A toolbox for digital transformation, part 1: Engaging with the customer
The first post in this series looked into what “digital transformation” means and why companies want one. In essence, to turn a traditional, pre-digital company into a tech company. The next few posts go from the why to the what, checking out some practices and tools from the tech companies. The selection is based on my experiences from working both in traditional companies and tech companies, with software-only products as well as hardware-and-software products.
While the name “digital transformation” might sound like a purely technical thing, that is not really the case. No, it is about using technology to create new products and opportunities, speed up workflows, reduce cost, and so on. And just to emphasize that point, this post is about engaging with customers through digital channels, which is certainly an important part of a digital transformation, and how the digital channels relate to the business model.
Digital channels for distribution, sales, and marketing
Digital channels offer new ways to interact with the customer. They work differently from the traditional channels and they have different cost structures. Because of this, they can enable, or even require, business models which were not feasible before digital. Let’s look at the digital distribution, sales, and marketing channels first, and then at some business models they can enable.
Digital distribution. Unless your product is physical goods, the Internet offers an amazing distribution infrastructure you can use. It can be in the form of a web and/or mobile application like Salesforce.com, as streaming content (Netflix) or downloaded content like games on Steam. Distribution cost can make or break a product; the digital distribution channels are certainly not free, but they are usually much cheaper than the logistics needed for physical goods.
Digital sales. Digital sales channels move away from the “one salesperson serving one customer at a time” model, into more of a self-service, asynchronous model. Customers are empowered to help themselves to your company’s offerings. And they can do so anytime and anywhere, at their convenience, without being restricted to physical stores and business hours. This can be an advantage both in B2C and B2B settings. The downside of this low-touch interaction is that it weakens customer loyalty. It also becomes more difficult to respond to the needs of different customers. Hence digital sales channels will not fit all products and customer segments. That said, you do not have to choose between strictly traditional or strictly digital. Mixed approaches (“omnichannel”) are becoming increasingly popular, one successful example being Home Depot’s approach where the physical stores and e-commerce build on and complement each other.
The cost structure of the digital sales channels are quite different from their traditional counterparts: salespeople and physical stores. While e-commerce solutions and other digital sales channels can certainly be expensive to build, they have lower operating cost and can scale faster and with a smaller investment.
Digital marketing. Digital marketing is a broad topic and there are many types of channels to choose from. For example ads: wherever there is valuable content on the Internet, there is also the potential to make money on advertising. Hence we get social media ads, search engine marketing, banner ads on the web, in-game/in-app advertising, YouTube ads, and so on. A key characteristic of digital ads is that the better you can pinpoint your target customer group, the more cost effective they become. This is because the digital advertising platforms can choose who gets to see which ads, something which is not possible with traditional mass media advertising. And as you pay per impression or per click, this can give you a much better return on the marketing spend.
There are a few other digital marketing channels which deserve to be mentioned as well. The first is email, the workhorse for newsletters and other kinds of customer communication. Email might be dropping in popularity, especially with younger people, but doesn't seem to go out of business anytime soon. The second is content marketing, in particular in the form of inbound marketing. Here, the idea is to get customers to find you instead of you finding them. How? Publish high quality content on the web and/or social media, content which shows up when potential customers search for information about your product area. This can be a powerful and cost effective marketing strategy, and one which can boost your brand, but it takes time and commitment to build. As an example, consider the machine tool maker Haas Automation. They have more than 200,000 subscribers for their YouTube channel where they publish machining tips and tutorials, mixed with product promotions and demos.
Third, influencer marketing, that is, liaising with influencers on social media platforms to reach their followers, is a digital channel which can help to build your brand and awareness for your products. While this channel has mainly been used for consumer products so far, is becoming increasingly popular with B2B as well. Influencers can be found in almost any area if you only go and look for them. Similar to digital ads, influencer marketing can be an efficient way to reach a narrow target customer group.
Business models based on digital channels
New channels open up for new business models. And with digital, it's not only new channels, but entirely new types of channels. So let’s look at a few examples of business models where they have been put to use!
Software-as-a-service (SaaS). This is a business model where customers pay for access to a software solution. The software is typically provided in the form of a web app and/or mobile app, with the data stored in the cloud. Payments are often in the form of subscriptions but there are also other models such as pay-per-use. There are often a few price tiers to choose from, catering for the needs of individual users, teams, or companies. Some examples of products using this business model include Salesforce.com and LastPass.
SaaS products use 100% digital distribution and the operating cost is normally only a small fraction of the sales price. Sales and marketing strategies depend on the type of product; whether it’s for consumers or businesses, and whether it’s for a broad market or a niche. Digital sales and marketing is common. In the cases where there are salespeople working with SaaS products, they tend to focus on the larger enterprise accounts where the cost can be motivated.
Freemium. A business model where there are at least two versions of the product: a basic version which is free to use, and a premium version which is for sale. For example, Spotify offers a free version of their product which plays ads, and a premium version which does not. Fusion 360 from Autodesk is offered for free or at a low price in its basic form, and offers higher priced add-ons for more demanding work. Free-to-play, a variant of freemium, is common in mobile games: the games can be installed and played for free, and the revenue comes from players who buy items such as boosters and outfits in the game to gain advantages or to look good to other players.
The freemium/free-to-play model can thrive when the number of users is large, because it is likely that only a fraction of users actually convert to paying customers. The free version builds awareness on the market, keeps competitors at bay, and provides a source of leads to nudge to become paying customers. However, it does require that the operational cost per user is low, and also that the cost of acquiring new users is low – otherwise it will be difficult to build the large user base. Digital distribution and sales help, or can even be necessary, to keep the cost down. Digital marketing is common, but due to the large scale, traditional mass marketing can also be effective. Could this model work for physical goods? Probably not, if the basic product is truly free of charge. But there are similarities to the printer-and-ink business model where the printer is sold with zero or even negative margin, and the ink at a high margin.
Manufacturing on demand. While contract manufacturing, print-on-demand and similar services are not new, they can be adapted to benefit from digital channels and tools. For example, Maryland-based company Xometry has built a manufacturing-on-demand service which allows customers to upload CAD models of the parts they want made. The system prepares quotes automatically and instantaneously. When an order is placed, the parts are produced (from metal or plastic) and delivered through a highly automated process. The automated production process is certainly an important innovation in this example, to reduce lead times and improve margins. But even more important is the digital, self-service sales approach, which lowers transaction costs and enables operation at a global scale.
...and so on. This is just scratching the surface of digital-enabled business models, and the field is still evolving. I hope the reading triggered some ideas about working with digital channels. And remember that the question is not whether to go fully digital or not, but rather which combination of traditional and digital is the best fit for your needs.
On the topic of innovation and short lead times: the next post in this series is about modern product management, a common theme in tech companies.
Note: Opinions expressed in this article are my own, not necessarily those of my employer.