Many of the new technology-based companies that have come into the market over the past few years have challenged the conventions of a traditional business model.
Rather than profits, they have focused their resources and efforts on acquiring users and on scaling the business as quickly as possible. It was all about “go big or go home”.
But can a business model that depends largely on the accumulation of a huge customer base eventually result in a profitable company?
Last month, US-based ride-hailing services company Lyft made its public debut on the New York Stock Exchange with a valuation of about US$24bil (RM99bil) while registering a net loss of nearly US$1bil in the last financial year. Lyft’s main competitor, Uber, which has also filed for an IPO and is reported to be seeking a valuation of US$80bil to US$90bil, is also loss-making.
Tech companies like Uber and Lyft have been able to prioritise growth over profits largely due to the abundant funding in private markets. Observers say they will have to demonstrate profit in the future.
It is common knowledge that like their ride-hailing counterparts, many of the e-commerce companies, including leading shopping marketplaces such as Shopee, are still loss-making entities.
No doubt, the e-commerce potential in the Asean region is indeed enormous. The Internet economy is expected to exceed US$200bil by 2025, according to the Google-Temasek e-Conomy SEA report published in 2016.
But there are doubts that e-commerce marketplaces, which rely heavily on perks such as providing subsidies on deliveries and free listing for sellers to draw in customers, can be a long term sustainable business model.
There may come a day when most or all forms of subsidies which currently benefit customers may have to end for these e-commerce marketplace operators to start turning in profits. This, in turn, could be a threat to many online sellers who have taken to fully digitise their business, selling their products and services directly to customers via these online marketplaces.
Note that in China, the highly competitive bike-sharing space, which has been growing rapidly in recent years, has taken to raising their bike rental prices to better support a sustainable business. Analysts see this move in the sector as a new era of stable growth, requiring players to shift their focus from rapid market expansion to refined management and operation.
Malaysia’s drop shipping operator Kumoten says there is still room for it to grow with its current model.
Isaac Leong, managing director of OGN Online Sdn Bhd – which operates Kumoten, is confident that the e-commerce marketplace platforms that currently dominate the regional market will maintain their current rates and subsidies to keep cost low for their customers and online shoppers.
“Making money from their platforms may not necessarily be the priority for these global e-commerce marketplace operators, at least for now,” says Leong.
What they may see as more valuable, is to have a large pool of loyal customers, and eventually look at better margins by offering value-added products and services.
Taking a cue from how China’s successful online companies operate, Leong acknowledges that it takes a lot of effort for companies to acquire a new customer and maintain the same customer for a long time.
“With all these companies pouring cash and other resources into South-East Asia, the e-commerce growth here is expected to pick up, and customers in the region will end up as the winners.
“We just have to ensure that with any changes in the operation or business model, we are able to respond and take the lead in preparing and providing the latest updates to our customers to maintain the platform as the source of business opportunity,” says Leong.
Time will tell if these tech-based companies can indeed turn the corner as competition heats up and the cost of customer acquisition increases. For sure, there have been successful players in the space such as Amazon and Alibaba. But the ability to emulate their successes will not come easy or cheap.