What is an Aggregator Business Model and How does it Works?

A lot of new-age start-ups are very innovative in their business models. However, a lot of these start-ups also follow the same type of model in a different industry. The aggregator model is a great example of such a start-ups. Companies like Uber and Airbnb can all be called aggregators. Also, there is a dearth of other companies who are using this model in their respective fields and marketing themselves as being the “Uber of X industry”.

The aggregator business model is a relatively new form of business model. Hence, it is not deeply understood by the average person. In this article, we will demystify the aggregator concept and try to explain it in layman’s language.

What is an Aggregator Business Model?

The aggregator business model is a by-product of the information age. With the internet boom, information became abundant. Many different types of service providers started providing their services online. However, customers did not have the time, inclination, or the know-how to search the internet in order to find the best deal for themselves.

As a result, the aggregator model came into being. The aggregator is simply a website that creates a brand and also creates partnerships with the actual service providers. The job of the aggregator is to collect information from various service providers, display them on their websites and sell the product. The actual job of providing the service is done by the service providers.

From the customer’s point of view, aggregators help them avoid the hassle of due diligence. Any service provider listed on the aggregator’s website has generally been vetted to ensure a basic level of service quality. It is common for aggregators to try to standardize various elements of service in order to provide a standardized experience. Hence, customers can be assured of a good service experience because of the brand association.

It is also important to note that all service providers on the aggregator’s website are actually independent entities. They are not employed by the aggregator. Hence, they are free to make their own choices. They generally decide to associate with the aggregator since they can provide more business. Some aggregators may allow service providers to continue their own independent business whereas other may require the service providers to exclusively serve their customers.

How does a Typical Aggregator Model Work?

1. When a founder tries to set up an aggregator business, the first thing they need is partnerships. Hence, the process starts with contacting as many service providers as possible. The aggregator then tries to convince the service providers that they can help their marketing efforts by bringing in more customers. The end result of this outreach is that a partnership agreement is signed between the service provider and the aggregator.

2. The founder has to build economies of scale. This means that they need several service providers to enroll with them before they pitch their service to customers. After all, the modern-day customer is spoilt for choice and hence is unlikely to spend money where they are not offered sufficient choice.

3. Once a certain scale has been reached with respect to the partnerships, the aggregator tries to create a brand. This is done by undertaking huge marketing campaigns. It is common for companies to deploy huge budgets for marketing. The idea is to make the brand name a trusted household name. This large-scale marketing allows the website to attract more customers than individual service providers could do.

4. Founders also need to build a system that allows them to enable seamless communication between the service providers and the customers while being in the loop themselves. Once the customer places an order, the entire service delivery process needs to be managed through the aggregators’ communication system.

5. Once the customer makes a payment after availing of the service, the money goes to the aggregator. The aggregator deducts a certain amount as commission and pays the rest to the service provider. Aggregators generally do not pay the money immediately to the service provider. Instead, they hold on to the money for some time and pay the service providers at specific time intervals.

How Aggregators Add Value?

Aggregators create value for two sets of customers. The details of both are as follows:

1. The first set of customers is the actual users i.e. the customers of the service providers. Aggregators create value for these customers since they promise good quality service delivery at a fair price. The customers have access to competitive quotes from several suppliers at the click of a button. Also, they have the assurance of quality guaranteed by the brand name. If the service is not of the expected quality, then they have a grievance redressal mechanism as well.

2. The second set of customers for the aggregators is the service providers. Aggregators add value to the service providers by marketing on their behalf. Aggregators allow the companies to focus on execution while outsourcing the marketing function. Also, aggregators are able to generate economies of scale. Since their advertising and marketing efforts are so huge, they draw in customers in large numbers. The service providers get access to these customers and are able to thrive if they provide good quality service.

The bottom line is that aggregation-based start-ups are available in almost every industry and in every part of the world. There are companies that aggregate all types of products and services right from household cleaning services to complex medical services.