Disadvantages of Asset Light Business Models
It is true that some asset-light business models have been very successful of late. However, this does not mean that all asset-light business models will always be successful. There are certain advantages to structuring a business in a way that is compatible with an asset-light business model. However, there are certain disadvantages of choosing the asset-light business model as well. Since we have already seen the salient features and the advantages in the previous articles, it is now time to have a closer look at the disadvantages.
- Over-Reliance on Vendors: The biggest problem with asset-light business models is that companies that follow such models face an overreliance on vendors. Vendors are independent entities who are seeking profit and oftentimes their philosophy does not match the philosophy of the startup.
Vendors are the face of the company to the end consumer and provide the final service. Hence, if they are not aligned with the values of customer service, they might resort to profiteering and other unethical means. As a startup company grows larger, it has high bargaining power with the vendors. This is because it redirects several customers to the same vendors. However, a smaller company does not have much leverage over its vendors. Hence, it is important for startup companies to be very careful when they select the final vendors who will actually provide the good or service to the customer.
- Less Standardization of Services: The problem with having several vendors is that maintaining a certain standard of quality is often very difficult. This may not be because of wrong intent on part of the vendors. Instead, it may simply be due to the lack of availability of resources. For instance, different vendors providing different types of car repair services may have mechanics of different levels of expertise. In such cases, standardization of services is very difficult and it is quite possible that different customers might have very different experiences with the company which leads to dilution of brand image.
- Low Barriers to Entry: Before the advent of asset-light business models, a significant amount of capital was required in order to begin any business. This high capital requirement used to act as a barrier to entry. Since a high amount of capital was required, very few people could actually enter into the market. Hence, there was lower competition and higher profits for the existing players.
However, the possibility of using asset-light models has changed the game completely. It is now possible for small entrepreneurs to use bootstrapping techniques and enter the market. Once they do enter the market, they start using discounts as well as predatory pricing in order to gain market share. This creates a pricing war which ultimately negatively impacts the entire market.
- Higher Cost of Operation: The entire asset-light business model is based on the concept of converting fixed costs into variable costs. Now, there is no doubt about the fact that this conversion provides the organization with a lot of flexibility. However, it must also be understood that this conversion can lead to more expensive products.
The scalability is achieved by outsourcing to third-party vendors. These third-party vendors provide flexibility at a cost. For example, if a company has a high scale of operations, cloud-based computing services can prove to be much more expensive as compared to a fixed-price data center. Hence, if a company has a stable business with relatively stable sales, they are better off having a fixed cost-based cost structure instead of relying extensively on variable costs.
- Lower Quality Human Resources: Most asset-light business models try to lower the cost of human resources. Companies like Uber and Airbnb are notorious for having very few employees. Most of the people working for them are not classified as employees. Instead, they are classified as contractors. Hence, they are not in the purview of employment laws.
Startup companies are not required to provide benefits such as insurance or retirement funds to these contractors. This may seem like a great mechanism to cut costs in the short run. However, in the long run, high-quality human resources are unwilling to work under this model. Asset light business model-based companies generally have a hard time filling up positions across the various levels of the company. They generally face a high turnover of employees across all levels which ends up being more expensive.
- Risk of Obsolescence: Finally, the entire asset-light business model is generally based on the superiority of some kind of intellectual property. Companies like Uber and Airbnb are at the top of their respective fields because they use the latest technology in their applications. Their success is predicated on the technological superiority of their mobile phone-based applications.
However, it is quite possible that with the passage of time, a new startup may come up with another application that is more superior from a technological point of view. This is where the asset-light-based companies face the threat of obsolescence. They have to invest huge sums of money in research and development and have to constantly be ahead of the game at all costs.
The bottom line is that there can be some significant disadvantages to following the asset-light business model as well. Entrepreneurs need to be aware of these disadvantages before they structure their entire business venture based on this design.
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