This week, as part of our Twelve Shifts of Digital we discuss how to drive value from new business models. If you missed last week’s introduction to the Twelve Shifts of Digital, read our blog "Are you confident you know what Digital means to you?".
Once upon a time it was easy to dissect the value chain of an industry. Everything seemed simple – businesses owned the relationships with customers and their experience; it was clear who the buyers and sellers were and what the product or service was.
The proven formula (i.e. Revenue = price x volume), that served many organisations well for decades is being disrupted and marginalised by new digitally enabled business models. We have seen some of our familiar, large incumbents brands disappear as a result and many are now caught in the middle. To respond, organisations must take a long-term view, have an appetite to cannibalise profits and disrupt themselves.
“The innovator’s task is to ensure that this innovation – the disruptive technology that doesn’t make sense – is taken seriously within the company without putting at risk the needs of present customers who provide profit and growth” – Clayton Christensen.
Digital business models are constantly in flux, barriers to entry are lowered by removing friction, lowering transaction costs and facilitating innovation. Digital business models can start with one service but then move rapidly into adjacent markets to drive network effects and unlock new forms of value.
New sources of value
Enabled by the availability and scale of data together with enhanced connectivity, the API economy has fragmented traditional value chains, driving new opportunities for competition.
What were once the factors for production have become the value proposition themselves:
- Distribution layer: leveraging channels (and the relationship with customers) to distribute external products and solutions and disrupt relationships e.g. Xero
- Manufacturing layer: leveraging products to be white labelled by others, or tailored to be sold through external providers – e.g. Barclaycard US
- Information layer: leveraging data and insight for commercialisation, becoming a data platform e.g. John Deere, DBS
- Infrastructure layer: leveraging platforms or superior capabilities to act as utilities for third parties e.g. Ocado, Starling Bank, Amazon
New revenue models
Personalised experiences and an open ecosystem that is agile, scalable and reduces time to market, has led to the emergence of new breed of entrants (e.g. PropTech, InsureTech) that are making money in new ways:
- Subscription models: From SaaS to socks, products/services are subscribed to usually for a finite period of time locking customers in with a recurring revenue stream, higher customer lifetime value and reduced upfront cost. Adobe, recognising the shift to cloud and mobile, successfully adapted its business model from selling largely perpetual software to a largely cloud based subscription model
- Ad revenue model: Charging producers for ad impressions and click-through rates e.g. Facebook and YouTube
- Freemium and tiered service models: charging for premium services or additional add-ons above free-to-use basic service levels e.g. Amazon Prime, Revolut’s standard, premium and metal accounts
- Marketplace model: Rental for marketplace presence to access a vast community of customers and partners and network effects e.g. Xero and AirBnB
- Utility model: Opens up white-labelling opportunities by charging for the use of underutilised assets or access to data-led insight e.g. MVNO's do not own the wireless network infrastructure but instead buy network capacity major mobile carriers
Significant cost advantage
With the widespread uptake of emerging digital technologies such as robotics, AI and intelligent automation, organisations transitioning to and successfully leveraging digital business models also enjoy marginal costs to serve close to zero through economies of scale and lower human intervention. Platform based business models take this further, as they incur little cost by way of housing and maintaining assets. The expectation that the asset is owned by the consumer or producer, for example, Uber is successful because it has a low marginal cost of connecting its drivers (asset owners) with riders.
In the Digital era, traditional incumbents can feel like they are operating in quick sand with new entrants re-defining how value is created and attacking traditional markets. Whilst scale, brand loyalty, incumbency does matter, we believe organisations need the courage and clarity as they choose how they disrupt their own business models to compete in a world of platforms, data and APIs.
Baringa encourage you to ask yourself whether your long-held core beliefs about how your organisation creates value still hold true?
Next week join us again as we explore the next shift focused on the ecosystem impact on businesses.
Please feel free to reach out to our team to find out more and how our Twelve Shifts can underpin your digital strategy or transformation journey.
Robert Ward | Partner | Customer and digital
Ben Morgan | Director | Customer and digital