Asset-light business model

Asset light” is essentially a business model strategy and the question of how a company prepares and optimizes its balance sheet. A company is therefore “asset light” if it has (relatively) little ownership of assets, i.e. has only a small amount of fixed assets on its balance sheet. The asset-light strategy is particularly common among companies in the service sector, which in principle require little capital for their business operations. The best-known examples include well-known companies such as Airbnb and Uber or providers of co-working spaces such as WeWork.

What is an Asset Light Business Model?

An asset-light business model, as the name suggests, is a business model where the company focuses on reducing the amount of capital that is invested in assets.

In financial terms, this would mean that the size of revenue generated by the company would be very high as compared to the amount of capital tied up in assets.

Finance enthusiasts will say that these companies have a very high asset turnover ratio.

Entrepreneurs carefully study the value chain of a business in order to identify the key functions which need to be kept in the house. Any other functions which are not mission-critical are outsourced to vendors in order to increase efficiencies.

Salient Features of the Model

Focus on Intangible Assets: The whole focus of companies using asset-light business models is to gain a competitive advantage over the competition using intangible assets.
For some companies, this intangible asset is in the form of a brand name. On the other hand, for some other companies, this intangible asset is in the form of patents, algorithms, software, or such other intellectual property rights.Instead of spending money on constructing factories and warehouses, the money is often spent on building intellectual property which provides a very specific value proposition that is difficult for the competition to replicate.
Focus on Customer Facing Side of the Business: It is also important to note that most of these asset-light companies focus on the customer-facing side of the business. Their business models are created in such a way that they solve a specific need for a business and acquire customers. The execution part of the business is then passed on to other service providers.
It is the ability to acquire and pass on customers to service providers which allow these companies to earn a return on investment that is higher than the competition.
Creating a Lean Enterprise: The entire asset-light business model is based on the concept of lean enterprise. This means that these businesses conduct every activity in a manner that is not wasteful.Asset light business models are meant to redesign the entire process and eliminate any wasteful activity.
Fixed Costs to Variable Costs: Another important feature of the asset-light business model is the relentless focus on de-risking the business model by reducing operating leverage. Asset light businesses are famous for turning every fixed cost into a variable cost.
For instance, companies can turn fixed salary costs into variable costs by hiring contractors and gig economy workers instead of full-time employees.Similarly, asset-light companies use cloud-based solutions to lower their costs instead of investing upfront in buying servers and other data center related expenses. The more any company can convert fixed costs into variable costs, the closer it is to having an asset-light business model.
Faster Response Times: Another important characteristic feature of asset-light business models is the ability to quickly respond to customer requests.
Even though the requests are serviced by third-party services, the customer-facing business has to take ownership of the service delivery.This means that they have to create a system wherein they can quickly pass on the message to a nearby service provider and can also track their performance and service delivery process. The entire supply chain has to be linked by well-designed information systems that quickly and accurately transfer the required information to all stakeholders.

Advantages of Asset-Light Business Model

The costs of investment and running the Asset-Light Business Model business is less, and revenue and profits would be more.
Start-ups can own the operational part of the company and outsource any other assets needed.
They confer greater flexibility to tech-enabled new-age businesses to scale up much faster than traditional asset-heavy industries. This quick scalability gives them a definite edge over others in the market.
The startup can grow new assets and sell them later at a profit.
Businesses with high scalability and lower capital requirements are more attractive to equity investors. So, it will help entrepreneurs to get the company listed.

Disadvantages of Asset Light Business Models

Over-Reliance on Vendors: The biggest problem with asset-light business models is that companies that follow such models face an overreliance on vendors. Vendors are independent entities who are seeking profit and oftentimes their philosophy does not match the philosophy of the startup.Vendors are the face of the company to the end consumer and provide the final service. Hence, if they are not aligned with the values of customer service, they might resort to profiteering and other unethical means. As a startup company grows larger, it has high bargaining power with the vendors. This is because it redirects several customers to the same vendors. However, a smaller company does not have much leverage over its vendors. Hence, it is important for startup companies to be very careful when they select the final vendors who will actually provide the good or service to the customer.
Less Standardization of Services: The problem with having several vendors is that maintaining a certain standard of quality is often very difficult. This may not be because of wrong intent on part of the vendors. Instead, it may simply be due to the lack of availability of resources. For instance, different vendors providing different types of car repair services may have mechanics of different levels of expertise. In such cases, standardization of services is very difficult and it is quite possible that different customers might have very different experiences with the company which leads to dilution of brand image.
Low Barriers to Entry: Before the advent of asset-light business models, a significant amount of capital was required in order to begin any business. This high capital requirement used to act as a barrier to entry. Since a high amount of capital was required, very few people could actually enter into the market. Hence, there was lower competition and higher profits for the existing players. However, the possibility of using asset-light models has changed the game completely. It is now possible for small entrepreneurs to use bootstrapping techniques and enter the market. Once they do enter the market, they start using discounts as well as predatory pricing in order to gain market share. This creates a pricing war which ultimately negatively impacts the entire market.
Higher Cost of Operation: The entire asset-light business model is based on the concept of converting fixed costs into variable costs. Now, there is no doubt about the fact that this conversion provides the organization with a lot of flexibility. However, it must also be understood that this conversion can lead to more expensive products.

Working Structure of Asset-light Business Model

The asset-light business model does not require a lot of tangible assets like buildings, machines, warehouses, etc., or anything which requires heavy investment. But one thing that they cannot do without is the adoption of technology. From manufacturing and packaging to marketing and distribution, any company that integrates technology at all stages of its operations will succeed in today’s competitive marketplace.

Asset-light companies can focus their time and resources on R & D and forming strategic alliances for greater synergies, by asset sharing, franchising, and outsourcing non-critical functions.

Asset light vs Asset-heavy Businesses

Asset light business model	Asset heavy business model
Less capital expenditure is required to start the business.	Large capital expenditure is required to start the business.
They own fewer capital assets compared to their operational assets.	They own more capital assets.
They are usually not vertically integrated	They are usually vertically integrated.
They are more flexible in a fast-changing environment.	They are less flexible.
They do a lot of outsourcing.	Most operations are done in-house
This model is ideal for scaling up.	It is a bottleneck that will hamper your pace when scaling up.

FAQs

What is an Asset-Light Model?

he Asset-Light Model is a business strategy where a company focuses on leveraging minimal capital investment in physical assets and instead relies on partnerships, outsourcing, or leasing arrangements to deliver products or services.

How does the Asset-Light Model differ from traditional business models?

Traditional business models often involve significant investments in physical assets like manufacturing plants, warehouses, or retail outlets. In contrast, the Asset-Light Model emphasizes agility and flexibility by minimizing capital expenditures on such assets.

What are some examples of companies using the Asset-Light Model?

Companies in various industries have adopted the Asset-Light Model. Examples include Airbnb (which doesn’t own properties but rather facilitates rentals), Uber and Lyft (which don’t own fleets of vehicles but provide ride-hailing services), and Alibaba (which operates an e-commerce platform without owning inventory).

Practice area's of B K Goyal & Co LLP

Company Registration Services in major cities of India

Complete CA Services

CA in Delhi | CA in Gurgaon | CA in Noida | CA in Jaipur | CA Firm in India

RERA Services

RERA Rajasthan | RERA Haryana | RERA Delhi | UP RERA

Most read resources