Why Unprofitable Dotcoms Keep Getting Funded?

We have often asked this question about why do companies, especially the new age online marketplaces like Amazon, Ola, OLX etc. delay profitability. Why should they operate in losses and till when?

Today let’s try to find the answer to this perennial question.

So, the traditional and industrial way of thinking is that the more you create something, the less would be its incremental value for users. For e.g. a special edition Ferrari not just commands a specific value but people would be willing to pay more if one more unit is produced, the reason being that it is limited. But if the same Ferrari is produced in mass, then the value of an incremental unit may start to decrease after some time.

This is the reason why, the traditional marketing and industrial thoughts revolved around creating exclusivity to increase value, and precisely why the industrial age firms would strive to make profits as early as possible, because otherwise the incremental value of the product and service could decrease and keep going down as the scale of operation goes up.

Now, the digital or platform way of working is exactly the opposite. The digital platforms or marketplaces work in such a way that the more people use them, the higher is the value of the platform for an incremental user.

For e.g. people used OLA in the initial days received less value, because there were limited drivers leading to longer wait times and less connectivity to locations. But today the value to a user is much higher than what the early user received- there are more drivers, less waiting time and more locations covered. So the more this platform is used, the higher the value people using it will get.

In the case of OLA As time passes by the value provided by the platform becomes so huge that it will become difficult for drivers and passengers to abandon Ola and switch. Hence, today OLA management is in a position to reap or plan to reap profits. They can now increase their commissions.

All platforms should in their initial days, focus on ONE SINGLE attribute and that is ‘growth’, the growth of users and growth of transactions. Profitability, increased commissions, etc. act as frictions in the expansion of a platform and hence they should Which is why the endeavour for any platform in the initial days is to reduce friction by way of making the registration process very easy, attractive incentive schemes for joining and the focus is on increasing usage of the platform.