Asset Light Business Model
It is common knowledge that the worlds largest cab service Uber does not own any vehicles. Similarly, one of the worlds largest boarding and lodging solution providers, Airbnb does not own any hotels either! The largest and the most profitable companies of the world such as Microsoft, Google, etc. do not own any tangible assets.
It is important to note that this did not happen by coincidence. All this has happened because of a concerted effort of entrepreneurs to focus more on asset-light business models. Asset-light business models have become a buzzword today. It is almost impossible for any new enterprise to get funded unless it classifies itself as an asset-light business model.
In this article, we will closely examine what an asset-light business model means and will also look at some of its salient features.
What is an Asset Light Business Model?
An asset-light business model, as the name suggests, is a business model where the company focuses on reducing the amount of capital that is invested in assets. In financial terms, this would mean that the size of revenue generated by the company would be very high as compared to the amount of capital tied up in assets. Finance enthusiasts will say that these companies have a very high asset turnover ratio.
Entrepreneurs carefully study the value chain of a business in order to identify the key functions which need to be kept in the house. Any other functions which are not mission-critical are outsourced to vendors in order to increase efficiencies.
For instance, in the case of Nike, manufacturing is generally outsourced. The company decides to focus on marketing. On the other hand, in companies like Uber, the tech function is given a very high priority. Asset light business models are a smart way to deploy business capital to build a competitive advantage and then use that competitive advantage to run all non-critical functions efficiently.
Salient Features of the Model
Asset light business models are not really new. They have been in existence for many years. However, with the resurgence of tech-based businesses, asset-light business models have come to the forefront once again. Here are some of the salient features of asset-light business models which have been mentioned below:
- Focus on Intangible Assets: The whole focus of companies using asset-light business models is to gain a competitive advantage over the competition using intangible assets. For some companies, this intangible asset is in the form of a brand name. On the other hand, for some other companies, this intangible asset is in the form of patents, algorithms, software, or such other intellectual property rights.
Instead of spending money on constructing factories and warehouses, the money is often spent on building intellectual property which provides a very specific value proposition that is difficult for the competition to replicate.
- Focus on Customer Facing Side of the Business: It is also important to note that most of these asset-light companies focus on the customer-facing side of the business. Their business models are created in such a way that they solve a specific need for a business and acquire customers. The execution part of the business is then passed on to other service providers.
It is the ability to acquire and pass on customers to service providers which allow these companies to earn a return on investment that is higher than the competition.
- Creating a Lean Enterprise: The entire asset-light business model is based on the concept of lean enterprise. This means that these businesses conduct every activity in a manner that is not wasteful. Asset light business models are meant to redesign the entire process and eliminate any wasteful activity.
- Fixed Costs to Variable Costs: Another important feature of the asset-light business model is the relentless focus on de-risking the business model by reducing operating leverage. Asset light businesses are famous for turning every fixed cost into a variable cost.
For instance, companies can turn fixed salary costs into variable costs by hiring contractors and gig economy workers instead of full-time employees. Similarly, asset-light companies use cloud-based solutions to lower their costs instead of investing upfront in buying servers and other data center related expenses. The more any company can convert fixed costs into variable costs, the closer it is to having an asset-light business model.
- Faster Response Times: Another important characteristic feature of asset-light business models is the ability to quickly respond to customer requests. Even though the requests are serviced by third-party services, the customer-facing business has to take ownership of the service delivery. This means that they have to create a system wherein they can quickly pass on the message to a nearby service provider and can also track their performance and service delivery process. The entire supply chain has to be linked by well-designed information systems that quickly and accurately transfer the required information to all stakeholders.
Asset light business models have transformed the way businesses function. These businesses are now present everywhere from grocery shopping to real estate brokers. Asset light business models are able to utilize the existing setup that small and medium businesses already have in order to provide the last mile reach to the customers. These companies are highly focused on their competitive advantage which is what makes them highly successful.
|❮❮ Previous||Next ❯❯|
Authorship/Referencing - About the Author(s)
The article is Written By Prachi Juneja and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
- Seed Funding - Introduction
- Why is it Difficult to Raise Seed Funding?
- Documents Required for Startup Financing
- How Co-Founders Split Their Equity?
- Proof of Concept
- Minimum Viable Product
- What is Prototyping?
- Asset Light Business Model
- Advantages of Asset Light Business Model
- Disadvantages of Asset Light Business Models
- Cash Burn Rate: The Basics
- Managing the Cash Burn Rate
- Startup Financing and Term Sheets
- Key Terms and Conditions in a Term Sheet of Startup Funding
- Red Flags that Investors Need to Look out for in Term Sheet
- The True Cost of Owning a Property
- Valuation of Early-Stage Startups: The Mindset of Investors
- Pre Money and Post Money Valuation
- Start-Up Valuation: Advanced Concepts
- How Pre-Revenue Companies are Valued?
- Valuation Divergence - Meaning and its Importance
- How Do Option Pools Work?
- What are Capitalization Tables?
- Asset Sale vs. Stock Sale
- Financial Models for Startups
- Key Performance Indicators for Startups
- Restricted Stock Options (RSUs)
- Veto Rights - Meaning and its Importance
- Financial Benefits of Incubators
- What are Unicorns?
- Why Startup Companies are Staying Private?
- Why Unicorn Companies Fail?
- Building a Startup Team
- Bootstrapping: Meaning and its Advantages
- Disadvantages of Bootstrapping
- Revenue Based Financing
- Convertible Notes and Startup Funding
- Pros and Cons of Convertible Notes
- Simple Agreement for Future Equity (SAFE)
- Keep It Simple Securities (KISS)
- Series A Funding
- Series B Funding
- Series C Financing
- Venture Debt in Startup Funding
- Pros and Cons of Venture Debt
- What is Venture Leasing?
- The Freemium Model - Different Types of Freemium Models
- Pros and Cons of Freemium Model
- Scalability and Startups
- Pros and Cons of Scalable Business Models
- Why Do Start-ups Fail After Receiving Funding?
- Start-ups and Arbitration
- What is a Revenue Model?
- Understanding Investor Focus on Burn Rate
- How Investors Evaluate Start-up Ideas?
- Government Regulations Which Impact Start-Ups
- What is a Start-up Accelerator?
- Managing the Operational Metrics of a Startup
- Different Types of Investors
- The Founders Dilemma
- Role of Social Media In Start-Up Funding
- Start-Ups and Public Relations
- Red Flags for Start-Up Investors
- IPO: An Exit Route for Start-Ups
- What is Acqui-Hire?
- How to Build a Start-Up that gets Acquired?
- Legal Issues Faced by Start-up Companies
- Corporate Venturing
- How Reverse Pitching Works?
- Aggregator Business Model
- Marketplace Business Model
- Difference between Aggregator and Marketplace Business Models
- Product as a Service (PaaS)
- Benefits of Product as a Service (PaaS) Model
- Disadvantages of Product as a Service (PaaS) Model
- The Co-Working Business Model
- How Co-Working Spaces Make Money?
- Peer to Peer (P2P) Business Model
- The Instacart Business Model
- The Goodleap Business Model
- The Twitter Story
- How Tesla Reinvented the Automobile Industry?
- How Epic Games Changed the Gaming Industry?
- The SpaceX Success Story
- The Stripe Business Model