Print this chapterPrint this chapter

How Data Informs Business

Firms and Data

Business Models for Digital Platforms

Emerging business models for multisided platforms are based around the bargaining power of different participants to drive revenues and organize dispersed information to make it available to market participants. By using platforms, firms can drastically slash transaction costs, creating new markets. By using social networks combined with such digital platforms, firms can leverage a "long tail" of market participants, that is a large number of customers with specific product preferences, or a large number of products that sell in small quantities. So-called long-tail effects on digital platforms give users more choice, enabling them to search for less common items or services from foreign countries, such as Indian music or Latin American cultural artifacts. The value to advertisers of capturing long-tail marketing data fosters marketplaces, such as Jumia in Africa (see box 5.1) and MercadoLibre in Latin America. Other differentiators may include price discrimination, delivery, geographic reach, and wholesale versus retail.

Box 5.1 Jumia: "Cash on delivery" e-commerce in Africa

Jumia is an African online shopping website, primarily for electronics and fashion goods, developed through a strategy of envelopment and service diversification. Jumia launched in Lagos, Nigeria, in June 2012 with initial funding from Rocket Internet (Germany), MTN (South Africa), and Millicom (Luxembourg). It has grown through acquisitions and foreign expansion and, in fiscal year 2017, it generated some €93.8 million in revenue (US$111.4 million), although it continues to post substantial losses. It had 2.2 million customers across 14 countries in Africa, though it also offers sales elsewhere.

As in most of Africa, Nigeria mostly uses cash, with 99 percent of transactions cash related. When launched, according to MasterCard, some 59 percent of the Nigerians questioned the safety of online transactions and 43 percent were concerned about the quality of the products delivered and would rather buy from stores where they could physically inspect products.

To address these constraints, Jumia uses a cash-on-delivery mode of payment. Consumers can pay by cash or with a point-of-sale terminal and receive their receipt on the spot. This method addressed consumers' concerns, giving them the human contact associated with visiting a physical shop while building customer trust as well. Some earlier e-commerce ventures, such as kasuwa.com and sabunta.com, had failed and the incubator investor, Rocket Internet, merged and rebranded them as Jumia in 2012. Just a year after introducing the cash-on-delivery option in six Nigerian cities, Jumia.com.ng had become the most popular and fastest-growing online merchant in the country and accounted for 92 percent of total orders.

In the Kenyan market, which Jumia entered in March 2013, the company also offers the facility to pay through mobile money. In addition, it has launched offline "experiential centers" to help consumers overcome their doubts about the look and feel of the products they are purchasing. A major constraint on home delivery is the lack of formal street addresses in many African cities, or detailed mapping, and Jumia has had to develop its own maps for delivery.

For the moment, the global e-commerce majors, such as Amazon and Alibaba, have not developed a strong presence in Africa, though Amazon is building a fulfillment center in Cape Town and Alibaba has established a fund for young African entrepreneurs. It remains to be seen whether local African e-commerce companies, such as Takealot (South Africa), Kilimall (Kenya), Konga (Nigeria), as well as Jumia, can build sufficient scale to resist the global majors when they do arrive.

Platforms in emerging markets share many of the characteristics of business models encountered in high-income markets. Regional matching platforms like Laimoon.com (matching labor supply and demand in Arab countries) and Arabmatrimony.com seem to mirror the models, respectively, of Upworks and Match.com, taking cultural differences into account. Successful platform models that worked in advanced economies were also adopted by local platforms, as the case of Careem shows. Careem is a transport network company based in Dubai, with operations in 53 cities in the Middle East, North Africa, and South Asia. The company was valued at about US$1 billion as of 2017.

As platforms have evolved, four main business models have emerged for revenue:

  • Commission-based revenue

  • Subscription-based and service-based

  • Advertisement-based

  • Tertiary services developed based on the data from the network (for example, supplier financing that many platforms provide to their sellers based on their transaction history on the platform)

Täuscher and Laudien introduce a taxonomy of platform business models in which, in addition to the four revenue models, other dimensions of the revenue source are also captured (such as price discrimination and source), in addition to the delivery dimensions (consumer to consumer, business to business, business to consumer, global, regional, and local, among others). Digital platforms may be primarily wholesale (business to business) or retail (business to consumer). Platforms may mutate the scope and breadth (reach, timeliness) of markets or lower entry barriers (or both), thereby affecting competitive dynamics.

Organizational science has introduced additional elements, adding new dimensions to this taxonomy, including the degree of standardization of output (product) and (input) and how they shape different organizational mechanisms.

The biggest obstacle to the development of certain digital platform models is the relative underdevelopment of the advertising industry in many emerging markets. This factor may limit the ability of platforms in those markets to subsidize a side of the business and limit the range of possible business models. One outcome is to encourage the development of "transactional" models to the detriment of commission-based platforms. A real estate owner in a high-income country, for instance, can choose whether to list a property on a pure, local marketplace (whose business model is purely advertising based) or to use a foreign, commission-based platform like Airbnb. But absent a mature advertising market, the consumer may have a more limited choice of platforms.