I’m very good friends with 25 letters of the alphabet but I don’t know y.
This blog has no relation to the first line, it just tickled me to write it. Same with “your positivity is highly suspect” and “I’m a victim of my own humility”. I have to think they would make for perfect opening lines if I had any sense on how to connect them to the topic of the day. In all fairness, my linkages in the past year have been…let’s say…“weak” at best anyway.
I’ve been itching for a while to get into this topic, and since I’ve never had an unexpressed thought, let’s roll up our sleeves and jump into it quickly (before I change my mind).
As my past CFO used to say frequently: “it’s all about cash flow”. Good ideas and good businesses are about making money and spending just enough to grow that money incrementally and predictably over time. “The faster we achieve positive cash flow on any particular project, the more investment money will be available to innovate again” was a mantra I heard time and time again from the CEO.
Getting to financial steady-state for new organizations and/or maintaining incremental positive growth for mainstay companies is becoming more difficult however:
- Competition from internet/mobile born startups that are quick to innovate and can change priorities on a dime
- Changing consumption demands from a changing consumer market will make or break product success far faster than ever
- Explosion of massive automation techniques like robotics and artificial intelligence is reducing the human effect of customer service
- Globalization and ubiquitous information sharing are creating real time service comparison and global rating systems
- Startup adjacent markets like Bitcoin is competing with centuries old financial markets
These “disrupters” could be summarized into one simple word: CHOICE. Your clients want choice in products, service, payment method, company, length of engagement, etc. They are perfectly happy to REPLACE you if they are not satisfied by simply “deleting the app”. Consumers are also choosing to break up long term and broad business relationships to create several short term DIVERSE relationships. Instead of being loyal to a single bank consuming all the retail, investment and insurance offerings available, the desire is to spread their wealth across many institutions and they will purposely and quickly move to another institution if it’s not keeping up with their side of the bargain on customer service.
Collectively these digital disrupters are chipping away growth potential, especially if executives are relying on the traditional tools in their tool belt: introducing new products at the same rate, incrementally improving customer service, price reductions, sales and promotions.
The best way to compete with disruption? DISRUPTION!
Competing against these disrupters requires a new disruptive business strategy: DIGITAL TRANSFORMATION largely described into these three categories:
- Operations and Processes: Ground up re-evaluation of the services you deliver to DRAMATICALLY change the time to market delivery of your products (from months to hours)
- Customer Experience: Purposely identifying and understanding new customer behaviors and buying expectations with a consumer mind of REPLACEABLILITY
- New Business models: Shift from “sell product” to “sell service” to “sell usage” to “sell outcome” to “sell network”
A quick reminder in the last few minutes: The customer expectation is CHOICE, as evidenced by competitive pressures from digital disrupters
MANY of the digital disrupters, including your digital competition likely have a significantly different business model. We could go in depth in terms of the various characteristics of your business mode including value proposition, customer segments, partner relationships, key assets and activities, etc; which would certainly show major differences:
- Major hotel chains have trillions of dollars with of property, while online room rental capabilities have none
- Big-box retailers cater to a diverse set of customer demographics while drone-based delivery retailers focus on urbanites
- Large Manufacturers require hundreds of partners to deliver an array of complex machines while a niche manufacturer needs a 3D printer and time on their hands
- Major technology companies rely on a solid brand for continued patronage, new entrants need some samples that fit into the trunks of their car
We could go in depth of each of these characteristics, and they do need to be addressed by the executives, but let’s focus even more on the financial models of your offerings relative to customer CHOICE and offering cash flow.
