Building for Loyalty

In my last essay I focused on metrics and incentives that companies should use to achieve customers’ loyalty. I believe that Loyalty should be considered in every relationship of an organization. In this essay, I discuss ways to take Loyalty into consideration when building an ecosystem. Most companies do not achieve consumer loyalty and it seems to me that even less of them achieve loyalty from their partners.

Having a good product may not be enough to achieve competitive advantage. Tech winners must focus on developing competitive advantages for their business ecosystem. Acting as platforms, they are central hubs that connect multiple suppliers to multiple customers (TEECE, 2018). The job of those central companies is to keep customers entering the ecosystem and give reasons for the participants of the ecosystem to stay here, taking care not to steal business from partners and to always keep evolving (BIRKINSHAW, 2019).

For example, Apple offers the AppStore on their devices. External partners benefit from Apple’s distribution infrastructure and can build and sell apps on the AppStore to end consumers. In return, Apple appropriates part of the value generated by the partners and define rules that they must follow in the ecosystem. Variations of this ecosystem model are used by many digital companies around the world.

Whole System Loyalty

Partners have a dual role as supplier and consumer of the central platform. On the one hand, they provide content or products to be sold to consumers by the platform. On the other hand, they consume services provided by the central platform and take advantage of its reach. When managing an ecosystem, it is important to seek policies and incentives for partners’ double role.

As stated in my last essay, loyal customers should be desired because they will remain with the organization even in difficult times and even if cheaper new offers appear. Similarly, a loyal partner is one who will remain in the central company’s ecosystem, perceiving value in a long-term partnership. Companies with loyal partners will also have hard-to-copy advantages. They can increase revenue from services while getting more partners. They can also increase their reinvestment in the ecosystem while managing to increase profits. Even when the ecosystem is in trouble, faithful partners will be reluctant to jump ship, choosing to work together and to solve issues with the platform.

Companies that have partners with low levels of Loyalty are fighting on two inner fronts. On the one hand, they must be careful that partners do not bypass the platform and gain direct access to customers. On the other hand, they must be always alert so that partners do not decide to use other platform or several platforms at the same time.

A successful ecosystem needs a loyal network. In most platforms it is possible to find loyal customers but partners who would rather go to any new platform that comes up with a marginally better remuneration model. Uber, Doordash, Apple and Amazon experience a lack of loyalty from partners who feel they are harmed by their relationship with the platform and feel alienated from the decision-making processes. They use those platforms because they have nowhere else to resort, for now. As they are unable to negotiate with the platforms, partners are now pressuring the government to intervene on these companies. When a competitor company appears, partners are quick to use it, in hopes of them beating the incumbents.

A lot of the large companies that are called platforms today focus on maximizing the value they appropriate from partners instead of the value created for all agents involved in the ecosystem. Others, such as Facebook, achieve success but are mostly decoupled from partners/creators, aggregating content (THOMPSON, 2018). And a few, such as YouTube, Alibaba, Amazon’s Twitch and Bandcamp have strategic models that take partners business growth into account — all with their own issues and limitations of course.

No company is immune to alignment issues within its ecosystem, but it stands to reason that with more transparency and expectations alignment, partnerships could be more successful. Central companies should focus on partner’s metrics and success indicators as their own.

This means having partners in mind when making investments decisions and having the role of a knowledge hub. The central company has an active duty of finding best practices developed by partners and teaching them to other partners. It is also the central company’s role to allocate resources for ecosystem innovation, possibly with the help of a partners’ forum.

In large ecosystem, with thousands of partners, it gets harder to keep up with partners’ innovations, knowledge generation and process improvements. To ensure that relevant information reaches the central node, the platform needs to encourage that there are means and incentives for partners to actively bring issues up. This will only happen if partners are convinced that the advantages of sharing information with the ecosystem outweigh advantages that they could grab for themselves. This process is only possible with open communication channels. Partners should be encouraged to use their Voice for what they think is working and what should be improved. If their Voice is heard and they feel that there is a real effort to address what they say, they will not have to Exit the ecosystem when something goes wrong. Likewise, if partners feel that their positive inputs are being adopted with positive results for them and the ecosystem, this will reinforce their Loyalty.

