Most companies focus on high revenues, low costs and big profits. Digital disruptors however, do things differently. They focus on market share and long-term potential, instead of short-term monetization and earnings.
Disruptors and their investors are willing to sacrifice their profits in the short-term, to ensure a long-term global success. And it’s not just the rising startups following this course.
Amazon has been in business for nearly 20 years and still doesn’t make money. In the past five years, Amazon’s revenues rapidly grew from 25 billion to 90 billion USD, while the company’s net profit has only broken one billion USD once.
“People have been buying ‘AMZN potential’ for a decade because they’re certain that they can sell the stocks at a higher price than when they bought them – as Amazon executes well toward becoming the world’s largest store” noted James Walker, a lecturer of business statistics at The King’s College.
Matthew Yglesias of Vox calls Amazon a charitable organization being run by elements of the investment community for the benefit of consumers.
“The shareholders put up the equity, and instead of owning a claim on a steady stream of fat profits, they get a claim on a mighty engine of consumer surplus.”
The competitive pressure of needing to square off against Amazon, cuts profit margins at other companies, thus benefiting people who don’t even buy anything from Amazon. The worst thing of all is that the shareholders who are giving Amazon this financial freedom are quite likely the same ones who made their money in traditional retail. They are now using the profits they made there to disrupt their previous investments.
The Amazon-model is definitely not a one-off phenomenon. In the past, Zalando did not even generate a positive EBIT (Earnings Before Interest & Tax), yet now for the first time in years, they are about to. The low profits of these companies can be attributed to their tremendous growth on the one hand and the small profit margins on the other hand.
Although they aren’t making money, investors are keeping their faith in these businesses and their plans seem to be working out gradually. Again: they’re betting on long-term potential and global market share.
Zalando, like Amazon, focused on the growth of their market share instead of cashing in on quick – short-term – earnings.
Within 5 years, the company went from building an online marketplace for shoes, to becoming the leading online fashion outlet in Europe, by using product and geographical expansion. Now that Zalando has gained the market leadership, they are focusing on improving their efficiency so that their sales will transform into profit.
Not making money today, taking yours tomorrow
Both Amazon and Zalando have a lot in common as digital first businesses. They started off with a focus on rapid market share. To swiftly gain leadership, they kept their margins as low as possible (if there even were any at all) and invested all their profit into their expansion.
By doing so, they not only reinforced their own position, but also attacked their competitors from all sides. Amazon and Zalando have been pulling clients away from – online and offline – competitors, by selling things to people at prices that seem impossible. This pressures (and ultimately narrows down) the competition, which cannot afford to do this. Eventually this results in the possibility for these big players to become even bigger, gulping every bit of competition Google-wise.
This is a massive challenge for any traditional company in business today. Don’t let these disruptive companies ruin your business. Take your future in your own hands and start thinking about how you can start your digital transformation right now. It won’t be easy, but at least you’ll be taking a stand.
If you feel like you need help in dealing with digital disruption, check out our book on Digital Transformation.