Digital Transformation Project – Redjepakketje.com

14

October

2016

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For our digital transformation project, we analyzed Redjepakketje.com, which is a parcel courier provider in the B2B market. The parcel courier industry in the Netherlands is very interesting, because it’s dominated by one firm (PostNL), but due to the internet, smaller players have emerged to take a piece of the pie. And that pie is large, because the B2B parcel industry grows hand-in-hand with online shopping.

We conducted an interview with the founders of Redjepakketje.com to identify processes in their daily activities and their current business model. It turned out that Redjepakketje.com already implemented a lot of IT to take care of the planning, routing and communication with web shops of clients.

When analyzing the industry, one important aspect came to light: there is a huge power of buyers. Buyers (in this context companies) are very price-sensitive, demand a high quality and are able to switch to different courier providers, without a lot of costs. Buyers are very price-sensitive, because a small decrease in price per parcel could potentially have a huge impact on their profit (taking into account that a lot of packages are send by companies every day). This made us focus on IT solutions that would either increase the service level, or decrease the costs.

Three processes were identified that needed improvements:

Availability of drivers: Currently Redjepakketje.com uses regional managers that manually collect the dates and times that each driver is available to work
Hour registration of drivers: Drivers are on the payroll. Currently they send their worked hours via email at the end of each week. Due to information asymmetry between the driver and Redjepakketje.com, this could have the potential of moral hazard.
Estimated delivery time: Currently Redjepakketje.com estimated the delivery time of each recipient on a route in the morning. This estimate is bound to be inaccurate for the recipients that are at the end of a route, which leads to absence of recipients. This leads to more unnecessary costs for Redjepakketje.com that can’t be redeemed.

Our proposed IT solution is to create an integrated system that includes availability registration, hour registration and Track & Trace in combination with GPS in one system. The availability registration should be a digital platform on which drivers can select their own availability. This will decrease costs for scheduling and shifts the responsibility to the drivers themselves. The use of GPS in the track & trace system will result in more accurate estimated delivery times, because the delivery time of each recipient on a route can be updated throughout the day. Because of the use of GPS and timestamps, hour registration of worked hours by drivers can be done automatically based on the GPS data.

This IT solution does not require Redjepakketje.com to change their business model, but it does improve their chances for their biggest opportunity: collaborating with large online e-commerce platforms. If they can shift their focus from small business to larger e-commerce platforms, their piece of the pie will become a lot bigger.

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Facebook: Shouldn’t 2 sides be enough?

26

September

2016

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One of the biggest multi-sided social platforms is Facebook. Facebook connects users with app developers, advertisers, websites and companies. The subsidy side has always been the users, because the users have the strongest positive cross-side network effects on all other sides and are the most price-sensitive. More than 90% of Facebook’s revenue comes from advertisers, but still, Facebook has chosen to open up the platform to two other sides, namely The Facebook Platform (for app developers) and Business Pages in 2007. I’d like to share my thoughts on why I think Facebook did this.

Almost everyone knows what Facebook is. It is a social network founded in 2004 as communication tool for students at the Harvard University. By that time, the membership was restricted to only serve Harvard students. But because of the huge demand, it quickly loosened its entry-barriers by allowing other universities and high school students to join the platform. In 2006 Facebook launched the newsfeed (although not as advanced as it is now) and other social tools, such as messaging, discussion boards, groups and events, which all boosted the user engagement (30% increase in average time-spend on Facebook) and installed base. In 2006 the number of active accounts was 12.000.000, which made the platform hugely attractive to advertisers. In 2006 Facebook’s revenue was $48.000.000, all coming from the advertisers-side.

In 2007 Facebook launched Facebook ads and Social ads, which allowed advertisers to target specific groups directly. This was also the year that Facebook opened up two new sides to the platform: Businesses (Pages) and App developers (Facebook Platform). Businesses (Pages) were not monetized directly; a business could simply create a company-page for free. However, Facebook was able to monetize the App Developers directly by charging a fee for each transaction an app made to the user. But if you quickly scroll down to the revenue chart in figure 3, you’ll see that this revenue (labeled as ‘other fees’) is just a small portion of how Facebook monetizes its platform.

So why would Facebook open up these two new sides, facing a lot of software adjustments, if the direct revenue of these two sides is such a small portion of Facebook’s revenue?

Although maybe not intentional, Facebook unleashed huge positive cross-side network effects directed at users by opening up the Facebook Platform and Pages for Businesses. More pages and more apps resulted in more users and higher user engagement. At the end of 2007 (the year of the introduction of the two new sides) the installed base was 58.000.000 (an increase of 383% to 2006) which grew substantially every year.

chart users revenue

Figure 1. Facebooks user installed base and revenue 2008-2011

To understand why this is so important for Facebook, I’ve illustrated the network effects between (and within) each side of the platform in figure 2. The users are in the dead center; being the driver of the growth of all other sides. Interesting to see is that the side that produces almost all revenue (advertisers) is the only side with a direct negative cross-side effect on users. So what Facebook needed to do, is to increase (and introduce) sides that have a positive cross-side network effect on users to balance out the negative cross-side effect that the advertisers have on the users. And that is exactly what the Facebook Platform and Business Pages did.

network effects

Figure 2. Cross-side and same-side network effects within the Facebook platform

So yes, direct revenue of Business Pages and App Developers are very low. But the most valuable part of the two sides is that both have a huge positive cross-side network effect on users. The ecosystem Facebook has created makes sure the installed user base was constantly growing, driven by same-side positive network effects as well as positive cross-side effects from both the Facebook Platform (apps) as Business Pages, making the platform hugely attractive for advertisers. And to make it even better: Business Pages and App Developers became advertisers themselves as well.

chart revenue

Figure 3. Facebook quarterly revenue from 2012 – 2015. Source: annual reports

Adobe Creative Cloud: Pay more and more and more

21

September

2016

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When discussing price differentiation strategies in the lecture, one company popped in my mind: Adobe Systems. And not only because they’ve used Versioning and Group price differentiation strategies from very early on, but also because they’ve drastically changed their business model in 2013, in favor of the subscription (rent) model.

