The digital transformation is in full swing and is changing the way we live. Technological developments are rapid: we get information from news feeds, communicate via messenger services and consume online - our lives are digital. The last months, with the state of emergency caused by the Corona crisis, have brought this development back into focus.
The exciting question now is: how can companies benefit and turn the crisis to their advantage? In this article, we would like to give you an insight into the challenges and risks, but also the opportunities and possibilities of digitalization.
Companies that embrace digitization have the opportunity to gain market share, reach new audiences, and conquer new markets. It also reduces the risk of being squeezed out by large companies, which are increasingly using digitalization to enter niche and regional markets.
Three-quarters of small and medium-sized enterprises in Europe have already recognized this and consider digitalization to be a strategic priority. In order to remain competitive, more than one in two SMEs believe that the introduction of new technologies is essential. In particular, e-invoicing, workflow software, cloud computing and e-commerce have been adopted, as well as social media, data analytics and artificial intelligence.
All these technologies are part of the digitalization of a company, but they do not make it successful. You need a forward-thinking approach that sets a goal for each action. So let's take a step back and look at the exact definition of digitalization, as well as possible strategies and business models.
The term digitization has been used since the 1970s to describe the conversion of analog values into digital formats and their processing or storage in a digital system. However, the term has evolved significantly and now describes one of the megatrends of our time.
Digitization refers to the changes in processes, objects, and events that result from the increasing use of digital devices
More narrowly, it refers to the creation of digital representations of physical objects, events, or analog media. However, when we talk about digitization today, we usually mean digital transformation: It goes beyond that to describe a structural and systemic change in the enterprise, including value creation, organization, and business model.
There are five key challenges that companies must overcome to successfully digitize:
These hurdles need to be overcome step by step. Special attention should be paid to the development of a holistic strategy.
A good strategy should always be holistic: It starts with a vision, i.e. a clear idea of the role a company wants to play in the digital markets of the future. This is followed by the action plan, which starts with a detailed analysis and leads to the development of a digital business model, including concrete measures for its implementation. All departments of a company should be involved. The digital strategy also serves to engage employees in digital innovation and make them active drivers of change.
The strategic direction should not lose sight of the fact that analog processes should not simply be transferred to digital, but should be rethought. In this way, you can shorten some or all of your work processes, or even make them obsolete. This also applies to the sale of products and services: do not just sell them online, develop new business models or expand and optimize existing ones with a digital component.
Digital business models are a form of value creation in the context of digital transformation. They are based on the development of customer benefits based on digital technologies. The goal is to create value that customers are willing to pay for.
Digital business models have different characteristics, usually several at the same time:
The most important step in developing a digital business model is to understand the usage and buying behavior of digital customers. You cannot simply borrow from your analog audience; you need to rely on detailed analysis.
Fortunately, you don't have to reinvent the wheel when it comes to developing a digital business model; you can get inspired by concepts that have already been successfully implemented: The successful models in the digital industry are based on recurring patterns that can be applied to your own business.
Free: In this model, a company offers its core product for free and monetizes it, usually by collecting data. This model was developed and popularized by companies like Google and Facebook: Their large number of users allows them to mine large amounts of customer data and use it for advertising and personalized offers.
Another successful example of the free model works differently: The popular free mobile game Angry Birds has gained such a large fan base through its widespread distribution that it can easily be monetized through merchandise. The game has been licensed for movies and board games, among other things.
Freemium: Made up of the words "free" and "premium", the artificial word freemium describes a model that offers the basic version of a product for free and also provides a premium version with additional features that the user can purchase or subscribe to. This generates a high number of users and awareness, while the paid premium features generate revenue.
The model is particularly suitable for digital products, as their digital distribution is less expensive than that of physical products. This is evidenced by the popularity of Dropbox, Spotify, and iCloud, all of which have adopted this widespread principle. Dropbox, for example, gives each registered user a limited amount of cloud storage for free and with no further obligations. If that is not enough, the user can choose from three different paid subscriptions and add more storage and other features.