(Reader note: I will go out on limb here and acknowledge that you may work for a very large organization and have very diverse their offerings, and therefore have very diverse business/financial models; so you don’t need to read the rest. Fine, gotcha, no problem. But for everyone else who hasn’t perfected their business to grow double digits annually, this breakdown “could” be helpful)
For the most part your financial model (how you earn revenue and how you spend it) largely fits into this generic description:
Sell product or service; make money….spend money to make product or deliver service…invest profit to make new product or service
It’s tried and true, and you can create and deliver a variety of products and services that fit this model. The more profit made, the faster debt is paid, the happier investors become. But what happens when your customers are looking for choice, and finding the exact same product or service but available in DRAMATICALLY different financial models with your digital competition, ones that suit their particular financial needs MUCH better? The CHOICE, becomes them. Let’s explore those other models:
- Sell product; make money THEN sell service; make money:
- Not a huge difference from the generic model, but does create potential for new and reoccurring revenue. Adding the ability to sell add-on post sale services not only creates new revenue, but also creates a level of “stickiness” with the customer due to the ongoing interaction. Instead of buying once and hope they come back for a newer model later, the continued interaction keeps the brand front and center. The negative of course, is that poor or declining customer experience will have a dramatically negative effect. It’s almost impossible to bring back a customer with a poor experience.
- Sell product AS a service; make money over time:
- This model is the BIG SHIFT from CAPEX to OPEX for all participants. For a customer, it’s replacing the financial burden of an upfront cash outlay with ongoing expenses over a period of time (contractual term *or* when they stop the service). For the company, it means changing the spending model by taking on the upfront risk of product or service creation and availability; with the potential return of more profit per product over time. This model is preferable for customers looking to manage a predictable cash flow.
- Sell product AS a service; make money based on USAGE:
- While still an OPEX model, the difference in that the burden of profitability is entirely on the shoulders of the company to create enough customers with enough usage over time to compensate for the upfront initial investment in the product creation and expenses over its lifespan. The potential return however is a far higher potential of profit if usage becomes popular. This model has created many Cash Cows. For customers, the expense is directly controllable and they can spend as little or as much as they need as their discretion.
- Sell product AS a service; make money based on OUTCOME:
- As an extension to the USAGE model, the outcome model helps balance the risk between the seller and the consumer for the cost of the product. The burden of the product investment is still with the company, and the usage over time will still dictate the mount of potential profit, but that risk is now reduced with each customer interaction by jointly taking on the risk for the ongoing or end price. This is the “everybody roll up your sleeves” to create an average transaction price lower for the consumer.
- Sell platform services; make money from all participants:
- A dramatic shift from creating and selling products yourself, to creating a network of buyers and sellers for a particular set of products or services. From the consumer perspective, and even your brand recognition as a whole, you may be seen as a provider, but this model is only about making offerings available from a variety of different sellers and earning revenue transactionally, as part of the buying experience. The burden of product investment remains with the sellers. The burden of creating a marketplace (both the platform and relationships with all parties) becomes exclusively yours. The time and investment required to create these platforms will be a significant burden and the potential of failure, significantly high. However, once the network is thriving, net new revenue can be earned by creating new and innovative value to each of the participants in the network and creating logarithmic profits by the simple organic growth the network alone. The value for the customer of course is creating the ultimate venue for choice.
Just to be clear: I am not advocating a “shift” or a “move” to a new business or financial model for your existing offerings. And even if strategically you decide a new model would be valuable, I am not suggesting the various models described is a maturity (ie evolve from model 1 to 3 to 3 over time). My recommendation is to evaluate your current growth with those of your competitors and the desirability of your customers to create DIVERSITY in your business financial models to offer CHOICE to the various customer segments. Ultimately it’s CHOICE that will be the winning digital transformation business strategy.
I’m happy to spend some more time with you on this topic…in fact, you can learn more by joining our upcoming Virtual Event on December 8th:
Data-Driven Disruption for Thought Leaders and Practical Solutions: Digital transformation is a business imperative. Join us for this live virtual event on December 8 to hear the how and why of digital transformation and the strategy you need to achieve it from a host of industry leaders, including experts from Forbes, IDC and PAUL LEWIS!
Register here…and bring a friend! http://bit.ly/2fTCUra
Everyone has a perspective and point of view. Spend time reading, forming an opinion and talking about it. Being right isn’t important. If you are never wrong, you aren’t trying hard enough.