Uber is a company that has been talked about a lot. When we talk about platforms in business schools, Uber is one of the most frequently cited examples. We might think of Uber as a successful company because we have heard about it so often, but I would argue that this is not the case. In fact, Uber has suffered immensely with profitability. Despite having its best ever quarter in terms of revenue in Q2 2022, it still racked up losses of 2 billion dollars (Browning, 2022). So let’s look at a couple of possible explanations why Uber is struggling with profitability.
First, Uber is a two-sided platform, with drivers on the one side and riders on the other. One of the reasons why Uber has struggled to make a profit is that people on both sides can switch between different platforms easily. For example, in the US it is not rare to see drivers with both Uber and Lyft logos on their cars (Santoro, 2018). The drivers have both apps and can easily compare to see which one offers a higher fare. If they are not happy with Uber, they can change to Lyft in a few seconds. Same goes for the riders. I find myself doing this quite a lot as it takes only a minute to check across multiple platforms for the cheapest ride or the fastest pick up time. Because the switching costs are low, Uber faces a problem of retention and has to compete for both riders and drivers.
Second problem with the Uber business model is that it is fairly easy to imitate and barriers to entry are low (Cohan, 2019). We have seen lots of local competitors copying the business model. Examples of these are Yandex in Russia, DiDi in China, and Bolt, an Estonian company, with strong presence in Europe (Keane, 2022). Tough local competition combined with low switching costs means that prices are pushed down, customer acquisition becomes more expensive, and Uber (along with the whole industry) faces challenges with profitability. Due to these reasons I believe that Uber will continue to struggle with profitability in the foreseeable future. Do you think that the business model and industry characteristics are such that there is no way for Uber to achieve sustained profitability? Or do you see Uber sustaining profitability in the near future?
Browning, K. (2022, August 2). Uber Posts Record Revenue but Loses More Money From Investments. The New York Times. Retrieved October 8, 2022, from https://www.nytimes.com/2022/08/02/business/uber-quarterly-earnings.html
Santoro, P. J. (2019, June 11). Uber Switching Costs Could be A Lyft. C[IQ] Customer Intelligence Solutions. Retrieved October 8, 2022, from https://www.c-iq.com/blog/2018/11/2/uber-switching-costs-could-be-a-lyft
How Revolut is using network effects to reach profitability
8
October
2021
No ratings yet.
The rapid rise of UK-based fintech Revolut is well-documented. Founded in 2015, the company already has over 15 million users, with its services available in all EEA countries, Australia, Japan, Singapore, Switzerland and the United States (Revolut, 2021a). Revolut’s initial value proposition was centered around two key pillars: its fully digital and lightning-quick onboarding and services, enabled by the customer-friendly mobile application, and the ability to instantly exchange currencies at very advantageous rates using the application’s ‘multi-currency wallet’ (Crow and Megaw, 2020).
However, since the company’s launch, its ability to reach profitability has been considered questionable (Detrixhe, 2019). This was given by the intensity of the competition, coming from similar players (e.g., Monzo, Monese) and from incumbent banks accelerating their processes of digital transformation, and by the low-margins sources of revenue characterizing the initial iterations of Revolut’s product. While registering strong user base and revenue growth, Revolut’s losses continued to mount:
Sources: Curry, D. (2021), Revolut, Business Insider
Over the past 12 months, though, the fintech’s ‘weapon’ for becoming profitable and winning in the market became apparent: network effects. Network effects, or externalities, can be defined as the change occurring in the value of a product or service due to the increase in the number of consumers using it in a shared way (Eisenmann, Parker and Van Alstyne, 2006). They can be either positive (i.e., the value of the product/ service increasing with the number of users) or negative and their influence can be felt on the ‘same-side’ (i.e., the value of the product/ service changes for one group of users when the number of users within that group is changing) or ‘cross-side’ (i.e., the value of the product/ service changes for one group of users when the number of users of a parallel group employing the product/ service is changing).
In Revolut’s case, positive same-side network effects were at the core of their spectacular user base growth. More specifically, as the number of users rose, the value of Revolut’s offering increased for all customers due to the ability to conduct instant, fee-less transactions with more and more people, using a growing number of currencies. This was further enhanced by the implementation of attractive referral schemes, with €5-10 rewards available for existing customers for each new user brought to the platform (Revolut, 2021b). As the user base gained critical mass, the company was able to start segmenting their customers and implement versioning, offering different packages of extra services (e.g., metal physical cards, access to airport lounges throughout the world, etc.) on top of their free offerings for various monthly subscription fees.
While the subscription plans quickly became a key revenue source, accounting for ~30% of Revolut’s income in 2020 (Woodford, 2021), it seems that leveraging same-side network effects was just the first step in the company’s path to profitability. In July 2021, Revolut announced the rollout of the ‘Revolut Stays’ service for its UK users, effectively entering the online travel market (Blew, 2021). Revolut customers can now book holidays all over the world at accommodation providers integrated in the application, even receiving 10% cashback on their booking costs if they are subscribed to one of the more expensive paid plans. The implications of this move are significant, as it signals the company’s likely strategy going forward: creating positive cross-side network effects to generate new and more profitable revenue sources, on the path to potentially becoming a ‘super-app’ such as WeChat in the Chinese market.
In this specific case, Revolut comes with a highly attractive value proposition for accommodation providers, namely a customer base already larger than 15 million. To put it into context, Expedia, the 2nd largest player in Europe has ~20 million customers, with a market share of 13% (Statista, 2021). As the number of users will grow further, more and more accommodation providers will want to be part of Revolut Stays, in order to get access to them. And as the offering on Revolut Stays becomes more diversified, the number of Revolut users itself will be further boosted by travelers looking for the best options available. This ‘virtuous circle’ is replicable with other segments of the travel industry, such as flights booking, car renting and insurance, with Revolut indeed announcing it plans to start offering these services as well in the near future (Browne, 2021).
