Aggregator Business Model: What Is It And How It Works

 The aggregator business model has transformed industries decimating some firms.

Taxis, hotels, groceries, insurance, travel and many other industries now have a dominant aggregator.

The Value Proposition of An Aggregator Model

aggregator business model

Customer Value Proposition

The value for a customer is based on time, money and trust.

1. TIME: Let’s face it hopping across sites and trying to compare prices would be very time-consuming. Aggregator business models save customers time. This not only reduces the search time but also offers the consumer an instant and often, customizable list of similar products/services to compare.

2. EASE OF USE: It would also be a challenge to then collate and makes sense of all that data. You’d have to create tables with features and prices. By using comparison tables and filters aggregators help customers to make selections based on their needs. In turn, this makes it easier to make decisions.

3. TRUST: Often aggregators also aggregate reviews from a multitude of customers or have their own rating systems. This provides a large pool of reviews and helps the customer to choose a trusted product or service.

4. MONEY. By comparing the prices across the market and balancing that with reviews, customers get the best price vs quality assurance or the best good/supplier for their budget.

Value Proposition To Partners

Partners benefit from having to get customers without the cost of marketing. Since most marketing activities work on acquiring a small percentage of customers which then finally purchase there is often a high-cost per acquisition.

There are also costs associated with all the activities related to the systems and staff needed to market a product or service.

The benefit to a partner is that they only pay a commission when a customer buys.

Customers make purchases through the online aggregators and in this way, the providers get more customers without spending an arm and a leg for the marketing. With each order, the aggregator firm gets the commission.

Why Digital Has Fueled The Aggregator Model

A theory is a hypothesis that can be tested and validated scientifically. Some have coined the term aggregator theory, but it is not really a theory just a set of reasons why technology has enabled new forms of business, new digital business models.

Platform economics neatly explain aggregators, and these theories date back 50 years.

On-demand digital business models

The features of digital technology that enable the aggregator business model. Digital enables aggregation models to scale because of the following reasons:

1. Direct access to consumers across multiple channels at scale (Marketing). In other words, there are about 7.5Bn people on the internet that you have potential access to. Previously you couldn’t get close to marketing or selling to that many people in the physical world.
2. The immediacy and digital distribution effect (Distribution and On-demand). Digital products can be distributed at low costs (near zero costs per unit) but not zero costs. However, compared to physical distribution this has been a game-changer e.g. digitalization and distribution of books, music, news, and video are all examples where previous physical distribution and storage costs were high.
3. Transactions Costs. In a digital world the total costs associated with transactions are relatively low but not zero. As an example, platforms that use Stripe or PayPal are subject to their commissions.
4. The modularity of digital. Digital apps can be changed in an instant and this will be reflected in the user experience. Modularity provides greater degrees of personalization that cannot easily be attained in the physical world.
5. Zero/Low marginal costs of scaling digital services or products. There are zero marginal costs for copying a music file or the details for a room booking. However, the cost of marketing is not a zero marginal cost – important to remember.
6. Demand-driven multi-sided networks with decreasing costs. The network effects are based on acquiring more customers who in turn help to create referrals and more marketing momentum, thus lowering the cost of acquisition. Eventually, as firm scales, the costs per customer e.g.fixed costs diminish, costs of acquisition lower and so it becomes more profitable. However, as we can see with Netflix if new competition enters the market, they push up the cost of acquisition and thus counter the network effects.

Physical Value Chain

In most consumer markets there are normally three players: suppliers, distributors, and consumers/users.

Profits prior to the internet and digital went to integrators integrate. As an example, those that integrated supply and distribution or distribution and consumers

Print Industry: Writer and Editors produce the content which was then aggregated into a newspaper (the distribution vehicle for content). Because of the audience, they commanded they were able to sell space in a newspaper to advertisers.

Music Industry: Companies like Sony controlled the artists and the production of the records/DVDs.

Digital Disrupts The Value Chain

Winners in today’s digital economy succeed by providing seamless experiences where they offer value within a supply chain either through disintermediation or bundling or unbundling.

In other words, digital enables a firm to find a gap in the value chain and then fulfill it at a low cost.