Subscription: This is a classic membership and abonnement principle: The vendor provides a product to the customer that can be used permanently and usually pays a monthly amount for it. This has advantages for both parties: The provider binds the customer easily and without much effort and receives comparatively stable and easily predictable revenues. The customer has access to the product at all times, does not have to worry about purchasing it, and may even benefit from a discount or bonus.
The model is particularly well suited to streaming services like Netflix, software vendors like Adobe, and dating sites like Parship. But it is not only digital products that can be sold efficiently using this model: providers such as the diaper manufacturer Lillydoo or the meal kit provider HelloFresh also offer their goods as online subscriptions.
Lock-in: With the lock-in model, customers are tied to a product by keeping the barrier to exit or switch very high. In the customer-unfriendly variant, this is often done in the form of a subscription that is expensive to cancel. Another option is to lock in customers by offering exceptional benefits, such as excellent service or unique product features.
The best-known example of the lock-in model is Apple, whose closed platform and hardware make it extremely difficult to switch to competing products.
Pay per use: Or sharing economy and renting instead of buying - regardless of the name of the model, the principle of time-limited use is described here. The provider does not sell his product, but grants the customer limited usage rights for a certain amount of time. For the company, this potentially generates more revenue than a one-time sale, while the user benefits from not having to make a large investment.
A well-known example of this model is Car2Go: Similar to a traditional car rental, but coordinated through an app, the customer books a vehicle and pays only for the time they use it. The principle also works for smaller purchases such as clothing. For example, you can rent ecological baby clothes from the online shop Räubersachen and send them back when your child has outgrown them.
Solution provider: This model follows the principle of "one-stop shopping": the provider delivers not only a product, but a complete solution. This allows the customer to focus on their business and have a single point of contact for questions. The supplier, on the other hand, intensifies its relationship with the customer and prevents him from switching to the competition.
A prime example of a German SME is Heidelberger Druckmaschinen: It supplies its customers not only with hardware, but also with the necessary application know-how, including monitoring and consulting services that help optimize printing processes.
Platform Business: Marketplace strategies are among the most successful models in the digital economy. They bring together different groups of users on a platform and usually charge a brokerage fee, commission or fixed transaction costs for their interaction. A membership fee or monetization through advertising is also conceivable.
The best-known examples, such as Amazon and eBay, derive their relevance from the size of the platform: the more participants meet on a marketplace, the more users are attracted. However, the model also works on a smaller scale if the platform specializes in a certain niche: the MyHammer platform, for example, brings together craftsmen and customers.
The long tail: Colloquially, this model would probably be called "small things add up": instead of focusing on large individual sales of a few blockbuster items, sellers use this principle to make their sales from the mass sale of individual products for small amounts. This model requires a lot of storage space when selling physical items, so it is particularly suited to trading digital products.
Successful examples include job boards like Stepstone and Indeed, where companies buy the right to post individual job ads, or services like iTunes, where you can buy individual songs for a few dollars or cents.
User Designed: Vendors outsource the creative work to their customers and allow them to design the products themselves. The benefits of this model are mutual: The company saves some of the work, while the user enhances the item through their own involvement and gains a special connection to it.
Spreadshirt, for example, has successfully implemented this model: The online store allows users to create custom T-shirt designs that are not only used for their own clothing, but can also be purchased by other users.
Orchestrator: In this model, providers focus on their core competencies while outsourcing the remaining steps of the value chain and actively coordinating their partners. Specialization reduces costs, but there is no difference for the customer.
This principle is often used in the apparel industry: Adidas, for example, focuses on design, development, product management, marketing, and distribution, while outsourcing manufacturing.
Of course, there are many other business models, but these are the most common. As you can see from these ten examples, the models are based on relatively simple mechanics. The trick is to find the right business model for you, adapt it to your business, and make it efficient. A clearly defined goal that sets the direction of your digital strategy is essential.
Digitization is an opportunity, and not just in these times of declining retail sales and reluctant customers. It is an opportunity for you and your business to survive and grow. Be aware of the challenge, develop a holistic concept and tackle its implementation together with your employees.
We look forward to helping you implement your new digital business model! You can reach us by phone at +49 711 184 206-0 or by email at hello@wus.de.
