#best practices

5 min

What Are Digital Ecosystems, and Why Are They Ruling the Market?

Exploring the strategy that propels businesses to the next level

Alex Semenov

Chief Executive Officer

Eva Petritski

Content Manager

June 1, 2023

Imagine a digital environment that allows its users to manage all their planned errands in one interface. Getting a taxi to work, ordering groceries for dinner, buying new art supplies, booking flight tickets, and setting a date for a doctor’s appointment. No countless accounts, multiple passwords, stuffed mailboxes, or notifications from different services. Now, top it off with seamless digital payment, and earned bonuses to spend on the following purchases. Pretty convenient, isn’t it? That’s the integrated power of a concept, known as the “digital ecosystem”.

A digital ecosystem is a seamless network of cross-industry services that covers a variety of user needs. These services are accessed under one user profile and have mutual promotions, bonus systems, and a shared client base. Digital ecosystems span various markets, from finance to home improvement, oftentimes blurring the line with cross-industry services.

Companies choose this development model to outdo the competition by creating extra value for clients. The Revolut neobank provides direct messaging and travel booking with its financial services, and an accommodation rental ecosystem Airbnb runs a comprehensive insurance program and host coaching to complement its booking service.

How ecosystems scale businesses

Ecosystem companies grow by creating a comprehensive user experience where previously unmet needs are fulfilled in a single session. Users complete their daily tasks faster, easier, and at a lower cost than in separate services, and the ecosystem benefits from multiple interactions.

Digital ecosystems are not just about convenience and efficiency; they also offer a unique advantage to businesses. By offering extra services that add value to the core business, these ecosystems secure the loyalty of existing clients.

On top of that, extra offerings add more value to the core business, help reach new audiences, and attract more users to the ecosystem. Once attracted to one service, the user is seamlessly introduced to the others, as they comprise a single network. This strategy results in multiple users being acquired at the cost of one acquisition, a powerful competitive edge.

The ecosystem gets multiple users at a cost of one acquisition.

The services benefit from the shared user base and support each other in times of crisis. An ecosystem might not feature all of its services in a super app or a website. What’s necessary is a well-balanced network of supporting offerings that satisfy the customers’ needs and generate profit for each other.

Amazon is a good example of such a system. As of 2022, it had a suite of at least 97 acquired subsidiary companies, and an advanced ecosystem of its own services, covering multiple user wants: Amazon Music, Amazon Pay, Amazon Kindle, Amazon Fresh, and others.

The services in the Amazon ecosystem are accessed under the Amazon Prime subscription. It has 200 million users and covers a variety of their daily needs, to the point that it becomes a part of their lives. Users start their day with an Echo alarm clock powered by the voice assistant, Alexa, check out books on Kindle or Goodreads, get their food and groceries delivered from Amazon Fresh or Whole Foods, shop on the Amazon Marketplace with exclusive deals and lower prices, and round the day off with a good movie on Prime Video.

Today, Amazon is the largest e-commerce company in the world, and it wouldn’t have gotten there without leveraging the ecosystem strategy.

The digital ecosystem trend is taking off globally

If we look at the bigger picture, digital ecosystem companies dominate the whole e-commerce market. Amazon, Apple, Google, and Walmart are only the tip of the iceberg. New ecosystems are emerging and gaining momentum all over the world.

The scenario for ecosystem development is usually the same: first, perfecting the core service and gaining a loyal client base; then, thoughtfully connecting extra offerings and benefiting from their mutual promotion and support.

In many cases, this scenario is embodied in a super app, a digital interface of an ecosystem. For example, super apps Uber, Grab, and Gojek have ride-hailing at their core; Klarna and Vodapay were initially digital payment systems, and the AirAsia Super App’s first service was flight booking.

These ecosystem leaders began with a core service, closely studied their customers, and discovered additional needs. Now, they offer all these services in one convenient super app, making life easier for users with a single login and shared loyalty perks.

Ecosystems help companies as well as their customers

In this broader context, it's evident that companies are increasingly recognizing the power of digital ecosystems. According to BCG data, more than half of S&P Global 100 companies already participate in digital ecosystems, and 90% of multinational companies are determined to pursue this strategy in the future. They understand that it is beneficial both for the businesses and the clients.

In the end, the created ecosystem advances the interests of all its participants. Let’s look at the power of ecosystems in action.

Example. Ace Hardware has the most physical stores in the U.S. In 2022, there were over 4 thousand Ace Hardware locations in the States, and over 5 thousand locations in total. The company is a retailer-owned cooperative that drives its growth from opening more physical stores. It has been noted for its rapid expansion, and in 2021, made a revenue of $8.6 billion.

Another player in this industry is The Home Depot. It operates 1,994 physical stores in the U.S., which are much fewer than its competitor. Instead of launching new locations, it focuses its efforts on creating a digital ecosystem of home improvement services.

Apart from DIY sales in stores, the company develops solutions for the B2B market, boosts online channels, and implements seamless in-store and online shopping. To expand its ecosystem even further, it has acquired and joined HD Supply, a leading industrial distributor in the multifamily and hospitality markets. In 2021, The Home Depot ecosystem made a total of $151 billion—it is almost 20 times more than the revenue of Ace Hardware, which has twice as many physical stores but doesn’t develop an ecosystem.

So, it’s not really about the number of stores. It’s about exploring new markets and targeting different clients with relevant, custom-tailored services.

How to join the trend

Depending on the initial resources and end goals, there are several ways a business can scale into an ecosystem.

#1. Buying off other companies or services

Here, a company can simply acquire the businesses that have the needed service or technology and merge them with the core platform. It’s a great solution for ecosystems that cannot spare the time or resources for development and want to complete their offering with a certain service as fast as possible.

Example. PayPal purchases smaller companies with relevant technologies to expand into new market sectors.

#2. Developing the new services on one’s own

Another option is to create a mini-business from scratch: from studying the market and pinpointing the potential offerings to the actual development of the new services and their integration with the core platform. Usually, big companies have their own IT departments that can take on a new challenge. But sometimes it can put the support of the existing projects at risk, so, to be on the safe side, companies can delegate the task to outsource teams.

Example. Sportmaster is a sporting goods retailer that developed its own ecosystem of services for athletes.

#3. Entering partnerships

Thirdly, one company can partner up with another on negotiable terms and conditions and create an ecosystem together. In this case, minimal investment is involved, but the companies have little control of one another: the deal can be terminated by any party, and the partner company can participate in other ecosystems as well.

Example. Shopify entered into a partnership with a marketing platform, Yotpo, to create a smart and innovative ecosystem for merchants.

#4. Joining bigger ecosystems

Finally, a company can take a different approach and become a partner of a larger ecosystem instead of creating its own platform. This way, it can benefit from the vast user base of the host ecosystem and its partners, and find new areas for further growth.

Example. SpotHero is a parking reservation platform that integrated its services into Apple Maps to reach more users.

Let us help you choose the right strategy

Based on what challenges the business needs to overcome, or what results it aspires to achieve, it should choose the right strategy—which is sometimes not that straightforward. A well-weighted, tailored decision is often better than following a general trend. Start by examining the customer's journey and recreating the user’s path to purchase. Our guide can help map it all out.

If you feel like you could benefit from leveraging the ecosystem strategies, drop us a line. We can help you work out the specifics of your case and determine the most suitable growth strategy for your business.

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