Google and content

• Content now is digital and fluid. It can be easily indexed, categorized, combined and distributed.
• Google unbundles the newspaper industry allowing people to quickly find articles and content as they needed it – in the form of single pages. Advertisers thus shifted from newspapers to Google as well to new digital aggregators e.g. Huffington Post.
• Content creation shifted from journalists to bloggers and experts across various fields. The cost of production and distribution dropped as access to technologies to produce and distribute content became accessible to all, it became democratized.

The same is true of video production hence the rise of YouTube and other social networks like TicToc.

How does an Aggregator Business Model Work?

First of all, the aggregator firm creates a network of partnerships that supply the data to the aggregator. The aggregator and partner agree on terms (commission charges) and then set up systems e.g. data exchange.

Terms usually include

• Branding Terms.
• The standardized quality required by the aggregator.
• The Commission, or
• Take-Up rate.
• Other terms depending on the industry and the aggregator involved.

Often, the aggregator model works because all the main players operate on the platform and the aggregator then commands a significant value benefit to the customer.

How do aggregator Sites make money?

The revenue generation in an aggregator business model is similar to that of the marketplace business model. The partners of the company are the source of the revenue. The company generates revenue through commissions which are paid in one of two ways:

1. The company makes a mark-up on the partner price. The partner fixes the price and the aggregator firm quotes the final price to the customers after adding their mark-up e.g. 20%.
2. The company takes a commission rate per purchase from the partner. This is the same as an affiliate commission but usually has stricter terms and conditions because of the data.

Different types of aggregators

Digital goods can be replicated at zero cost, meaning they are often non-rival. The role of geographic distance changes as the cost of distribution for digital goods and information is approximately zero.

Let’s break this down a bit:

1. The goods sold by an aggregator.
2. Distribution costs
3. Transactions

I’ll use a few different examples.

The overriding premise is that platform companies aggregate demand to disintermediate the distributors (which is now possible because of zero-cost distribution) and win on direct customer experience.

The value platforms offer goes without saying, the ease of use, speed and convenience overrides previous value offered through physically bounded firms.

1. Goods sold and marginal costs

The Cost of Goods Sold (COGS) refers to the direct costs of producing the goods sold by a company.

In the case of Netflix there are two types of Cost of Goods:

1. Content purchase which is then amortized (debt in current liabilities and long-term).
2. Production of Netflix originals.

If we take the first case for Netflix in 2019 they had $4.4 billion in current content liabilities and $3.3 billion in non-current content liabilities. The Cost of Revenue for streaming in 2019 was 62%.

Replication is near zero, production is not near zero and streaming through a platform can’t happen without infrastructure and therefore are not near zero. A digital product doesn’t distribute itself.

2. Distribution Costs

The internet is an easy way to distribute digital products. That’s true, but it isn’t free by a long shot. If you look a the cost of the infrastructure needed for Netflix to stream in over 160 Countries and the degree of localization needed there are significant costs. Technology and development cost $1.5 billion for Netflix in 2019. Even Uber has a figure of over $1 billion. The difference is the perspective. Operational costs = the platform – the technical staff and infrastructure – these are the cost of goods for a platform business – the platform.

3. Transaction Costs

Two types of costs are incurred with digital transactions. Usually, third-party commissions e.g. Stripe or PayPal. The second is fluctuations in exchange rates which often hit companies.

The emergence of music aggregators is a market response to the high level of transaction costs and bargaining asymmetry associated with selling digital music online. 

The Types of Aggregators

The aggregators can be classified based on the value chain – customers, partners and costs.

1. Single value chain offer or value chain integration.
2. No or low COGS vs high COGS.
3. Primary distribution or secondary.

What Are Some Examples of The Aggregator Business Model?

There are hundreds of aggregators, but here are some examples that illustrate how the aggregation model is playing out in different markets.

Digital music aggregation industry

Aggregation Business Model – music aggregators

Search Aggregators

Google is a search aggregator. Google indexes data across multiple industries and then use to present search, consumers, data that they are looking for. From hotel bookings to queries on weather to content…Google indexes the web and then monetizes this by giving opportunities for companies to be on page 1 in exchange for payment.

Travel Industry Aggregator Business Model

A travel aggregator is a website that searches for deals across multiple websites and shows you the results in one place. For example, if you wanted to find a cheap flight from New York City to London, you could sit down and check multiple airlines which would take ages. Alternatively, you could use a website like Skyscanner, which will check hundreds of airlines at once.

