Business Model Disruption
When people refer to digital, they often mean digital channels: a shiny new app or beautifully designed website. But scratch beneath the surface, and you discover so much more. Digital business models are the real story. So what are they, and why are they reaping such havoc across so many industries? Think back for a moment, to a time before Spotify and Netflix. Racks of CDs from Our Price, HMW and Woolworths filled our living rooms. We’d walk through the rain to our local Blockbuster to rent films, relying on helpful tips from the staff behind the counter. Spotify and Netflix are lauded for turning the dynamics of their industries upside down. Consumers pay a subscription for incredible ease and variety, dramatically improving their entertainment experience – and for many, the economics of the industry. Today, we unthinkingly click on the Uber app to instantly order a taxi. We use Airbnb to book accommodation anywhere in the world. We go to LinkedIn to connect with clients and colleagues, and Skyscanner to book flights to every corner of the earth. Over the last decade, the emergence of platform-based business models has changed the game. The explosion of data, connectivity of APIs and ability to design meaningful, human-centred experiences have created opportunities for new relationships and forms of value. And the results have been transformational. For retailers, the pandemic catalysed a shift that was already in flight when those without digital offerings suffered a sudden and severe breakdown in customer relationships. In these drastic circumstances, digital proved its ability to build connections. Companies flocked to the likes of Amazon, Shopify or Deliveroo to maintain a point of sale, others launched engaging social media campaigns, or accelerated development of their own direct-to-consumer propositions.
Maintaining the Customer Relationship
Stung early on in the pandemic by the drop high-street footfall, Pret A Manger was one of many companies looking for alternative ways to reach consumers and rescue declining revenues. The firm raced to develop innovative digital propositions and new routes to market, bringing the Pret brand direct to consumers in their homes and supermarkets. Owning the customer relationship has long been critical to maintaining a strategic advantage in any sector. But it has become increasingly difficult as Big Tech and nimble start-ups disintermediate this all-important dynamic. Through mass personalisation and last-mile convenience, Amazon has developed a self-fulfilling spiral that’s difficult for suppliers and consumers to resist. Fuelled by the power of Prime, its expansion into adjacent industries, from groceries to movies, has left incumbents wondering if it’s too late to catch up. This threat of disintermediation is set to increase over the next five years. In this context, building brand affinity will take centre stage – and the battle is on. Nike developed engaging social media campaigns during the pandemic. A global leader in marketing, the sportswear giant used emotive branding and alignment with its purpose to connect with customers undergoing isolation. This helped it take more control of its product distribution. Driving customers to its free NikePlus app was a way to personalise the experience, and reduce its reliance on Amazon and third-party retailers. Some businesses see an opportunity to enhance their revenue model and increase customer loyalty. No longer confined to software, a shift towards subscription models has driven loyalty and revenue across traditionally product-orientated industries. With YourPret Barista, Pret introduced a subscription coffee service, offering up to five cups a day for a monthly fee. The use of a QR code made for a seamless experience, while facilitating data capture to enhance Pret’s understanding of their customers. While some businesses focus on their direct relationships, others are reaching customers beyond their own channels. In the banking sector, there’s an emerging shift towards embedded finance, with services intuitively integrated into other aspects of our lives. This allows small businesses owners to manage all their business needs through their accounting platform. It enables prospective house buyers to check their mortgage eligibility for specific properties while searching real-estate sites. And it lets flatmates split the bill while ordering takeaways. Investments in critical infrastructure are accelerating these trends. With 5G increasingly available to consumers, opportunities are emerging to engage consumers directly with rich content and intelligent services. Take the gaming industry, for example. Nintendo, Sony, Microsoft and others have been quick to respond to consoles taking a backseat, with gamers increasingly playing through cloud services at home or on the move. Difficult choices lie ahead. Looking to the future, we see an emerging paradox for businesses focused on customer-centricity. In the endless pursuit of making customers’ lives easier, and being there for them at the point of need, businesses must be prepared to operate in ecosystems. And that means having less ownership of, or influence over, the experience. In five years, businesses will no longer be asking whether to access customers through third parties or develop direct-to-consumer propositions. Maintaining the customer relationship will mean doing both: creating relevant, engaging and valuable interactions with customers, and meeting their needs through third-party ecosystems.
What should you be thinking about now?
- How can you defend and enhance customer relationships?
New Sources of Growth
Given the impact of the pandemic, the uncertainties of Brexit and the global trading environment, the economic outlook for the next five years is challenging. With sustained pressure on margins, businesses will need to rely on digital for top and bottom-line growth. Many traditional organisations still carry bloated cost bases compared to their digital peers. By embracing self-service, intelligent automation and a leaner operating model, digital businesses can undercut incumbents with lower transaction costs, while also providing differentiated customer experiences. It’s a compelling double act. And while it drives value creation in increasingly commoditised sectors, market leaders are also looking to digital for new sources of revenue and growth. Fragmented value chains have created the potential for whole new business models through:
- aggregation of third-party products and services
- access to external data to tailor customer experiences and propositions
- monetisation of core capabilities to serve whole new segments.
As the search for growth and margin becomes more pressing, we expect to see a number of new business models amplified. Taking the banking sector as an example, while we can point to the success of digital natives such as TransferWise or Starling Bank, the next five years will see traditional players make more significant moves. JP Morgan has announced its intention to enter the UK market with a significant investment in technology driving a lean digital business. Meanwhile, Westpac, a self-proclaimed “200 year old start-up”, has launched the beginning of its banking-as-a-service model in Australia. Finally, given the exponential increase in data, access to 5G and processing power, we anticipate significant growth in the monetisation of data across sectors – driving the development of new valuable services and smarter operations. With competition intensifying, products becoming commoditised and technology driving innovation, digital disruption will continue apace. As organisations search for growth in a subdued economic environment, the need to become a digital business will become more pressing than ever.
What should you be thinking about now?
- How can you exploit digital technology to enhance top and bottom-line growth?
- How can you unlock new ways to make money, while defending your core business from digital disruptors?
- Which ecosystems do you need to be part of – and on what terms?