From hereon, the opportunities become endless: if one can conduct all banking operations and fulfil their leisure travel needs from one application, at the highest possible convenience, why not also order a ride from it while on holiday? Or find a restaurant, book a place in advance and confirm it with a down payment? Or even use it to chat with the new friends made during the holiday? As WeChat’s model has proven in China, the significant impact of the network effects and the convenience factor can make it possible for just one application to go to the status of ‘super-app’, allowing users to conduct most of their day-to-day activities within no more than 5 screens, while reaching record levels of profitability (BBC, 2018).
Whether replicating a similarly far-reaching model is possible in markets such as Europe or the US, where competition in all segments is much stiffer, remains doubtful. However, Revolut’s continually growing user base will certainly represent a more and more attractive proposition for players across multiple industries, allowing it to unlock new sources of positive cross-side network effects. Over time, these are likely to turn Revolut into a profitable business and make it one of the major players in today’s growing platform economy.
Airbnb Gets Support in a Fight for Business Travelers
7
October
2017
No ratings yet.Airbnb has gained reputation as the world’s largest online community marketplace that connects people looking to rent their homes with people who are looking for accommodations. It has taken away profits from hotels all over the world, and is valued nowadays at $31 billion (Thomas, 2017), which is more than the market value of Hilton ($23.33 billion) and Hayat chains combined ($6.87 billion) (Skift, 2016).
Nevertheless, the war between Airbnb and traditional hotel chains is not yet over. In 2008 Airbnb entered the fight by targeting leisure consumers who required cheaper prices and larger variety of accommodations than traditional hotels could offer. Nowadays, the growth area with a largest potential for Airbnb is the business market. Even though business guests have for long remained loyal to traditional hotels, their approach to travel is changing. They demand the opportunity to immerse themselves in the area they are travelling to fully. In order to win business travelers’ attention, Airbnb launched a “Business Travel Ready” feature in 2015, which helps users select accommodation that matches specific search requirements, such as comfortable desk and Wi-Fi.
This year it is time for Airbnb to make the next move in a fight for business consumers. Airbnb has recently announced a trial partnership with WeWork (Mogg, 2017). WeWork is the world’s largest provider of shared work spaces, renting desks to freelance workers, startups and larger companies that don’t want to sign an office lease (Zaleski, 2017). It offers everything you need: a super-fast internet, business-class printers, micro-roasted coffee, office suppliers, daily cleaning, fresh fruit water, comfortable common areas. While booking a room on Airbnb’s site during the trial period, business travelers will be able to reserve a Spot at WeWork location closest to the place where they are staying. This partnership is expected to strengthen both platform businesses. Airbnb hopes to attract some business travelers who need to focus away from their unmade bed, and WeWork expects to enlarge its customer base by getting closer to young entrepreneurs.
Even though the platforms have not signed any permanent deals yet, the efforts of Airbnb show that the platform wants to extend its services beyond just accommodation. Would you book a spot in a modern and stylish WeWork location via Airbnb? Do you think the partnership will succeed?
References:
Mogg, T., (2017). Business Travelers, Airbnb Is About To Make It Easier To Find A Workspace. Available from: < https://www.digitaltrends.com/web/airbnb-wework-business-travelers/> Accessed [07-10-2017].
Skift, D., (2016). Airbnb’s Latest Investment Values It as Much as Hilton and Hyatt Combined. Available from: Accessed [07-10-2017].
Thomas, L., (2017). Airbnb just closed a $1 billion round and became profitable in 2016. Available from: Accessed [07-10-2017].
Zaleski, O., (2017). Airbnb Teams Up With WeWork to Lure Business Travelers. Available from: Accessed [07-10-2017].
Nike as a Platform Business
1
October
2016
No ratings yet.Nike wants to bring inspiration and innovation to every athlete in the world. The company creates products, services and experiences. Nike focuses on the future by constantly innovating using the statement ‘beating yourself is a never-ending commitment’. This ensures that Nike survives in an ever-changing economy.
In 2012, Nike introduced the revolutionary Nike+ FuelBand, a wearable device to measure movement and different activities, and from that moment the customer tech and fitness industry was born.
However, in 2015, the Apple Watch was introduced by Apple and Nike became a third-party application on this Apple device.
Nike decided to focus again on fitness data platforms with communities, like Nike+ and NikeFuel. NikeFuel makes it possible to calculate activity, compare and compete with friends or other Nike+ members and become more motivated. Nike+ is the overall account for the applications, services and website of Nike with 30 million members. Both platforms provide connection and social interaction between users.
Nike strongly believes in the power of collaboration and therefore the company has recently started with organizing hackathons. Nike makes platforms available for developers and provides them with all data gathered by Nike for self-created applications.
Nike also launched Nike+ Fuel Lab, a partnership program to collaborate with industry leading companies and to use emerging technologies to create innovative solutions. A platform that is more open and free is more likely to grow and connects users with your business to establish co-creation. The more people are connected to a platform, like NikeFuel or Nike+, the bigger the community and the higher the value of the platform. The value for users, for example developers and suppliers, depends on the number of other platform users, for example Nike customers.
Through hackathons, the Nike+ Fuel Lab and partnerships with other fitness tracking technologies, Nike’s applications integrate with more partner devices, applications and fitness equipment. It can be concluded that Nike developed itself as a real platform business.
What do you think will be the future of Nike as a platform business?
Sources:
Li, T. (2016) ‘Platform Mediated Networks’, Information Strategy Session 4, Rotterdam (26th of September 2016)
