All through the weekend I read the biography of Jack Ma and his juggernaut, Alibaba. Okay, we all know that running a B2B platform takes you away from the ever so “iffy” crowd of consumers. It even takes away the huge burden of trying to dabble into the expertise of a vast logistics network and supply-chain. Ma recognized the leverage this model offered him and a year later after founding Alibaba, he got his first seed funding and an exposure to the Western markets (Hello, Sachs!). It was this leverage Alibaba enjoyed, and with enough cash in reserves, Ma launched the dominant C2C platform; Taobao.
Now, this isn’t an ode to Jack Ma (there are literally a billion of them out there, go figure!), however, what amazed me was how Ma recognized the need for switching costs to ring-fence his companies and lock-in customers in a value-chain. Technically, switching costs are the extra costs borne to a consumer in switching from Brand A to Brand B. For Ma, the essence of having an “Ecosystem” automatically creates such switching costs for his customers. An ecosystem (in tech/startup world this is known as “Platforms”) is a business model that takes a basic business service and builds other complimentary services on-top in order to fully service the needs of a customer without having to consider a substitute / competitor.
Now, looking at the history and emergence of Alibaba, we can see that the first major incentive that locks-in any customer (myself included) is the “Network Effect”. Meaning that there’s incremental value for me being on Alibaba, as there’s a guarantee of a community of business people like myself seeking to interact with each other daily. Also, in the early stages of Alibaba’s growth story, the platform was basically FREE! While this seemed fool-hardy then, it essentially allowed Alibaba build, reach and maintain critical mass, and also scale. Then, Ma went hard on inculcating “Trust-As-A-Policy” on the platform. There were the Trust Pass, Trade Pass standards, e.t.c. This was immense in positioning Alibaba as a global player.
We now take a look at Taobao and how Ma built a model for locking-in customers. Even when it was created, Taobao faced the huge challenge of going toe-to-toe with the global giant, eBay who had recently teamed up with EachNet with a combined market-share of 80% of the Chinese auction market. However, Ma, just as he did with Alibaba, offered free inclusion for prospective customers seeking to use Taobao; something eBay couldn’t have contemplated. The result of this was that Ma burnt liquidity, while he chased critical mass. Three years later and tens of millions of dollars too, Taobao reclaimed market-share and was positioned as the largest auction platform in China. The growth was phenomenal.
Another case was when Alipay was created. Knowing that he faced stiff competition from global brands already present in China (Paypal had already made inroads in the Chinese market), Ma recognized the need for switching costs as well. But this was no mean feat, it had to take total stealth moves, cash to burn and the resolve to see it through. So, he made it free to carry out transactions via the Alipay portal. This meant no transaction costs whatsoever (heck! you could even move funds via the portal). While this was greatly cash-intensive, it was 100x effective! The growth numbers were magical and Alipay won eventually.
It is also important to note that Ma made it mandatory to have 100% efficiency in customer service delivery. This he learned from looking at the Amazon model.
To bring this down home here in Nigeria, it is really imperative our e-commerce platforms learn from history. Yes, the e-commerce market is barely a decade old, but it is already matured. However, you see e-commerce ninja brands churning out services that really aren’t beneficial to me or any other consumer out there. A major problem has always been the low cost of switching across platforms. How do they know what to know about their customers? How do they create incremental value for each customer? How do they map a consumer’s journey across their platforms? Do their customers feel part of something great each time they access their platforms? How about scaling via network effects? Why introduce a payment platform when you can easily find other pain-points to satisfy? I mean, the questions are endless.
However, the platform that will win in the end won’t do so with alchemy, rather it will start by answering those very deep questions. And like Ma will always say: “Alibaba is just an ecosystem that helps small businesses to grow.”