Two years ago my whole family traveled to Abu Dhabi to celebrate my niece's wedding (congratulations Sara!). The wedding took place at the Rixos resort. Needless to say, the wedding was magical when the bride and groom are phenomenal.
From a business standpoint, I'd like to suggest that there is a hidden layer that contributed to such an unforgettable evening: a value chain designed to nurture guest happiness. Let's dig up this layer.
A week before the wedding, my brother organized our reservations and, while he was doing it, he told me that the Rixos has an “all-inclusive, all-exclusive” concept. (He said "forget the wallet at home"). I laughed sarcastically. I guess we all know what "inclusive" means in an industry like this; at best, it refers to breakfast and the Internet.
Surprisingly, our experience began at the reception desk: the "all-inclusive, all-exclusive" at the Rixos has a much deeper meaning than what we used to experience elsewhere. Among others, it includes:
Underneath this “all-inclusive, all-exclusive” concept rests a deep conviction: creating an abundance of value and capturing a fair part of it.
I was astonished by how the Rixos reconfigured its value chain to create a spectrum of tangible and intangible values for their guests (by generously sacrificing a chunk of their margin in exchange for their guests’ happiness). The value chain is designed to share happiness across the physical boundaries of the resort. The “all-inclusive, all-exclusive” is intended to encourage the guests to spend their time out of their luxury rooms, interacting with each other, while the Rixos’ workforce takes care (your wish is their command) of almost everything you need.
By doing so, the Rixos magically removed “tension” from the equation. By creating an abundance of value, they managed to diffuse the roots of any potential tension (between guests and staff), which is very common in hotels.
I have never witnessed such a value chain that can mitigate the risk of potential tension on a 24/7 basis. When the guests are happy, relaxed, and calm, their interactions with each other as well as with the staff will yield a virtuous cycle of happiness and kindness. During our stay, we encountered zero incidents of discomfort. At first, it was scary a bit to see everyone, happy, relaxed, and calm — all the time.
Such a virtuous cycle of interchangeable respects and excellent services driven by the “all-inclusive, all-exclusive” concept was the seed for “owning our experience.”
Now let us move to the core of this post.
Apart from the above well-deserved candid appraisal to the Rixos workforce, this post is raising a red flag at the face of platform-based businesses. For the first time, I feel that platform-based business models are at risk.
As an example, for our future destinations, my family always starts with looking for the Rixos; if not available, only then we will revert to use Airbnb. I never thought that Airbnb would be the second choice (i.e., an afterthought). To clarify my point, I would like to drag down a few concepts from the above episode (value creation, margin, and own experiences).
In Platform Scale, Sangeet Paul Choudary explained how value creation shifted from process to interaction, “In linear pipes, value creation is centered on an end-to-end process that shifts value down the pipe, from producer to consumer. On platforms, the interaction between producers and consumers, facilitated by the platform, determines value creation and exchange.”
In Competitive Advantage, Michael E. Porter defines margin as “the difference between the total value and the collective cost of performing the value activities.”
Let us visualize the above two paragraphs within the context of this post.
On the left side, you see a pipe-based business (a hotel) with a full-fledged value chain that links and configure the processes, assets, services, products, personnel to deliver a value proposition (luxury room). In return, the hotel generates a profit margin (e.g., hardly up to 10%).
On the right side is a platform-based business (e.g., Airbnb) that enabled interaction between supply and demand. Such platforms efficiently (algorithmically) facilitates the mismatch between supply and demand. In the case of Airbnb, by digitizing trust, the business unlocked an abundance of supply to meet never-ending demand (a job well done). Yet, the means of value creation belongs to the host. Still, they generate a high-profit margin (e.g., above 10%).
If we revisit the above definition (Margin = Total Value — Collective cost), we will notice that the equation is not factoring in the weight of the demand side. The profit margin was viewed as a natural derivative of the value creation process.
With platform-based businesses, the economic forces changed, so does the structure of the profit margin. Let us visualize it.