Platform and partners have complementary sensitivities to changes in the competitive environment and in the behavior of customers. While platforms can address mass trends, partners can be quicker to perceive local changes. Mustering data from both ends enhance the capacity of the ecosystem to act faster than competitors.

Central companies that excel in finding best practices and in listening to their partners create hard-to-copy competitive advantages. True ecosystem differentiation occurs when the bond formed between partners and platform are hard to emulate and advantageous for all involved.

Platform executives have the role to manage not only its employees and departments, but to act as conductors of the entire ecosystem. Managers must have the data on individualities of each partner and understand how each activity from the central company connects with partners’ activities. The central company must have processes for attracting, selecting, and improving partners, having in mind the ecosystem’s long-term strategy. This type of activity resembles strategic HR processes but they have intricately connected internal and external operations.

Building for Loyalty

Companies should focus efforts on collecting data that feed metrics of Loyalty, both from customers and from partners. Central companies should find ways to measure the health and success of the entire ecosystem.

What do your partners look for when they join the ecosystem? What partners are important for building the ecosystem brand? How is each partner ranked in terms of alignment with the ecosystem strategy?

Those questions lead to qualitative metrics and become harder to measure the larger the ecosystem. Qualitative research with key major partners/clients and a sample from minor ones can bring relevant insights about strategy alignment, reasons to joy the ecosystem and brand value.

Other questions lead to quantitative metrics and are intentionally ill defined here:

How reliable are your partners? Are you being a reliable partner to them? What partners are presenting bad results and why? What are some partners doing better than others and what can the platform teach to the rest of the network?

Reliability and results can be easily measured once defined but their definition differs for each ecosystem and all partners should have a common understanding of the reasons for those metrics. Outliers, both bad and good, should be investigated by the central company.

Loyalty, on the other hand, is a complex metric that takes into account both qualitative — partner churn and engagement — and quantitative metrics — partners opinions and perceptions.

How beneficial is the ecosystem to partners? Which partners are bringing loyal customers? How loyal are partners to the ecosystem? Are partners using competitors’ ecosystems at the same time as yours?

Loyalty is also a two-sided relationship. To ensure a loyal partnership, platforms should address ways to reward partners.

What advantages do partners receive for being part of the ecosystem for a long time? What incentives does a partner receive to be exclusively into the ecosystem? What platform initiatives are designed to improve specific partners businesses? What benefits do partners lose by entering a competitor ecosystem?

Central companies must be able to create a safety net for loyal partners who are doing poorly. They should also offer development steps for partners who are doing well so they can further improve their products and processes. Having the right data and transparent rules goes a long way. Alibaba, for example, studies all transactions on its platform to understand the success of each partner. When identifying positive cases, the company uses its previous knowledge of similar partners to offer investments that help those partners reach their next step (ZENG, 2018).

Loyal partners that show good results should be a priority for ecosystem reinvestments. Only the central company can identify which partners are presenting results that have a positive impact on the ecosystem’s long-term plans. Those “super partners” should be treated with special attention and have special development paths.

What are the signs that a partner will be able to achieve the next step in its development path? What resources are needed for this partner to improve? Are there other agents in the network that could help this partner achieve more scale? Are we optimizing the ecosystem so that partners that grow are those most loyal to the ecosystem? What do the most successful partners believe they need to develop themselves even more? What do the best partners expect for the future of the ecosystem?

Not all loyal partners will have good results. To retain super partners that are doing bad, the central company can develop a safety net for them. This is no easy task. Ecosystem loyalty is impacted by network effects. Having a bad apple may be negative but sometimes cutting it from the network has an impact that is even worse. Central companies’ managers should have a deep understanding of the ecosystem and how partners feel about these decisions.

Which ones should stay and receive help and which ones should be removed from the ecosystem? What kind of help is best for each one? What is the reason for a partner who was doing well to be underperforming? Are there external factors at play? Which partners that are weak today will be important for the future of the ecosystem? What went wrong and what can the ecosystem learn from this?

Sources

BIRKINSHAW, J. Ecosystem Businesses Are Changing the Rules of Strategy, HBR, 2019.

TEECE, D. Profiting from innovation in the digital economy, Research Policy, 2018.

THOMPSON, B. The Bill Gates Line. Stratechery. 2018.

ZENG, M. Alibaba and the Future of Business, HBR, 2018.