A few decades ago, firms ruled supreme in getting the best profit margins out of their customers. It was an era of optimizing for the maximum possible profit. Market was very opaque because information was very expensive and untimely. Customers could not track price changes in real time. Even when they get the comparative prices, the distance to the other shop was a huge barrier. So in most cases, customers would knowingly pay high prices because of the need to save time.
This was the era when airlines maximized prices on tickets. When you leave your house to a travel agent, you have made up your mind to come back with a paper ticket. The travel agent was serving the airlines and the higher you pay, the better is the business. Though the agent may offer some choices among the competing airlines, there was no major price pressure, since at the end you would be forced to buy from the agent.
Why? You may need to drive another twenty minutes for another travel agent. Under this model where you either buy from the airline offices or travel agents, your choices are very narrow and the airlines were in control.
Then came the Internet era; from Wakanow to Jumia Travels, Expedia to Priceline, the customer for the first time had the power to make decisions based on price without even leaving the house. Go online; describe the trip and airline choices will roll down; usually, the cheapest one comes first. This market is a commodity business, especially for an average traveler. Who cares for the airline you flew from Boston to Baltimore? Without that brand loyalty, the cheapest ticket always wins. The travel agents have lost the power to control the price. The airlines suddenly must compete on price resulting to lower profit margins.
The internet has commoditized the airline pricing sector. Without the Internet which destroyed the pricing model, through commoditization, most airlines will still be commanding huge prices based on the mismatches owing to information asymmetry. The Internet has allowed the low-cost carriers to have direct access to customers. It has abstracted out the brand. The Internet was the most important factor that enabled these low-cost carriers to get into the industry. It provided a platform through which they connected to customers directly and competed on price effectively.
We will continue to see major transformations and disruptions arising from the Internet.
Your Business on Internet
Starting and operating an internet business is not as easy as anyone could tell you. As I have noted on Tekedia, Internet has three main core features when you look at it from the business angle
- Aggregation Capability: Internet has this feature that those that create contents and value may not be the core recipients of the value delivered. Those that aggregate become the people that earn most of the values. Wakanow will always be in a better position than most airlines in Nigeria because it is asset-light, aggregating ticket pricing with minimal risk. When you expand that to Facebook and Google, which offer services completely free, the entities that create the values like media firms are totally lost. If you can build scale on the Internet, a business that depends on this aggregation construct is always good. Airbnb, Uber and most modern digital firms are good on this. Narialand is also one, aggregating contents, legally or otherwise, under one man and earning big profits all the way.
- Diminishing Abundance: Internet offers unconstrained distribution channel. This makes it so hard for anyone to control pricing because you do not just compete with your local peers; you compete globally. Yet, in some industries, the fact that Internet gives you global scale does not mean you can make money. ThisDay Nigeria newspaper may be accessible to any reader in the world, having thousands of readers daily, yet, it may not be making as much money as when it had very fewer readers, before the dawn of Internet. That is a diminishing return: internet is very notorious for that.
- Commoditization: Any content that is online is simply commoditized because they all have the same level of access. And when the contents are linked on Facebook, they compete for the same positions. Unlike in the past, before Internet, where New York Times print would be seen as a more prestigious material than most competing papers, the fact is that within this Internet era, everyone is competing for positions with Google search algorithm. Mastering this commoditization is very critical in understanding how to find success on the web. Building a fintech must be designed on the construct that a great product can be chosen over a big bank product because for the internet user, say for remittance, provided the money gets safely to the destination, no one cares how nice the branch of the bank looks. So a fintech can compete on price against a bank, if its services are great. The bank heritage has been commoditized. To win and succeed on the web, one has to differentiate by efficiency, pricing and or elements of value.
The future of commerce resides on the web. You should go for it. But understand the biggest vulnerability of Internet business: lack of defense, because on Internet you compete globally, with limited defined boundaries. Your mistakes cannot be masked. Your pricing can easily be compared with peers, and you cannot be guessing while on the web because information asymmetry, typical in the meatspace, is gone. Internet demands the best from you because Internet is a huge “continent” that herds, working on the wisdom of the crowd, the network effects. You cannot trick the crowd and that is why succeeding on the web is harder. If you ask a typical web hosting company in Lagos, Nairobi and Accra, you will be surprised on the number of people that abandon renewing their domains after just a year. Why? The promise of a huge global market was met with the inability to find a space in a big sea, mimicking the seaman that shouted “water everywhere, but not a single drop to drink”.
---Visit our Store for my books, cases, etc. Now, enjoy our consolidated subscription for all contents (past, present and future).
-- We offer Advisory Services (tech, strategy & Africa).
---Sign-up to my Founders Mentoring (click here).