The competition for customers is getting tougher. E-commerce is on the rise, and the industry is developing at a lightning speed. In 2022, it comprised 15% of the total U.S. retail sales, and over the next four years, it is expected to reach 21%.
Propelled by the COVID-19 lockdowns, businesses are actively investing into online sales channels, social media presence and communities. About 2.5 million companies in the U.S. are already selling through their websites, while independent brands, small businesses and merchants are starting online sales on marketplaces and social media in just a couple of clicks.
As the market grows, advertising costs are skyrocketing, and winning new audiences is getting more and more difficult. Marketers can no longer rely on cookies and targeted campaigns, as users are opting for stricter privacy regulations. With the abundance of online retailers, customers easily turn to companies that offer more value. And the universal accessibility of digital tools results in businesses losing their competitive advantage, as they offer the same level of customer experience. As a result, business growth slows, the competition presses, and companies feel bogged down.
Whether it’s the problem of reaching new clients, overcoming a plateau, increasing customer lifetime value or competing with industry heavyweights, when obvious solutions don’t work, one should start thinking—and searching—outside the box. One of the possible options for solving such business challenges is leveraging the power of digital ecosystems.
Market leaders win clients with ecosystem strategies
Customers are not interested in a company if it offers no value.
By value, we mean any useful service or product that a user thinks worthy of paying for. A 2022 Wunderman Thompson report on consumer shopping behavior suggests that the value bar is rising as customers are expecting instant and environmentally-friendly delivery, easy returns, shopping ideas, and a more entertaining user experience.
In today’s e-commerce market, users find the most value on online marketplaces. People shop on Amazon, Alibaba, and Walmart three times more than on retailer websites, with 35% and 12% respectively. Shopping on these digital platforms has gotten so easy, that 36% of consumers bypass search engines and go directly to marketplaces to look for a needed item. This is because marketplaces deliver the best customer experience and cover most of the customers’ needs in just one session.
Let’s look at a typical user shopping online. To buy a new Christmas sweater, a user can go on a marketplace, or trawl through specific retailer websites. Not all individual websites have such a solid reputation as marketplaces, so it’s a gamble sometimes: will the delivery work, are photo descriptions accurate, will the support help in case of emergency?
On each new website, the user will have to learn to navigate its interface, study its specific delivery and returns policy, check whether all the needed items are in stock, and if they are, switch between multiple tabs and websites to compare the items and pick the best option. They will also have to leave their personal payment information on every website they are ordering from.
A marketplace, on the other hand, offers a more streamlined experience: a user studies its interface and gives personal data only once, shops across multiple item categories with clear delivery and returns, backed by user reviews and ratings. They pick the best option using inbuilt comparison tools, create gift lists and shop items from other users’ shared carts.
During the same session, they can donate to charity organizations, and directly ask sellers about their goods. With advanced analytics and artificial intelligence (AI) tools, users can enjoy virtual fittings, hyper-personalized recommendations, and digital payment, while special offers and sales present a great opportunity to save money. Many marketplaces also offer premium subscriptions that unlock access to more partner tools and services, such as streaming, food delivery, travel, finance, and so on.
Quite different from what a regular store has to offer. Marketplaces stand out because they implement ecosystem strategies. They provide an integrated digital space for managing multiple tasks at a cost of minimum effort. And as the statistics above shows, such convenience is a major competitive advantage.
How the world’s biggest companies make use of ecosystem strategies
An ecosystem model means aggregating a wide range of sellers and services on one digital platform and uniting them through one user profile. Marketplaces successfully implement this approach to create more value for digital shoppers. As a result, they don’t experience customer churn, keep their status as market leaders, and effortlessly expand to new audiences. Other companies across industries can do the same.
Digital ecosystems are taking over the global market. Back in 2001, it was dominated by multinational corporations like General Electric or ExxonMobil. In 2022, six out of the top ten companies in the world by market capitalization are digital ecosystems like Apple and Amazon.
The reason for this is the value that comes with using the ecosystem model. Diversifying a core business with subsidiary services and uniting them through one user profile helps secure customers and expand further with new offerings and products.
Apple has over 1 billion clients in its closed ecosystem of services and devices
An example of one of the world’s biggest companies using the ecosystem model is Apple. It controls almost 28% of the mobile operating system market and has over 1 billion active device users. The company expands its massive business ecosystem using the “Walled garden” strategy. Having bought one Apple device, a user automatically enters its network of interconnected devices and services for storing media files, streaming music, sharing content, sending messages, and conducting digital payments.
