investing thesis, especially for digital companies. Our process has three core phases:

Discover And Deepen The One Oasis

Just as in physical geography where the oasis is the area in a desert that sustains lives of the inhabitants, the “one oasis” is the best product in a business, defined by many variables which could be market share, brand equity, or profitability. Other products depend on that one oasis to thrive within the firm. For example, in Amazon, the e-commerce unit is the one oasis, as that is what most know Amazon for. Our model is to accelerate investments around this main product, to make it the best possible, in a world where few are dominant in business categories. In Zido Logistics, a Lagos-based digital logistics startup, the one oasis is helping customers move their goods as that is what the company is known for.

Identify The Value

Once the best service or product has been identified, the next phase is defining the possible value points in the company. In Zenvus, a Nigeria-based agtech, the value is the farm data, not selling precision soil sensors. In Krozu, a Florida-based SaaS startup, the value is productivity advisory, not the collaborations. In our Dubai-based uber-for-helicopter, Vetifly, the value is on infrastructure ground services, not just on tickets.

Monetize The Value

Finally, we find ways to capture value. But this capture does not have to be on the one oasis. In Zido Logistics, we make more money on invoice financing of supply chain than in transportation, which is what everyone knows the business for. The invoice financing unit is the double play which would not have been possible without the logistics arm.

For any company, understanding how to capture value in any business playbook is particularly important and it does not have to be on the most popular product of the company. For startups, specifically, the optimistic attitude of “If we provide the best services to customers, value will come” may not be evident in a world where platform businesses like Google and Facebook are dominant and most things are already free. So, at the early phase of the business, defining how value would be captured is especially critical, even as users are added. But even for mature companies, there is need to assess your operations and find if there could be a double play around your one oasis.

originally posted on hbr.org by Ndubuisi Ekekwe

About Author: Ndubuisi Ekekwe is a founder of the non-profit African Institution of Technology and Chairman of Fasmicro Group with interests in technology, finance, and real estate.