Taxi Aggregator Business Model

The Uber business model is an example of an aggregator business model within the taxi industry. Uber takes the services from the drivers and provides customers to them in exchange for a commission.

Uber has been the most influential taxi booking app. Uber provides personal as well as shared taxis. The company hires drivers who bring their own taxis. Uber does not have employees, it hires these drivers as service providers and provides them a platform where they could get more customers. Uber works on a commission basis. It charges up to 20-25% commission rate from the drivers and also earns revenue through promotional partnerships. There is also a price surge on holidays and during a certain period of the day.

How Blockchain will Be The Game Changer

Why do blockchains allow new startups to compete with the likes of Google and Facebook? Blockchains will change the aggregator business model to a distributed business model.

• Network Effects—Blockchains offer tokens (monetary incentive) which give early adopters greater upside the earlier they join the network.
• ML Data Advantage: Blockchains use a DLT (distributed ledger technology) architecture where data is shared and open, rather than a client-server architecture where data is closed and siloed.

Network Effects: Token-Based Incentivizes for Early Adopters

Before blockchains and the digital scarcity of tokens, it was difficult to attract early users to a new network. But now, a company can “pay” early adopters in a native token and those early adopters will be incentivized to increase the value of their tokens.

blockchain network effect

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Horizontal Strategy

 

Much of what we do at CROSS-SILO Management Consultants is focused on getting departments to collaborate more effectively to improve customer performance. To that effect, we utilize the ROUNDMAP™ Customer 360 Mapping System and Integrated Methodology as our guide. Our mission is to focus on achieving goals from a horizontal business strategy.

However, we don’t confine ourselves to improving cross-functional collaboration per business unit: horizontal collaboration between business units or divisions is already known to provide a concern with added competitive advantage, as suggested by several sources:

• In ‘Competitive Advantages’ Porter described what he referred to as ‘horizontal strategy’ to achieve competitive advantage in a diversified/multinational firm. A diversified firm has a number of advantages because it is a multi-business/multi-product organization. As companies face increased competition, the need for competitive advantage intensifies.
• Ansoff (1988) described the combined effect available to a diversified firm as ‘synergy’. He suggested that synergy can produce a combined return on resources that is greater than the sum of individual parts. This has been expressed as 2 + 2 = 5 to illustrate that the firm’s combined performance may be greater than the simple aggregate of parts.
• Hofer and Schendel (1978) referred to synergy as “joint effects”. The ‘development of interrelationships’ is suggested as a way to obtain synergy.
• Chakravarthy and Lorange (1991) see adapting the strategy process to the context of the organization as an important management task. This includes nurturing strategic thinking and promoting intrafirm cooperation.

Porter et al suggested that ‘interrelationships’ between business units/divisions are a precondition for obtaining competitive advantage from a ‘horizontal strategy’. However, it is important to note that he actually means ‘horizontal corporate strategy’. According to Porter, a business strategy is to achieve unit goals, while a corporate strategy focuses on portfolio management, restructuring, transferring skills, and sharing activities across the enterprise. We won’t dive in any deeper. There is ample documentation on these subjects on the internet.

However, be aware, while horizontal corporate strategy (interrelationships) is part of the curriculum of most business schools, horizontal business strategy (interdisciplinary relationships) is hardly ever. In our opinion it makes no sense to look for synergy on concern-level while ignoring similar leverages on the business-unit level.

As such, we’re convinced that it is critical for any business (unit) to improve customer performance by streamlining interdisciplinary collaboration – as suggested by the layout of the ROUNDMAP – in a similar matter to how a horizontal corporate strategy means to improve corporate performance.

In a scheme it looks like this:

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Business Model Canvas For Beginners. 4. Customer Relationships – Unpacking How To Fuel Long-Term GRowth

 All communications should strengthen customer relationships not only during the first stages of the marketing funnel but also post-purchase. Ask how each communication tool enables you to improve customer retention is as important as customer acquisition.

Building relationships and increasing loyalty are required to increase profitability.

Business Model Customer Relationships

Customer Relationships section of the Business Model canvas.

This Customer Relationships Building Block represents the fourth building block in the Business Model Canvas.

Why Customer Relationships Are Important

Customer relations are important because:

• you want to be trusted by your customers and potential customers.
• your brand reputation impacts how you are trusted in a market and therefore the willingness of new customers to buy from you.
• it costs 5X more to get a new customer than it does to keep a customer.
• growth comes from reducing churn as well as acquiring new customers.

