How a Pet Food Retailer Uses Platforms to Create Value Without Take Rates
Platforms and marketplaces often capture economics through take rates, and that’s hard. Optimization requires dynamic pricing, constant monitoring, true scale, and maybe even network effects to succeed overtime. Uber is the obvious example of a company that has done this well. While an upper limit exists on the number of ride sharing apps, the ceiling on the number of company-specific platforms is much much higher. However, creating a platform is one thing; capturing its value is another. In the world of Amazon, building true platform assets will require creativity.
As opposed to monetizing through take rates, another strategy is to build platforms with the goal of improving the average life-time-value (LTV) of current customers.
Chewy, the pet store retailor which aims to be the, “most trusted and convenient online destination for pet parents (and partners) everywhere,” provides a good example of this approach.
Recently, Chewy announced a new free telehealth service for animals.
The service works by connecting vets to Chewy customers via Chewy’s online platform.
Essentially, this:
Vets <-> Platform <-> Chewy Customers
What’s most interesting is that Chewy’s creating these connections for free!
While Chewy may eventually monetize customers through take rates or vets through affiliate sales, today Chewy is only requiring a change in purchasing habits. Specifically, to gain access to the telehealth services, platform customers must first enroll in Chewy’s automatic refill program, AutoShip. See below:
In fact, AutoShip has been fundamental to Chewy’s strategy as shown by the high percentage of Autoship sales relative to total sales below.
Why? Two reasons. Automatic refill customers are likely more valuable because they 1) order more and 2) churn less. In short, they have a higher life-time-value. This is good for enterprise value, but not just through higher revenues.
More automatic refill customers make future inventory needs more predictable. Predictability should lead to more operational efficiencies and improved purchasing power. With this improvement in process power, management could allow the improvements in efficiencies and gross margins to flow to their return on equity. Management could also invest the additional free cash flow in product line expansions, improving their value proposition of convenience and trust, creating higher brand assets with it.
In short, platform take rates are great when the dynamics make sense. In a world where, “your margin is my opportunity,” most will find this challenging. Instead, companies should think of platforms as a way to create and unlock pockets of value within their own ecosystems. By offering customers additional value through more convenience and better products, in addition to relevant services through platforms and partnerships, firms can create sustainable firm value overtime.
