The End Run 

A Case Study: The End Run 

 noun

  1. AMERICAN FOOTBALL

an attempt by the ballcarrier to run around the end of the defensive line.

 

Just like in football, we as business owners must defend ourselves against an end run, disallowing a supplier from going around you to get to your customers. The more you rely on a single provider for supply, the more vulnerable you are to that supplier eliminating your role and going directly to your customers. When it’s time to sell, you might find that this could drag down the value of your business and undermines your negotiating leverage.

One example of this is Sebastian Johnston who co-founded TheAmazeApp in 2014. The idea was that social media influencers could upload a picture of what they were wearing and tag the items on the app’s database of e-commerce wholesalers. When one of the influencer’s social media followers wanted to buy their look and purchase the tagged items, TheAmazeApp would receive a commission, 20% of which was shared with the influencer.

By leveraging their influencers to drive traffic, the app quickly grew to 4 million active users per month.

For the model to work, influencers needed to be able to tag whatever they were wearing, so TheAmazeApp needed a comprehensive catalog of the latest fashion items. This meant that they relied on the data feed of five e-commerce wholesalers who uploaded their data to the app.

They became increasingly dependent on Zalando which was one of their five data suppliers. As one of Europe’s largest fashion wholesalers, they controlled around 70% of the app’s inventory.

When it came time to sell, they had less leverage because of their reliance on Zalando’s data. Johnston approached the five data providers to buy his business, and two expressed interests. He thought because he had multiple bidders, he would have more leverage.

As the process dragged on, one competitor dropped out leaving Zalando as the only bidder. Given that they controlled the majority of the inventory, Zalando knew they had the upper hand.

Johnston knew if he pushed Zalando too hard, they could set up their own competing service against TheAmazeApp.

In the end, Zalando acquired the app for between two to three times revenue, which was relatively modest given the traffic the app had been generating.

The lesson? The more of your supply that comes from one provider, the more susceptible you become to your provider doing an end run around you. 







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