Souq.com is a two-sided marketplace. It is focused on selling to consumers in the Middle East (UAE, Saudi Arabia, Kuwait, and Egypt) and also in the Indian subcontinent and further afield. It’s sellers are predominantly SME’s in the Middle East, through it also trying to encourage large FMCG companies such as Nestle onto the platform. This articles describes the Souq Business Model Canvas and how Souq makes money
Unlike the US and Europe, the Middle East has a very fragmented retail environment with SME’s making up a much larger proportion of the market. This is typified by the number of souk’s in the region – forming a much more vibrant and important party of life than the British high street.
Souk’s merchant base is formed of these thousands of SMEs and anecdotally this appears to be a difference to Amazon in the US where merchants have come from a new class of entrepreneurs.
Customers at Souk are predominantly in the upper and middle classes due to the low market penetration of e-commerce (about 2% in 2017 compared to 8% in the US ) and this is exacerbated by the high-income inequality in the region even though 50% of the population is under 25 and in the west would be considered an ideal target market.
Souq’s value proposition is based around 4 key offerings. Firstly, it offers an easy and accessible way for hundreds of thousands of SME’s across the middle east to sell online without having to invest in a website. Equally SMEs do not have to develop technical or marketing skills. This makes it simple and easy for merchants to list products in Souq’s offering of 500,000 SKUs. The result is that merchants can move smoothly from 19th century sales techniques to 21st century methods without disruption.
For customers it provides a huge variety of choice. What differentiates it from other e-commerce sites are its payment options, its risk management and its brand status.
In the Middle East, as in much of Asia, credit and debit card penetration is much lower and less trusted. There is a fear that by paying online goods may not be delivered. Consequently, Souq has developed innovative forms of cash on delivery (COD) payment that minimise the risk to both merchant and customer.
As well as COD it also offers purchase financing through partnerships with several UAE banks. Both systems require customers to have a track record using the platform. In the case of COD, the more they spend the larger purchases they are able to make. In the case of financing, a better track record means great credit limits.
For customers Souq offers a wide variety of consumer protection instruments that deliver far more than the regions ineffectively enforced consumer rights . This has the impact of making it far less risky to purchase and item, and easy to obtain redress if there is a problem. It also has schemes in place to reduce fake gods and fraudulent use of IP ensuring that consumers get the value that they pay for.
The final part of the value proposition is the strong band based on its first mover advantage. As the largest e-commerce site in the region with a track record of almost a decade the brand offers consumers reassurance that they are not taking big risk by shopping online.
These value propositions are quite different to those of Western ecommerce sites. The reason is that there the battle to educate the consumer and change his behaviour has already been won. In the Middle East it is still ongoing, and it is likely that it was this educational problem that was responsible for the low valuation when it was purchased by Amazon .
Marketing & Distribution Channels
Souq reaches its customers through its flagship website and accompanying mobile app (which now contributes 70% of sales). It also generates substantial traffic through a network of affiliate partners. One of the larger parts of it’s cost base is the need to have large direct sales teams to sign up the 75,000 SMEs who sell on the site.
The scale of Souq also means that reverse network effects start to apply for merchants as many categories are swamped with similar products meaning that new merchants enter into a red ocean and are unable to create value for themselves.
Like Amazon, Souq focuses on a low-cost customer service model with all transactions and many customer service enquiries fully automated.
Souq makes revenue if four ways. Customers buying items on the platform pay nothing directly. Merchants using the platform pay fees which subsidize the marketplace for consumers.
Souq charges merchants a commission on sales and a transaction fee for each sale. This brings in most of its revenue. It also has a significant amount of display advertising on the site that merchants can use to promote their wares.
Finally, it offers consumers prepaid cards we site. It charges a small commission; however the expectation is that the breakage rate will be between 2% and 20% (Souq does not release the numbers)
The core of Souq’s key resources are three interlinked systems. The first is the website itself. This allows the core value of Souq to be delivered – the buying and selling of products online. In response to market failures in the Middle East it has also had to invest significantly in two other systems.
The first of these is the payment system that morphed into PayFort. This enables seamless payments across a region where there are no c0ommon banking systems or payment providers and large numbers of people are unbanked in the traditional sense
The second is the delivery system which was incredibly difficult as in many countries the postal system was non-existent or flawed. After trying several options Souq developed an in-house gig economy type courier service.
Both of these are key resources because they solve intractable problems that all competitors face and doing so efficiently provide a competitive advantage.
Souq’s key activities are improving and optimizing the platform and making sure that the cash to delivery process is as friction free as possible. It also continues to have to invest heavily into educating the market to grow market share to the same level as the west.
Key partners are Amazon which owns Souq and is presumably providing talent and technology. The other partners are the banks which provide financing, affiliates and couriers.
The business model is cost driven using the same model as Amazon. The goal is to reduce unit costs as low as possible to maximize the contribution from each sale. This means a focus on improving system and ensuring that they deliver more efficient outcomes as they scale
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