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The Secret of Capturing Value through Digital Transformation

April 5, 2020
Kristoffer Kvam

Imagine you are heading the digital transformation in a traditional business that is delivering services to the consumer (a business like a carrier, a retail chain, an airline etc). Everyone, including the board and the CEO are relying on your recommendations. Smart “advisers” tell you to copy GEs approach to advanced analytics, create business model disruption like Uber and do digital marketing like Zappos.

Sounds familiar? Many traditional organizations are now running their digitalization programs. In reality, these initiatives are about coping with competitive forces (a.k.a. disruption) coming to play into any industry from online business models and new digital customer interactions. In most cases organizations already have been online for a while, so now it really is about strengthening their presence, increase customer focus even more and bring in more data analytics to the scene.

In order to evaluate our digital initiatives, first and foremost they must create value for the customers — naturally. I am not going in depth into that here — that is discussed in so many great books, articles and blogs elsewhere. Still, for the company it is always about the money in the end right? That’s why we need to be clear on the areas we capture value for the business though digitalization.

Cash Flow Effects does Not Imply a Business Transformation

A core question then, is how you capture the value from any service initiative in a digital strategy? What should we focus on and what not to? There must always be a reason why, and in most cases direct revenue from a service is not the answer. The figure below shows a core model that I believe can enlighten the different drivers for a digital initiative. The model differentiates between a driver’s short term cash flow effect and a driver’s transformational value. In some cases there is a trade off, but in many cases I have seen you can have drivers from several areas with success. It’s just a matter of actually focusing on them.

Traditional value drivers captured in new ways

If you create a business case for a new product or channel you have 4 potential traditional value drivers for a project or product. These have been used in business cases for decades. When we go digital though, the rules are changing somewhat, but the drivers are still there.

a. Core business revenue: Looking at a company in a transformation to digital, a normal model is how a new service affects the core revenue. For a telco that could mean increased data traffic through a video streaming partnership, for an airline it can mean more flights or onboard purchases due to an excellent self service app. It can also be an analytics algorithm suggesting next best offers in customer service or self service apps. If successful, such initiatives can give quite large impacts on revenue streams short term. Weather this really creates transformational value is another case. You are still working on existing products and processes.

b. Cost reduction : Probably the easiest driver to pursue is cost reduction through a service. Where there is a manual business process, you can imagine that at some time in foreseeable future, the process will be automated. Through digital solutions you can automate though analytics, do customer self-service on an existing manual process, or you can simplify a customer journey eliminating touch points. All the hype right now in this area is chatbots. Whether the chatbots will deliver on their promise is still to be concluded, but proactive and automatic customer service in one way or another is here to stay. The transformational value from this automation is still limited, but it gives the organization great learning into the new thinking. It also lays the groundwork for the next driver (“c. Customer Loyalty”).

c. Customer Loyalty : To increase the lifetime value of a customer you need him or her to be loyal. That always starts with great products of course, but it’s a continual nudging of the customers perceptions of your brand that makes people stay for repeat purchases. Going digital, you have a totally new toolbox to use. Add on services that can increase satisfaction with the company’s core services can reduce their propensity to churn. For a bank that could for instance be an online smart financial planning service that makes the customer rely on the bank’s advice and hence stay longer.

In most cases though, digital loyalty is actually driven by the number of customer interactions and touch points you have with the customer. It’s related to the “b. Cost Reduction” driver above: As you automate processes, you get the option to add ways to add interaction with the customer by smart algorithms. It can be as simple as sending birthday messages with a tailored gift to getting advice on smart things to do with your product when you come to a new destination.

d. Direct service revenue : For digital services, direct service revenue is most usual for B2B services, while there naturally are exceptions in B2C as well the direct revenues are not that common for these. Pricing models to create revenue is a whole topic on it’s own: Freemium, subscription models, mixed models, dynamic pricing etc. Don’t expect big rev streams short term compared to your traditional business though. Here lies the innovators dilemma. However, if you are successful, this driver can be transformational as you are creating new revenue streams for your business.

The new digital value drivers based on the DSP Business model

Looking at the major DSPs “digital service providers”, their revenues are based on a business model introduced in the year 2000 (Google AdWords) grounded on two basic value drivers:

Build digital assets to increase customer share of attention and to capture all user data. The share of attention, the digital inventory, is then sold to businesses or used by themselves to advertise (inventory activation). The collected data is used as a way to target the messages to increase conversion (data activation).

The biggest DSPs, Google/Alphabet and Facebook, have based their whole business model of the data and inventory drivers (over 90% of their revenue come from this model). They use their data about their customers to create customer profiles that you can use to target an audience. The targeting is done on their own inventory: That means in gmail, in search, in Youtube etc for Google.

Many companies have both massive amounts of data and digital inventory (websites, apps, customer interactions, kiosks ..), and both are just sitting there waiting to be activated.

Your dormant inventory and data the is where the secret to digital transformation lies.

e. Inventory activation. Your digital service is an asset in itself. It is a contact point with your customer where you can place ads or sell ads to partners and in that way monetize. If you have a portfolio of apps and websites, activate these for personalization and targeting. If your assets are industrial/physical (ref IOT), make all the components centrally controllable and measurable (like GE).

f. Data activation must never be forgotten in a digital strategy. Data is the core asset that you are building. It creates a real option of a new world of data insights and machine learning value creators. Having data is in a sense like having money. Money in itself has no value until it is used. What is so cool with data is that it can be reused many times for a wealth of business purposes. Data activation requires many things, but a solid data collection and streaming data management strategy are core to succeed. To give an illustration, today data scientists in many companies spends 80% of their time collecting and preparing data. Only 20% is actually about doing data science. Think about the value your company can create if you turn that fraction around!

What’s in it for me?

The model for Digital Drivers for value capture for cash flow or transformation I just presented may seem obvious and good digital product and marketing professionals master it well. At the same time, my experience is that many I talk to say “Let’s just make the service success with the customer and then we can figure out how to create value”. I agree that that is a fairly good approach if you are a startup building a new customer base.

However, for an existing company with increasing digital exposure , your view should be different. You already have a solid customer base and a set of products or services that you sell on a market. New revenue is hard (only 10% of digital startups actually succeed) — so your success is much more likely if you focus on improving the performance of your existing business model and by building the foundation for new business models by activating your inventory and data.

Repost from Medium.