Platform-based businesses’ profit margins are pressurized between two forces: producers’ value chains and consumers’ value chains. In other words, unlike incumbents, platform-based businesses’ margins are not derivatives of the platforms’ value chains. Platforms’ margins are the residual value, after subtracting the cumulative costs of the value created by the producers (e.g., host) from the perceived impact of the core value unit (delivered by the platform) on the consumers (e.g., guest) value chain. In a nutshell, margin yields from an interplay between value chains and network chains.
So, if the economics behind value creation decentralized and reallocated (among the platform, producers of value, and consumers of value) and the margin is a factor of such interplay, then, what gives such platforms the right to keep the pie for themselves exclusively? Maybe it has something to do with the notion, “owning our experiences?”
Businesses during the industrial age took advantage of their capabilities to integrate backward, securing the means of production (the supply side) and then locking-in (us) the demand side of the economy. Then came the internet flipping the equation upside down — by liberating the means of value creation, empowering the demand side, and commoditizing the supply side of the economy. Unfortunately, this happened with a misleading perception that the platform-based businesses liberated us, and in return, they owned (cosmetically via UI/UX) our experiences by delivering superior values.
These platforms indeed redefined the relationship between owning the assets and the usage of such assets. It is an audacious statement to say that they own our experiences.
Enabling interactions was the theme of the last decade, but it no longer justifies ownership of experiences. If a platform wants to own our experiences, it must evolve them.
Evolving our experiences is not a wishful thinking endeavor. To evolve an experience, the platform growth ideology must evolve, the value proposition must evolve, and the integration between its value chain and network chain must get strengthened.
During the past decade, platforms bridged the gap between us and our jobs to be done (e.g., as a host, Airbnb helps you to rent a space efficiently, and as a guest, Airbnb helps you to find a space efficiently), yet the “space” belongs to the host. Airbnb notionally owned the experience (this is what platforms want us to believe).
If incumbents (e.g., Rixos) can stomach some of their profit margins and pass it to their guests in the form of new value creation, why don’t platforms-based businesses do the same to amplify value creation among their users? Platforms must evolve from the decade-old layer (enabling interaction). At least from a cost perspective, they are in a better position to do so.
Value creation under the pipe-based model is directly associated with the cost embodied in the value chain. The fixed cost element is constrained by the availability of capital (or leverage ability). The marginal cost is constrained by the limited resources, thus limitation to scale. Yet, we saw how the Rixso went beyond the industry norms to differentiate itself by giving guests superior experiences.
On the other hand, value creation under the platform-based model is decentralized and reallocated among several value chains. Still, platforms incur fixed costs, but their marginal cost is subsidized by distributing the units of economics among the platforms’ users. In other words, their marginal cost is liberated from space and time. I will leave you with Airbnb’s CEO's old tweets to explain the above. In a tweet (64 characters) Brian Chesky encompassed the paradigm shift in economic forces (zero marginal cost, zero transaction cost, network effects, etc.).
Accordingly, providing authentic superior experiences is economically feasible for such platforms. Superior experiences by reconstructing profit margins have nothing to do with offering discounts or lowering prices. For example, the Rixos rates are not cheap; however, they reconstructed their margin to create more value for their guests by enriching their experiences. And when you enrich your customers’ experiences, they will grant you the right to own their experiences.
When Jeff Bezos said, “your margin is my opportunity,” he strategically achieved two things:
First, he brought terror to the heart of other businesses. He was declaring war on attractive margins. Mr. Bezos unleashed his Platfornomous to hunt for attractive margins; as a result, some of these players kept their margins (purposefully unattractive) low. Indirectly, Jeff benefited customers around the globe, including non-Amazon customers. We salute you, Mr. Bezos!
Second, he strategically diverted the attention of the business universe to the margin itself in a conventional way, whereas he was mastering what I am humbly labeling the “Margin Re-monetization.”
