Digital technologies are radically transforming business models and it’s uncomfortable terrain for many strategists. On the other hand, it’s familiar territory to innovators, who’ve spent decades wrestling with the problem of how to manage uncertainty when there is little to guide them in getting their new offering to a new audience or market.
And considering how the digital era could or should transform their business models, the questions they face are questions of unprecedented uncertainty, where past experience may be of little help.
If your company is not the likes of Apple, Microsoft or Oracle, where it organically competes on the basis of continuous innovation, then your innovators live in a separate biosphere from your strategic thinkers. An unpredictable and risky situation, considering the discipline of the innovation process is tailor-made for addressing the wealth of unknowns that moving to a digital business model entails.
Three traps strategists fall prey to in fashioning digital business models, easily avoidable if they approached digital business modeling as an exercise in innovation:
Trap 1: Replicating Old School Approaches
The greatest temptation is to replicate your current business model digitally. That’s understandable, since making your existing resources do more makes good financial sense and often makes good strategic sense.
But if you think of a digital business model as an innovation, rather than as an extension of your core strengths, it becomes easier to think of the shift as an opportunity to take advantage of new capabilities, rather than leverage old ones.
Innovators lower the risks of moving beyond their comfort zones by breaking down new-product development into a series of small, low-risk, low-cost experiments designed to test the assumptions behind a new offering. This same approach can be used to test out the assumptions behind a new business model before going full force ahead.
For example, take the shift from print newspapers to online media portals. In the early days, many publishers assumed they could set advertising rates online the same way they did in print, on the basis of the volume of readers. The prospect of lowering production costs, by not having to print and distribute paper, combined with the ease of (theoretically) reaching a larger audience online, led many to assume that the online versions of their publication would be even more profitable than the print versions. Some further assumed that first movers had the advantage online, and rushed to get big fast.
But those assumptions turned out to be famously flawed, as advertising dollars were spread far more thinly across a proliferation of sites, and publishers found they could not even replicate their print revenue streams, let alone scale up. Incentives for the sales team turned out to be radically different, as well, as large, in-person bulk ad buys gave way to a series of small, semi-automated sales transactions.
Trap 2: Build It and They Will Come
On the other side of the coin is the temptation to just jump right in and build something awesome and expect everyone to see its “obvious merits.”
But bankruptcy looms over seemingly clever software programs and apps that were written in the mistaken belief that customers would want them.
All successful products and services satisfy a functional, emotional, or social job a customer needs to do by either mitigating some pain or creating some gain, and by doing so better than other available alternatives. And successful innovators take a step back, before building, to deeply understand what problem they could really solve with the new digital offering.
Take, for example, Instagram’s recent success. Instagram clearly allows for social connection, but so do many other online services. But with a few clicks on Instagram, users can not only send a picture (possibly worth a thousand words), but through the use of filters and simple effects easily and conveniently multiply their powers of self-expression, as well as get social validation through the feedback function.
Trap 3: Sale, The Process vs The Result
Even the enlightened strategists often miss or ignore what happens after the sale — service, support, and disposal. For digital business models, however, the “virality effect” — the rate at existing users recruit new users — may make how you connect to customers after a sale the key to success or failure.
Dropbox, for example, first launched as an innovative file storage, syncing, and sharing service, its executives assumed they could simply acquire customers using Google AdWords. But competitors had bid up the cost of keywords so much that it was costing Dropbox between $300 and $500 to acquire a customer who paid $100 a year in subscription fees. Recognizing that the business model was unsustainable, co-founder Drew Houston proposed another approach. Dropbox offered 250MB of free storage for referrals, both to the giver and recipient of the referral. Adoption of Dropbox shot through the roof and customer acquisition costs fell to pennies on the dollar.
Connecting to customers after the sale may mean transforming a one-time sale into a recurring subscription revenue model. Alternatively, it may mean giving away part of the business for free, recognizing that both the additional referrals and data captured may have more value in the long run than the short-run sales.
Every time you introduce a new value proposition to a new audience, or even change some key element of your business model, you introduce uncertainty. Introducing a digital business model often introduces uncertainties not only of degree but of kind, shifting the effort out of the realms of strategy and into the realms of innovation. Innovators know they need to manage uncertainty differently than they manage the execution-oriented part of the business.