The Evolution of Business Models: From Commoditization to Locking Customers into Ecosystems

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Jul 24, 2023

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The Evolution of Business Models: From Commoditization to Locking Customers into Ecosystems

In today's fast-paced and highly competitive business landscape, companies are constantly searching for new ways to attract and retain customers. Two key strategies that have emerged are the commoditization of services and the creation of ecosystems that lock customers into their platforms. In this article, we will explore the evolution of these strategies and how companies like Netflix, Airbnb, and Nespresso have successfully implemented them.

Netflix, once known as a content delivery provider, has transformed into a network that commoditizes time. By embracing the idea that their service is a marketplace for connecting content creators and consumers, Netflix has revolutionized the way we consume media. This shift towards commoditization is similar to what companies like Uber and Airbnb have done in their respective industries.

The law of conservation of attractive profits states that when modularity and commoditization cause profits to disappear in one stage of the value chain, new opportunities for earning profits with proprietary products emerge in adjacent stages. This concept is evident in the evolution of hardware architecture, where the optimization of one component necessitates the modularization of another. For example, the transition from integrated processors to modular ones allowed for the creation of handheld devices like the BlackBerry and later the iPhone.

Breaking up formerly integrated systems and modularizing them not only destroys incumbent value but also allows new entrants to capture new value by integrating different parts of the value chain. Airbnb commoditized trust, separating it from physical property, and integrated it into a worldwide network of hosts and guests. Uber commoditized dispatch and modularized cars, transforming the transportation industry. Similarly, Netflix commoditized time and distribution, enabling the integration of production and customer management.

Switching costs play a crucial role in locking customers into ecosystems. Companies like Nespresso, Gillette, and HP employ the "Base Product & Consumable trap" by offering a base product and then profiting from consumables that customers are forced to buy. Apple, Google Android, and Spotify use the "Data trap" by encouraging customers to create or purchase content and apps exclusively hosted on their platforms, making it difficult for customers to switch without losing their data.

The "Learning Curve Trap" discourages customers from switching by making it time-consuming to learn a new product. Industry standards, such as those set by Microsoft and Adobe, create a barrier for customers to switch to competitors. The "Servitization Trap" goes beyond competing against a product and offers an entire experience, as seen with companies like Rolls Royce and Hilti. Lastly, the "Exit Trap" forces customers to use a product for a specified period of time, as seen with telecommunications companies like Verizon and AT&T.

In conclusion, the evolution of business models has moved towards the commoditization of services and the creation of ecosystems to lock customers in. Companies like Netflix, Airbnb, and Nespresso have successfully implemented these strategies by understanding the importance of modularization, commoditization, and switching costs. To leverage these concepts, businesses can:

  • 1. Focus on creating a superior customer experience by modularizing their products or services around customer needs.
  • 2. Utilize data to create exclusive content or apps that encourage customers to stay within their ecosystem.
  • 3. Implement switching costs, such as contracts or industry standards, to make it difficult for customers to switch to competitors.

By understanding the principles behind commoditization, modularization, and switching costs, businesses can adapt their strategies to thrive in the evolving marketplace.

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