Users get trapped in an enclosed digital environment where Apple’s subsidiary services cover most of their needs.
Uber grows by upselling services
Another example is Uber. It started out in 2010 as a digital network for connecting drivers with passengers, and featured revolutionary digital payment, easy booking, and seamless operations. Its convenient and efficient business model started the “Uber for X” trend, where companies were trying to repeat its success. Today, it uses the same tools to power its ecosystem of ride-share marketplace, food delivery, restaurant aggregator, traveling, and freight transportation services across 10,000 cities globally.
Let us take a closer look at how exactly ecosystems help take businesses to another level.
Reducing customer acquisition cost
In 2021, Gartner asked its respondents to name their most pressing sales, marketing and channel initiatives. An absolute majority, 24%, named acquiring new customers.
This task is getting tougher as the customer acquisition costs (CAC) are rising: from 2014 to 2019 the average CAC grew 60%. According to FirstPageSage, the average CAC for business-to-consumer companies in E-commerce is $64, in Entertainment it’s $82, and in Financial Services—$146.
This increase might be tied with the proliferation of digital tools and growing numbers of online businesses. And the planned phaseout of third-party cookies, which used to power targeted ads, is going to drive the costs even higher up, especially for digital advertising.
Ecosystems help reduce the cost of acquiring new clients. For the cost of attracting a user to one service, an ecosystem actually advertises all its partners, as they comprise one unified network. This way, by having more partners and subsidiary services, the ecosystem increases its chances of being discovered by more clients and makes the cost of this discovery much lower.
Example. Gojek is an Indonesian ecosystem of on-demand services. It offers e-payment, ride-hailing, delivery, beauty services, and entertainment, all wrapped in a one-stop super app. It has 38 million monthly active users (MAU) across Southeast Asia and operates in 5 countries.
In his 2018 interview with CNBC’s Christine Tan, Gojek’s founder Nadiem Makarim revealed that the company’s rapid growth is mostly a result of transaction growth. People try one of the multiple Gojek services, and, after liking it, sample the rest. This way, they connect to Gojek’s ecosystem, where they turn to its multiple services for their everyday tasks at the cost of one attraction. He also adds that such a strategy actually results in more growth than simply acquiring new users, as it forges stronger customer loyalty and more frequent user-company interactions.
Overcoming a plateau
Alongside the soaring CAC, the ubiquitous technological advancement and broad accessibility of marketing and development tools causes commoditization, a process when multiple companies offer similar products and lose their competitive advantage. Competing with a series of alike players with a heightened acquisition cost makes it more difficult to win new customers. Being unable to stand out, businesses slow down and inevitably reach their growth plateau, which might be a tough spot to get out of.
Digital ecosystems are a good solution for companies that got trapped in their growth. By connecting new services and partners, or offering an integrated user experience, they are creating new value for clients that helps move up their industry’s curve.
Example. Microsoft’s search engine Bing has been plateauing for a while, overshadowed by the industry’s major players, Google and Apple. To solve this problem and attract more users to Bing, as well as Teams and Outlook, Microsoft is considering launching a super app.
Microsoft is betting on the perks that come with super apps to bring in more users. By accumulating web search, messaging, shopping, news feed, and other services in an alleged one-stop smartphone application, Microsoft is hoping to set in motion its search engine dynamics, and stand up to Google and Apple’s dominance in the consumer services and mobile search market.
Reducing customer churn and increasing LTV
Another challenge posed by the global e-commerce market is retaining customers and forging a strong customer loyalty. Ecosystems solve this task by offering users a convenient digital environment where all their needs are met with no extra effort on their side. Users get access to multiple services through a single profile, and use a shared bonus program or premium features across all the participant companies of the ecosystem. Such elements comprise a smooth and uninterrupted user experience, which customers are less likely to leave.
A PYMNTS study found out that 72% of consumers are interested in an integrated digital space, particularly for its convenience and security. A McKinsey report also suggests that for traditional companies, an ecosystem can be a way to keep its competitive advantage and secure its client base. And companies should use this knowledge to their advantage.
Example. Sportmaster is the largest sporting goods retail chain in Eastern Europe. They started losing clients to marketplaces and had to restructure their business so that it would offer more value and bring the customers back.
We analyzed their case and suggested implementing the ecosystem strategies. Marketplaces offer a wide range of services without targeting any particular user category. To compete with them, we decided to take an opposite approach and develop a one-stop service that would cater to the specific needs of athletes.
