During the last few years we have witnessed the rapid growth and positioning of various digital platforms. Even before the “new normal”, companies retail and from other sectors began to walk the path of digital transformation in order to adapt and compete with the new agents who, with remarkable speed, managed to attract and retain a significant number of consumers.
Amazon is a clear example. Jeff Bezos, founder and CEO of Amazon, sums up the cause of the success of the well-known platform in three words “obsess over customers”. The customer-centric value proposition and marketing strategies customer experience aligned to offer Amazon consumers a personalized shopping experience would be the pillars of its success.
New technologies and digital markets
New technologies are used by companies like Amazon to offer a more attractive value proposition to consumers. Big Data, Artificial Intelligence and the Internet of Things have become indispensable tools for the success of agents in digital markets.
However, not all companies that use these tools have achieved the same level of success. To understand this situation we must identify the elements that promote the accelerated growth of digital platforms.
The recipe for success
Digital platforms have the following characteristics:
Multilateralism and Network Effect: In P2P digital platforms, the entry of a new user to a digital platform produces effects on the value of the good or service offered to other users. A platform with a greater number of users will be able to obtain more data that will allow it to improve the characteristics of the attribute package offered to consumers. Thus, it is highly probable that those companies that do not have the same number of users will not be able to compete with an already positioned digital platform.
Data-driven: The large amounts of data that are collected and analyzed, for example, through the use of Artificial Intelligence, will generate a better position of the platform compared to its competitors. Although the use of Artificial Intelligence would imply a high investment in terms of the algorithm learning process, once this first stage is overcome, the cost of data processing would decrease considerably.
Scale economics: Investing in technology is a high fixed cost; therefore, as the number of users of the digital platform increases in the long term, the average costs are decreasing.
Exchange costs: It is usual that the transfer of a user from one platform to another implies incurring costs that end up discouraging the consumer. These costs could translate into the lack of interconnection for the transfer of information stored in the cloud or the impossibility of using a device linked exclusively to the digital platform.
The aforementioned characteristics demonstrate how digital platforms make use of data collection and network effects to improve their competitive capacity in the market.
As can be seen, data collection and processing play an important role in the development of the market power of digital platforms. The greater the number of customers, the greater the amount of data and the greater ability to develop personalized offers and use the information collected to continue increasing the number of users. This vicious circle would justify that a digital platform prefers to attract the largest number of users, even if this implies a radical decrease in the price of the products or services offered.
However, not all companies are able to tolerate a strategy of this type, so it will require sufficient financial resources to allow the company to assume the losses derived from setting prices below the market price, even if the price it is less than marginal cost.
In conclusion, a strategy that prioritizes increasing the number of users and collecting data will not only provide a better experience, but also increase the network that supports the platform. Those measures adopted to attract more consumers in an initial stage of the business are generally linked to the granting of additional attributes in the offer. Price reduction, free delivery, preferential attention, will be mechanisms that motivate consumers to look at a new competitor.
However, it must also be borne in mind that new entrants face significant challenges. Displacing a company with a great capacity for data analysis - with the possibility of carrying out targeted advertising and personalized offers - and a loyal network will imply hard work of innovation, efficient allocation of financial resources and a differentiated value proposition.
The opinions expressed in this article are those of the author and do not necessarily reflect the views of the administrators of The Crypto Legal blog or the Lawgic Tec association.