This case examines Zomato, a hyperlocal food delivery service, and its business model. The case shows how the company went ahead and broadened its business model to introduce Zomato Gold, a new loyalty programme. It reflects on the long-term sustainability of the hyperlocal market delivery model, as well as the challenges it faces to thrive and deliver against the competition (Goel, V., & Venkataraman, A. 2019). This case shows how Zomato hurt one of the platform's users and how the platform fared in the end. It also delays the study of important aspects of platform overreach and how it affects the network effects of this multifaceted platform market, delaying the analysis of the loyalty programme. The case can be used to demonstrate the drawbacks of a multi-faceted platform business model, such as how overreach on one side of the platform can jeopardise the delicate equilibrium of platform members, how to restore trust remedial steps, and how platforms are required to cope with the new normal that arises after these faith-reducing events (Harvard Business Publishing Education. 2020).
Zomato began as a forum for listing restaurants and their menus, as well as allowing diners to leave feedback. The company quickly switched to a cross-side network, which is common among online food aggregators (IIDE, 2020). A traditional cross-sided platform model brings together two disparate groups of users to perform commercial transactions. The use of the two groups of users is complementary. The platform's effectiveness is determined by the number of users on either side or how they interact.
In the case of Zomato, there are consumers on one side and affiliated restaurants on the other. The platform's effectiveness is determined by the number of orders placed by customers, which leads to a rise in foot traffic and business for partner restaurants due to "network effects." However, the value provided by such platforms is contingent on their ability to link the two groups of users in a win-win situation.
It's critical to comprehend the factors that have contributed to Zomato's preference for strategies aimed solely at rising platform users, which in turn drives up order volumes on the platform. This can be explained in terms of the types of funders and funding, as well as the essence of the platform's two users (restaurants and consumers).
The action plan needed to shift diners' focus away from discounts and toward loyalty: establishing a minimum billing cap for Zomato Gold; this could be $800 in the food bill; this would ensure that customers are offered valid non-discounted goods in addition to discounted items, increasing profit per order (Das, A. 2019). Since restaurants have lower profits on weekdays, customers can only receive discounts on certain days. Customers who spend a certain amount on a weekly or monthly basis are offered personalised discounts, such as Zomato credits. Restaurant royalty payments should be focused solely on annual revenue; therefore, if fewer profits are made, refunding a portion of the restaurant's royalties would improve their goodwill and enable more restaurants to use ZG. For new subscriptions, Zomato will limit the ZG membership package to six months rather than one year. Since the environment is unpredictable, Zomato should focus on short-term strategies rather than long-term goals. Two options are to diversify the company's product line and enter new markets. To pique the attention of stakeholders. Zomato may extend membership for two months to existing customers and partners.
Headquarters of Zomato which is in city of Bengaluru, is now subjected to criticism which is coming from the Indian Hotel and Restaurant Association. This is all happening while a is feud going on between the food tech veterans and owners of restaurants (AHAR). According to news, AHAR, a global organisation with 8,000 members, has decided to boycott Zomato Gold's distribution function.
The association took the measure after Food Tech Unicorn was charged with illegally operating kitchen deliveries, giving Zomato Gold owners a stringent exemption, and having problems with delivery officials.
Restaurant owners and grocery aggregators are perplexed by food technology firms. hefty discounts In September, Zomato added fuel to the fire by launching its Gold feature in its distribution section (Lahoty, A. 2020). Gold members can receive with the exception of mixes, specialty dishes, and MRP parts, the item with the second-highest price on their order is free.
Anurag Katiyar, president of the NRAI has described this event at the time as a desperate effort to "spark the sinking fate of its flagship Zomato Gold program". “It was originally used for eating out, but it is now also used for deliveries! Most importantly, it is now a strategy that only inspires heavy discounts on both the dine-in and delivery systems, with restaurant partners bearing a sole burden for costs,” Katiyar said in a statement.
AHAR has requested that alleged arbitration commissions provided by Zomato be terminated, as well as the inclusion of gold in the distribution service. It has been stated by the association that the distribution commission of the company will come to 20-25% (Povaiah, R. 2019). As a result, restaurant owners requested a limit of 15%, which included the Goods and Services Tax. According to the study, the increase is ultimately borne by the consumer as eateries are forced to raise food prices.
According to the NRAI, AHAR's move will have an impact on Zomato's business in Mumbai, where AHAR is headquartered and has a sizable presence. "The NRAI has stated unequivocally that Zomato Gold is detrimental to business and has no commercial value."," the organization says (Founder Fuels, 2019). "It has run a very active #Logout campaign." We did not do this for distribution; We wanted to give talks a chance as a responsible business group. However, it has not moved at the required pace, and if nothing changes, we will be forced to leave the negotiations and look for other options. A NRAI spokesman said, "We have all the options open."