First, we created an uninterrupted sales channel by uniting the offline and online sales. Then, we diversified the core business with subsidiary services such as online workouts, medical check-ups, equipment rent and repairs, sports media, and event calendar.
As a result, the conversion rate in its app grew by 14%, and the average ticket—by 15%. Additional services brought more users to the app and website, and the chain was able to gain its audience back. In 2022, it saw a 32% revenue increase and a 400% growth in monthly active users of subsidiary services.
Supporting core services with cross-selling
The recent COVID-19 pandemic proved that one can never be sure of what the future holds. During the quarantine, many businesses suffered shutdowns and major financial losses, being unable to adapt to the new, rapidly changing economic climate. In such cases, diversification with partners or subsidiary services can serve as a safety net and help keep the whole business afloat even when one of its elements is going through tough times.
Example. Uber is a mobility ecosystem that branched out its ride-hailing business into food and package delivery, booking, couriers, and freight transportation. The services grow from mutual promotion and a shared client base. As of 2022, Uber holds 72% of the U.S. ride-hailing market, and 24% of shares for food delivery.
During the 2020 lockdown, passenger traffic at Uber plunged by 75% in three months. People could no longer hail taxi rides, having no need or possibility to go anywhere. Such a situation could have marked the end of Uber Ride, had it not been for Uber’s subsidiary food delivery service. The very thing that trapped the work of one service, actually propelled the demand for another. During the lockdown, Uber’s food delivery gross bookings grew 113%. Thanks to Uber Eats, the company was able to compensate for the taxi losses and weather the year without losing its businesses.
Leveraging user data with respect to privacy regulations
Major tech companies are responding to users‘ demand for digital privacy. Google is determined to phase out cookies by 2024, and Apple released iOS 14.5 that obliges apps to ask users’ permission for tracking. Users are opting for sharing less data, which translates to companies losing a crucial instrument for learning and serving their audience with personalized offers.
Such regulations do not affect ecosystems. They offer a more secure and private digital environment. As users only need to enter their data once, instead of sharing it with multiple services across the Internet. The data is saved only within the members of the ecosystem, creating a win-win situation: users keep their privacy from outside third parties, and the selected companies get precise insights into the customer sentiment and emerging trends.
Example. A Colombian super app Rappi hosts a digital ecosystem of food, finance, travel, and on-demand grocery and goods delivery. To promote merchants on its platform, Rappi launched a custom marketing tool, Brands by Rappi. It collects the data of the registered users and sells it to the companies that participate in the ecosystem. This way, user data does not leak out to third parties, and the brands get highly specific insights about their audiences.
For example, Brands by Rappi analyzes user activity and tells a partner restaurant that its customers most often order pastries from 2 to 6 pm. Based on this knowledge, the restaurant can run a promotion at a specified time for this particular category of users. Such hyper-targeted ad campaigns and personalized offers result in more sales; the restaurant returns the investment on user analytics, and customers get a better experience without sacrificing their privacy.
Catalyzing rapid growth and expansion
A digital ecosystem is just the thing for the companies that aim to scale and grow as fast as possible. The more partners or services the ecosystem has, the easier it attracts more new partners and clients, thus experiencing rapid growth and yielding more benefits to its participants. This is the principle of a “Flywheel Effect”: small wins accumulated over time create a massive momentum that powers a business to new heights.
Example. The world’s fifth-largest ecommerce company, Alibaba started out in 1999 as a business-to-business marketplace in China. In 2003, it launched a consumer-to-consumer marketplace Taobao and a digital payment platform Alipay. It went on to launch an online retail, a comparison shopping website, international marketplace for small businesses, logistics company, travel marketplace, and a supermarket chain.
The more businesses it had, the more users it was connecting to its ecosystem. In 2014, it turned into the world’s largest B2B platform with ecommerce, mobility, finance, social media, and cloud computing services. Since then, it grew from 350 to 1.3 billion global annual active consumers in 2022, and evolved into an ecosystem of 700 different services.
Consideration is key
Digital ecosystems offer great opportunities for business development. That’s why the world’s leading companies leverage ecosystem strategies to create more value and boost growth. Ecosystems help lower customer acquisition costs, grow LTV and customer loyalty, create a better customer experience, and bolster businesses in times of crises.
Of course, it’s not a cure-all. There are cases when other approaches are more suitable for solving business challenges. To find the perfect solution, one must carefully study the market, consider customer needs and business resources, and plan out a strategy for further growth. We describe the whole process in our guide, and if you would like to discuss the specifics of your case, drop us a line. We will gladly research and work out the most optimal solution for your business.