The rise of platforms, such as Uber and Netflix, has been one of the key economic themes of recent years, but the success of these platforms has led to concerns that local, offline vendors cannot realistically compete with the online behemoths.
Research from Bocconi University explores how offline subscription platforms could thrive. The researchers highlight strategies such as alleviating price competition between vendors and the platforms, targeting variety-seeking customers in local markets, and recruiting vendors with a differentiated offering as possible approaches.
Offline success
From Netflix to Spotify, most of the hugely successful platforms in operation today are predominantly online, but the authors highlight the significant number of subscription services that operate offline. For instance, MealPal provides a subscription-based lunch service, while ClassPass does similar for fitness services.
These services are highly influenced by location, and the paper illustrates the importance of the local market in the success of any offline platform. The authors highlight how market structures can differ between cities, such as when the level of competition differs due to differing transportation costs, which means that in one city consumers can compare offerings between numerous stores, while in another such comparisons would incur high transportation costs.
The success of platforms also depends heavily on the differentiation of sellers in the market, as consumers benefit from this variety. It’s also a good sign when competition between these vendors is relatively weak as the subscription model is then likely to attract customers who are not otherwise active.
It’s also important for platforms to understand that their key USP is in the services they offer to consumers from a multitude of sellers. They don’t actually make anything themselves. As a result, they will have dual relationships whereby they want to collaborate with sellers, who hope that the platform will drive new customers, while at the same time they also compete on price in order to do so.
The authors urge platform managers not to fall into the trap of lowering the overall quality of the product that they offer to sellers.
“When a vendor offers lower quality to platform customers than the quality they offer to his own direct customers,” they conclude, “the platform is forced to compete even more fiercely on prices. In the end, neither the platform nor the seller can profit from the situation.”