Customer Relationships and why they are important.

Customer Relationship Management (CRM) is a business strategy that is designed to improve how you manage to focus on the right customers to generate profits:

• GET CUSTOMERS
• KEEP CUSTOMERS
• GROW CUSTOMERS

Customers Change

Customers change a lot and often very quickly. Sometimes that can be down to new competitors in the market, a change in economic conditions, new technologies… Assuming your customers are the same year after year can be disastrous.

Developing ongoing relationships with customers not only helps you understand them but also how they change. Great businesses know this and use this to innovate.

Keeping track of your customer’s allows you to:

• identify new opportunities to innovate and generate new revenue streams.
• measure your performance vs goals.
• understand changes in the market and make necessary changes.
• understand how and what you need to improve to add value to your customers.
• deliver a better experience.

What Is Customer Relations?

Customer relationship management concerns the way you engage with customers to deliver the customer experience. This involves creating long-term solutions that are geared toward customer success. Customer relations aims to create a mutually beneficial relationship with the customer that extends beyond the initial purchase.

Your vision, strategies and approach impact every part of your business. Customer relationships are not just about the customer service department. Sales teams, marketing teams, customer service teams, customer support, customer success, and product development all play important roles in building successful customer relationships.

Customer relations also extend to marketing and sales teams as well since these departments have a significant influence over the company’s interactions with the customer.

Customer Relationships are the type of relationship that you want to provide to a customer segment. It also represents the section where you consider the strategies for customer acquisition and retention.

The size of a brand’s customer base is closely linked to market share1.

Not surprising really, however, it shows the importance of growing a database of customers and lowering churn within your business.

What Are The Benefits Of Customer Relationships?

If you don’t have a good value proposition then you won’t get email sign-ups or conversions on landing pages. For more information on how to develop a powerful marketing process download the free Growth Marketing Blueprint. The Canvas is designed to help you map your customer acquisition strategy and test it.

Customer Relationship Management is at the cornerstone of marketing and for good reason. The research shows that customer relationships are fragile and impact the bottom line either positively or negatively depending on how well they are managed.

Companies that do a better job of managing customer relationships see higher customer retention rates.

• Studies show that 61% of customers stop buying from a company if they have a poor customer experience.
• 60% of customers who said they would likely do business with an organization again if the company handles a customer service issue fairly, even if the outcome isn’t in their favour.
• Studies show increasing customer retention rates by just 5% can increase your profits by 25% to 95%.
• Customers loyalty is highly valuable for businesses as repeat customers are nine times more likely to buy from you than leads that have not yet converted. 
• ThinkJar Research shows that 55% of consumers will pay more money for a product or service if it’s a guaranteed good experience. 
• 91% of unhappy customers who don’t complain simply don’t return to a company for another purchase. 
• Studies have even found that 65% of consumers believe that a good experience with a company has more influence over their purchase decision than advertising does.

 Despite the importance of customer relationships, many companies still struggle to get it right. A Microsoft survey discovered that the biggest complaint with a company is not being able to get help from an agent when needed to.

The Stages Of Customer Relationships

You need to test your business model in the market and understand if customers will buy, for how much and if they will also remain loyal.

Companies like Spotify, Uber, Amazon and many others, focus on ‘usage’ measures, not just customer acquisition measures. If you win customers but they don’t stick around to use your service then you know you have a problem. In effect, you have a big hole in the bucket that needs fixing.

Customer Acquisition

The definition of customer acquisition varies. As an example, some definitions consider it to be the absolute moment when a person buys your product. However, others consider this part of a larger process, and in this case, customer acquisition is acquiring customers email. The subsequent stages being validating the customer.

1. Content Marketing

One of the best tactics for acquiring new customers is utilizing the power of content marketing. Matching content to the different stages of your marketing is a proven method for winning customers.

Example Content Marketing Funnel

Content Marketing Resources

• Copyblogger
• Velocity Partners
• Content Marketing Institute
• HubSpot
• The Content Strategist

2. Search Engine Optimization (SEO)

Creating practical and useful content generates shares and links that help you start to naturally rank in search engines.