I am introducing the margin re-monetization as a variation to the Walmart philosophy. Instead of passing the saving to customers (favoring the demand side over the supply side), the margin re-monetization creates and transfers layers of values to all users (i.e., benefiting both sides, supply, and demand).
For example, while Jeff kept everyone mesmerized on their margins, he went to reconstruct the margin horizontally (margin re-monetization), by creating more value for the entire ecosystem. Thus, allowing for greater integration between Amazon’s value chain and the end-users value chains. By this, Amazon moved from experience enablement to experience enrichment. Via its fulfillment concept (storing, packaging, shipping, etc.) Amazon allowed the supply side to leverage Amazon’s value chain to create superior value to the demand side.
The margin re-monetization can apply to almost anything. Let us see how Amazon can leverage its boxes to move into the experience empowerment layer by intersecting with different ecosystems.
Today, the process of ordering moves in a linear and close-ended value creation process. The last stage in this linear process is extremely annoying (disposing of the box).
With the margin re-monetization concept, the box itself can generate multiple layers of value creations. Let us call them smart boxes or actionable boxes. Let’s explore this imaginary example;
1- After placing my order (book) on Amazon, I can select the type of the smart box (each box has its own story, functionality, theme, etc.).
2- These smart boxes are not merely advertisements vehicles (e.g., Fortniteboxes theme resemble the notion of spending quality time with your kids).
3- The box acts as a store of value, (i.e., delivering my book); the box, instead of being disposed of, starts to create new cycles of value creation.
4- The box then can be transformed into a Fortnite weapon, creating a social experience (me and my son ‘Facial). Once done, I can get more time to read my book (the faster I finish the book, the higher the chances for further purchases on Amazon).
5- The smart box (now Fortnite weapon) via a QR code will enable Faisal to start a virtual experience: unlocking the new Fortnite game mode on his PS4. Where he can collect redeemable v-bucks the more he progresses in the game (i.e., playing more).
6- Faisal via his PS4 can use the redeemable v-bucks to get discounts on future (Fortnite toys) purchases on Amazon. The smart box resulted in creating a commercial experience (i.e., a new customer to Amazon).
Margin re-monetization starts by reconstructing the foundation of the monetization framework from its grassroots. The platform monetization framework must align the right monetization approach and the right monetization strategy with the platform’s longevity growth stage, along with the evolution of the platform’s value proposition. Furthermore, the platform monetization framework must actively strengthen the integration between the platform’s value chain, end-users value chain, and the network chain. Below I would like to introduce a new tool that can help you towards this end.
Below is a hypothetical simplified example (Snapchat). In the upcoming post, we will dig deeper into exploring the functionality of the Platform Monetization Framework.
Snapchat started with a growth ideology by focusing on attracting teenager’s demographics by allowing them to be themselves away from parents and society’s radar. For such a job to be done, Snapchat’s value proposition rotated on disappearing messages (photos & videos). With such critical mass and same-side network effects, the monetization avenue may only be third-party advertising.
Margin re-monetization dose does not mean reinvesting in the same value proposition (i.e., introducing better filters). It means reinvesting part of the margin to create new value for the users.
What if Snapchat upgrades its algorithm to provide additional value on top of the existing value proposition? While using Snapchat augmented reality lenses, imagine if the algorithm can understand your context. For example, Snapchat can examine your tiny face tissues (tired eyes); accordingly, it suggests specific exercises or natural nutrition reenergize you.
What if the algorithm can access your calendar and learn that you will be attending a wedding soon; accordingly, Snapchat can customize an augmented reality lens with the latest makeup looks theme.
What if Snapchat aspires to climb up the experience ladder all the way to empower new experiences by intersecting with other ecosystems.
Leveraging on the above example, after Snapchat customizes an augmented reality lens with the latest makeup looks theme for you, and upon your selection, Snapchat based on your location can link you with a beauty salon or makeup artist (i.e., integrating social interaction with commercial interaction).
Or imagine if the algorithm can predict early symptoms of depression, (with your preauthorization); it can alert your loved ones about your condition or even link you to professional support.