The Asset-Light Business Model explored
Created on 23 Aug 2023
Wraps up in 6 Min
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Updated on 24 Aug 2023
Zomato does not own a single restaurant but has seen a significant rise in its revenue from operations from ₹371.03 crore in FY 2018 to ₹4,707.04 crore in FY 2023. Zomato's revenue during the pandemic had doubled, but it is also necessary to note that their losses widened, too.
Any idea about the reason behind this growth over the past few years?
Let me tell you that Zomato has adopted an Asset-light business model, which allows the company to concentrate on marketing as its core activity while outsourcing the rest of its operations. One specific reason for Zomato's remarkable success during the pandemic was its robust online presence. People avoided social gatherings and opted to order food online because of the prevailing pandemic, which proved to be beneficial to them.
Asset-light business models provide significant scope for scalability. Let's discuss the business model and find out which companies have been able to get the most out of it.
What is the Asset-Light Business Model?
As the name suggests, Asset-Light is a business model where the company focuses on reducing capital assets and primarily focuses on the operations segment. The company believes in outsourcing assets to perform various non-core functions. It is also known as the "Fly Light Model".
This model is perfect for those businesses that have great potential for scalability in the future.
The world's largest companies, including Google and Microsoft, are earning huge profits without owning tangible assets of their own.
To help you better understand, let's take up the case of Nike - a famous brand in the shoe industry. The company generally outsources its manufacturing activities and focuses more on the marketing segment.
Nike relies primarily on building strong and emotional connections with its customers through events, sponsorships, and advertising as its core promotional strategy. Nike spends a significant part of their budget featuring high-profile athletes, celebrities, and influencers, which helps them create a strong emotional impact on their potential audience.
Advantages of Asset-Light Business Model
Asset-light business models offer numerous advantages to budding startups and existing big companies in the following ways:
- Low investment: This business model requires less capital to start with. The initial cost may include app development costs and working capital requirements. So, the founders maintain a significant stake in the foundation stage of the business.
- Scalability: Asset-light business models are more driven by intangible assets. Hence, the money and time required for expanding the business are comparatively less, providing a better scalability scope.
- Flexibility: An asset-light company is more flexible in a dynamic environment as it owns fewer capital assets compared to asset-heavy businesses.
- Attracts investment: This model, with lower capital requirements & greater scalability, attracts investments from potential investors.
You might have seen companies mentioning that they operate on an Asset-light business model in Shark Tank.
|Are you guys aware that you can invest in unlisted companies? Check this article for further details.
- Risk transfer: One can transfer the associated risk from the business to external vendors. When a company outsources its non-core activities, its associated risks are transferred.
Disadvantages: Asset-Light Business Models
Every business model has its pros and cons, and so does this. Want to know about the disadvantages of asset-light business models? Here are some you should know:
- Low barriers to entry: As this model is easily adaptable to various new startups, it sets low entry barriers for new entrants.
- Obsolescence Risk: Many prominent firms, including Airbnb and OLA, are operating on the latest technology in their mobile & web applications. As technology expands rapidly, their business activities have a high chance of disruption.
- Vendor dispute: Any vendor dispute between the firm and its suppliers may harm the company's sales & performance.
- Dependence: As this model relies heavily on outsourcing, the companies may face over-dependency upon their vendors to get the work done.
Company's case study
Everyone talks about the advantages & disadvantages of any business model, but we have something different for you. Let's refer to a real-life business that uses an Asset-light business model to perform better in the marketplace.
So, we will be talking about Getaround.
What? Never heard of this company? That's why we are here to give you a detailed study of how Getaround makes money through this business model.
Founded in 2009 and based in San Francisco, California, Getaround is a digital marketplace that allows customers to rent cars for a short period from private car owners. It has a presence all over the United States and Europe.
Getaround is a peer-to-peer car-sharing platform that allows individual car owners to lease out their cars for a few hours or miles in exchange for a fee. The company involves various safety checks to ensure trust with its customers.
It sounds more like OLX, right? It is similar in a way that the customers engage with other customers through the OLX platform.
Now, how does Getaround make money? What is their revenue model? You might ask.
Getaround makes money by charging a 40% commission on the rental value of each car booked through the platform. Since it does not own a single vehicle, the earnings are substantial. It bridges the gap between individuals who want to rent a car for a short time and people who want to lease out their vehicles when not in use.
Getaround has two primary users - Car owners & car renters.
- Car renters download an app that quickly finds the nearest car, as OLA & UBER do for you. They charge very nominal fees from the individuals, which are comparatively much less than car rental agencies.
- For Car owners, people sign up their cars (one or multiple) for rent through Getaround's app. After all the necessary inspections, they install hardware that Getaround uses to manage, control and protect their cars.
Getaround saves a lot of costs since it does not have to pay parking fees as the cars are parked in open locations. They save vehicle maintenance costs as owners do this, and so on.
Getaround has two main revenue streams - Startup costs & rental costs.
For every vehicle to be registered on their platform, there is an upfront Connect Setup Fee of $99 along with a $20 monthly data subscription (also known as Connect Subscription)
So, every car owner is charged $99 as a Connect setup fee and $20 on a monthly basis for a Connect subscription. The value of a monthly data subscription varies with the number of cars actively shared by the host on Getaround. It is given as:
No. of cars
Value of Connect Subscription (per car)
Discussing rental costs is what Getaround is designed for. If a car rents for $30, Getaround straight away gets $12, and the car owner receives $18.
Apart from rental costs, Getaround charges:
- License Fee: Each driver must pay a license fee at least once to verify that they are a licensed driver.
- An under-25 fee: A driver below 25 years of age must pay an additional fee to compensate for the risk factor.
- Booking fee: This fee is for the user who booked a car, and promotional codes do not apply.
These costs are applicable for the end-users who book a car and, hence, are not a part of the owner's profit. The company uses these costs to cover administrative expenses, app maintenance fees & more.
The Bottom Line
Asset-light models can be a perfect starting point if you're a startup or a big organization seeking ways to expand your operations.
While asset-light models offer greater scalability, reduced capital expenditure, and other benefits, it's important to note that they also have several drawbacks that can impact long-term operations. Given all the pros and cons of this model, one needs to analyze the suitability of this model in their business operations.
Asset-light models have revolutionized the way businesses are managed today. It has helped companies to focus on competitive advantage and customer-facing operations to enhance profitability down the road.
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