In August, the NRAI met with food aggregators, highlighting eight problems, including food-tech firms resulting in restaurant high and uneven commission fees, deep discounts, private labels, unfair terms and conditions, and so on.
The #Logout campaign was launched by the association to oppose aggressive pricing and strong rebate practices of food aggregators (Nair, J. P. D. |. 2020). Subsequently, many restaurants, including EazyDiner, Dineout's Gourmet Passport, and Zomato Gold removed themselves from the platforms.
In a September follow-up meeting, the NRAI stated that both Zomato and Swiggy provided a strong roadmap to fix issues such as deep discounts and lack of accountability, but that no progress had been made on Zomato Gold.
Prices in competitive industries are typically determined by the marginal cost of constructing an additional unit, and profit margins are typically thin. Customers' ability to pay determines the price range in areas with high barriers to entry, and margins are likely to be thicker (Digital Innovation and Transformation, 2015). Pricing for two-way networks is slightly more difficult. Platform providers should set a price for each party, taking into consideration the growth and willingness of the other party to pay. In most two-way networks, there is a "subsidy side" or a group of users that are considered excessive by the "money side" or other user groups when they are drawn in large numbers. The platform provider sets prices for the party that was an independent sector because the number of subsidy-side users is necessary for the creation of strong network effects. On the other hand, the money side, if it is considered an independent sector, costs more than this. The aim is to build a "cross-side" network effect, in which money-side users will pay a premium to communicate with subsidy-side users if the platform provider can attract enough of them.
The tendency of cross-side network effects to behave in the opposite direction is common. Money-side users find the platform more appealing to subsidy-side users, increasing sign-ups. Platform providers with price caps on both sides must figure out how much of a single party's revenue should be subsidised and how much the other party can pay for the privilege of using it (Joseph, A. G. T. D. D. |. 2020). "Same-handed" network effects, which arise when attracting traffic on one side draw even more users in the opposite direction, further complicate pricing. New users would find it easier to share games with friends or find an online gaming buddy if more people purchase the PlayStation console. Economists refer to this snowball effect as the positive same-side network effect. (Same-side network effects can also be detrimental.) For a more detailed explanation of how network effects draw or repel users, see the sidebar "Dynamics of Two-Way Networks." It's not always clear who should fund the platform - whether anyone should - or who should pay for it. For example, nascent B2B exchanges should have charged buyers during the dot-com boom. Emerging B2B exchanges, for example, debated whether or not to charge buyers fees during the dot-com period.
Das, A. (2019, December 16). The Dark Side Of Discounts: Lessons From Zomato Gold For India’s Food Startups. Inc42 Media. https://inc42.com/datalab/the-dark-side-of-discounts-lessons-from-zomato-gold-for-indias-food-startups/
Goel, V., & Venkataraman, A. (2019, August 30). India’s Restaurants Rebel Against Food Delivery Apps. The New York Times. https://www.nytimes.com/2019/08/29/technology/india-restaurants-logout-delivery-zomato.html
Harvard Business Publishing Education. (2020). Hbsp. https://hbsp.harvard.edu/product/IMB811-PDF-ENG
IIDE, (2020, December 17). Case Study On Zomato's Digital Marketing Strategy . https://iide.co/case-studies/zomato-digital-marketing-strategy/
Joseph, A. G. T. D. D. |. (2020, May 30). Zomato should focus on building loyalty rather than giving discounts. BLoC. https://bloncampus.thehindubusinessline.com/case-studies/zomato-should-focus-on-building-loyalty-rather-than-giving-discounts/article30254451.ece
Lahoty, A. (2020, April 5). [#2] Negative Network Effects. Marginal Futility. https://marginalfutility.substack.com/p/negative-network-effects
Nair, J. P. D. |. (2020, May 30). Zomato can gain by working with restaurants on revenue management. BLoC. https://bloncampus.thehindubusinessline.com/case-studies/zomato-should-work-with-restaurants-for-better-revenue-management/article30254608.ece
Povaiah, R. (2019, August 21). Zomato Logout: Why Are Restaurants Protesting Against Discounts? TheQuint. https://www.thequint.com/explainers/why-are-restaurants-protesting-against-zomato-gold-discounts
Digital Innovation and Transformation, (2015). Two-Sided Network Effects for a Food-Tech Marketplace. https://digital.hbs.edu/platform-digit/submission/two-sided-network-effects-for-a-food-tech-marketplace/
Founding Fuel, (2019). Zomato Gold: A crisis that was waiting to happen. https://www.foundingfuel.com/article/zomato-gold-a-crisis-that-was-waiting-to-happen/
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