Social, Content and SEO

3. SEO Resources

• See my post on Best SEO Tips
• Moz
• AJ Kohn
• Ross Hudgens
• Bill Slawski
• Jon Cooper
• Brian Dean

4. Email Marketing

Email conversion rates

Smart businesses and entrepreneurs harness the traffic they receive from inbound marketing to build an email list. An email list is your customer database and forms the backbone of your CRM system.

Email Marketing Resources

• Litmus
• Mailchimp
• AWeber
• Vero
• Customer.io

5. Social Media

Social media gets hyped a lot but when it is combined with a broader strategy, brand narrative and marketing campaign it can be an extremely powerful way to generate leads.

Social Media Resources

• Social Media Examiner
• SocialFresh
• BufferApp blog
• Sprout Social blog
• Social Media Explorer

5. Analytics

Building an online business without utilizing analytics is like driving with your eyes closed.

Analytics Resources

• Google Analytics blog
• Avinash Kaushik
• Kissmetrics
• Analytics Talk

Analytics Tools

• Google Analytics
• Hotjar
• Clicky

Customer Retention

Customer Retention refers to the long-term relationship a company establishes with its customers. The more repeat customers, a company has, the more it is assured of champions who will market its products and help it acquire additional customers.

Customer loyalty is a behaviour while customer satisfaction is an attitude.

Customer Retention Strategies

1. Stand For Something

Customers are more likely to ignore you if your company doesn’t stand for anything. Research from the Corporate Executive Board that included 7,000 consumers from across the U.S. found that of those consumers who said they had a strong relationship with a brand, 64 per cent cited shared values as the primary reason. 

2. Use Positive Social Proof

While negative social proof (“Nearly 90 percent of websites don’t use heat mapping software!”) has been proven to dissuade customers rather than encourage them, numerous studies on customer acquisition have shown that positive social proof (like testimonials) are commonly the most effective strategy for getting people to listen and trust your brand.

3. Reduce Pain Points And Friction

All businesses, no matter the industry, are going to have to sell to the three types of buyers that are out there. According to research from Wharton Business School, nearly a quarter of these buyers will be conservative spenders or “tightwad” customers.

4. Don’t Just Sell — Educate

According to serial entrepreneur David Skok, sales are often more effective when you have an existing relationship with a customer, and when you’ve already provided value. This matches up with research from TARP Worldwide, which shows customers do enjoy receiving helpful recommendations on new information and products that will help them achieve better results.

5. Delivering Surprise Reciprocity And Delight

The #1 thing that creates loyalty in anybody (that includes your customers) is the social construct of Reciprocity. Reciprocity is the social construct that makes the world go ’round and keeps customers coming back. The premise is simple: when “delighting” customers makes sense, it’s best served up as a surprise. 

6. Don’t Overspend To Delight

Handing out discounts and freebies can be costly. Instead, you should embrace the art of the frugal wow — creating reciprocity through small, thoughtful gestures. In fact, psychologist Norbert Schwarz found that as little as 10 cents can create reciprocity between two individuals (it really is the thought that counts).

Types Of Customer Relationships

Personal Assistance

This type of customer relationship is characterized by human interaction and is typically used by industries such as hospitality and events. Customers have the opportunity to interact with sales representatives, customer services representatives, concierges and VIP assistants.

Dedicated Personal Assistance

This type of relationship takes personal assistance to the next level by assigning dedicated customer representatives to the customer. This kind of relationship is often used within B2B environment that involve complex services and products as well as high-value contracts. The representative develops a long-term relationship with a customer to help tailor services to a customers need and secure the business over the long-term.

Self-Service

Self-service has become more popular as new digital technologies are enabling a greater degree of personalization. Methods used include forums, AI Chatbots, knowledge bases and FAQ’s.

Automated Services

Automated services help customers to perform services themselves. These kinds of services usually offer more customized experiences. As an example, Amazon uses a customer’s online and buying behaviour to provide suggestions to the customer to enhance his/ her shopping experience.

Communities

In today’s social media-driven environment, communities are a wonderful way for companies to understand their consumers, get insights into their habits, perspectives and create a platform in which customers can get together and share knowledge and experiences.

Co-Creation

Companies are increasingly changing the nature of the customer relationship by involving them in the design and even the creation of the end product. Proctor and Gamble and many other companies have used customers to help them innovate and produce new product and services. Open innovation, which relates to concepts of co-creation and crowdsourcing, makes use of a technology-enabled platform to innovate with consumers, universities, startups and important network partners. 

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