Short History

Adobe Systems is an American company founded in 1982 that has changed the publishing, printing and creative industry throughout the years with the introduction of their PostScript language, PDF format, Illustrator, Photoshop and much more creative software.

In 2001 Adobe launched its first Creative Suite, containing all creative software programs in one bundle. With information goods, such as software, the costs of the first product are very high, but marginal costs of reproduction is very low, so Adobe needed to maximize its sales in terms of volume. This is clearly illustrated in the revenue graph at the bottom, showing that the growth of revenue is a lot larger than the growth of costs over the years.

But while the number of software programs grew with each new edition of Creative Suite, so did the price, which made in unaffordable for a lot of people. Thus, Adobe needed some pricing strategies to get their product in as much hands as possible. I’ll briefly discuss the price differentiation strategies based on some examples and later move on to the subscription model.

Versioning

With the introduction of Creative Suite 3 in 2007, Adobe offered six different combinations of the software programs which were focused on specific professions, often offering a ‘Standard’ and ‘Premium’ version. The editions by that time were:

Design (standard or premium): containing software for graphic designers, while the premium version included additional software programs
Web (standard or premium): container software for web developers, while the premium version included additional software programs
Production Premium: containing software for video production companies
Master Collection

Adobe knew that it could maximize its revenue by bundling their software specific for a certain profession, because they could lower the prices of the bundles that contained less software, which would be appealing to the people who have a lower willingness to spend. For instance: a graphic designer rarely uses Premiere Pro (video-editing software), while a video producer probably won’t even touch DreamWeaver (web-development software). This pricing strategy could thus be considered as a group pricing strategy as well, because it created groups in an organic way, charging each group a different price accordingly. The reason I list this example under Versioning, is that besides the fact that these unique bundles are a form of “versions”, within each “version” people could choose to have the “standard” or “premium” version (whichever they could afford or were willing to pay for). In the very early days of Adobe, they even had different price levels within an individual software program. So for instance, Photoshop had a “standard” and “premium” version, with the “premium” version being more expensive and offering more features. This pricing strategy has enabled Adobe to increase their sales by becoming affordable to different consumer groups and thus, maximizing their revenue.

Group pricing

Another price differentiation strategy they’ve implemented was Group pricing. Adobe introduced a Student and Teachers edition, which were identical in terms of software and features, but costs 70% less than the original edition.

A big question with group pricing is how to be able to charge a specific group less than another group. The prices of Adobe’s Creative Suite were out in the public (for both companies as students), so why did companies still pay a premium for the exact same software?

The answer is rather simple. Throughout the years Adobe has become the market leader in the creative software industry. They’ve pretty much set the standard. They’ve designed their software so well, and made their individual software programs so well compatible with each other that companies often have no other choice than to use this superior product.

Sure, Abobe would probably lose some revenue by people faking to be a student. But with some security checks in place (such as that the Student version should only be run on a private computer, the student or teacher needs to identify himself with a student card) , Adobe did get the opportunity to set multiple prize levels for the same software so it could maximize its total revenue that otherwise would have been lost.

Subscription model

In 2013 Adobe made a drastic change to its pricing structure. With the release of Creative Suite 6, Adobe offered the “Master Collection” (which is the full software package) as a CD version for $2.000. Adobe also offered the same software on a monthly subscription bases. For $20 a month, users were given access to one of the programs, and for $50, the user would have access to the whole package (including all creative software programs). But the big shock for the users was that Adobe announced that in the future it would only continue the subscription based model, changing the name from “Creative Suite” to “Creative Cloud”. People that would buy the CD version would not receive any more updates, bug-fixes or new features, essentially forcing users to make the switch to the subscription model. In addition, Adobe increasingly added more value to the subscription model by exclusively deliver new creative product innovations and features to the “Creative Cloud” subscribers to attract the former users of “Creative Suite” and to attract new users as well.

Furthermore, Adobe integrated a smart bundling pricing strategy. A lot of users by that time often used at least one (but often two) of the programs offered in the Creative Suite; a photographer always uses Photoshop, but in addition, almost always also uses Lightroom, while a video producer always uses Premiere Pro, but almost always also uses After Effects. So taking this into account, the bundle of the total Creative Suite (“The Master Collection”) became very appealing (paying $40 per month for just two software programs vs. paying $50 a month for the whole package annually).

In this new pricing structure, Adobe still offers price differentiation on groups; students can get the same subscription at around a 70% discount.

Although a lot of people were initially not happy with the subscription model, I do believe it has enabled Adobe to set the boundaries for usage to an all-time low. For $20 – $50 dollars a month people can start using the most advanced creative software, which lowers the bar compared to paying $700 for Photoshop alone upfront (and around $2000 for the whole package).

As Adobe stated itself in their Form 10-K 2013 :

“Adoption of Creative Cloud is transforming our business model and we expect this to drive higher long-term revenue growth through an expansion of our customer base by acquiring new users through a lower cost of entry and delivery of additional features and value, as well as keeping existing customers current on our latest release.”

If we again look at the revenue graph at the bottom, we see that the introduction of the “Creative Cloud” in 2013 did have a negative impact on revenue, but quickly recovered within two years as it starts to attract new customers every day; customers who probably wouldn’t have bought the whole package for $2000, but are willing to pay $50 per month to make use of Adobe’s software. So this pricing strategy allows Adobe to attract more customers and by doing so, they can maximize their revenue for the years to come.