Magazine Spring 2013 Research Feature

Optimizing Your Digital Business Model

What does it take to create the strongest possible online presence?

Peter Weill and Stephanie L. Woerner Reading Time: 19 min 

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Image courtesy of Flickr user BenLucier.

As Netflix Inc. discovered in 2011, business model missteps can annoy customers.

Image courtesy of Flickr user BenLucier.

Are your customers leaving you behind digitally? Are they seeking out other companies that provide great digital customer experiences?

These are far from idle questions. Customers are increasingly demanding to interact with companies anytime and anywhere. For instance, 72% of customers in a recent survey said they would replace some traditional channels with mobile apps if the capability was available.1

Given that, enterprises must strengthen their digital business models — how they engage their customers digitally to create value, via mechanisms such as websites and mobile devices.2 If your company doesn’t offer a great digital experience, many customers, particularly younger people, will move to industry competitors or do more business with companies like Amazon.com that offer great customer experiences digitally, operate in adjacent industries and are starting to offer services similar to yours.

To make this change more difficult, a great digital business model challenges the traditional physical business model that relies on places (such as bank branches, bookstores or department stores) and people (such as sales teams or insurance agents) to delight a customer. A digital business model challenges the physical model in three main areas: internal power, since who “owns” the customer’s experience often changes from product groups to the unit that manages the multiproduct customer experience; business processes, which require rethinking to be seamless across channels; and customer data, which become an enterprise-wide resource rather than remaining hidden in one area.

Whether you are a born-on-the-Web company, a large established company or a local business just starting to focus on the best way to connect with customers online, your enterprise needs to strengthen its digital business model. And the stakes are high if you get it wrong. Just ask Netflix Inc., which dominated the DVD mail rental business and had strong claims on the video streaming business. Through business model missteps — separating delivery via mail and digital delivery, coupled with a large price hike — Netflix annoyed many of its customers. The result was a 79% drop in share price from July to November 2011, despite revenue growth of 52%.

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About the Authors

Peter Weill is senior research scientist and chair of the MIT Sloan School of Management’s Center for Information Systems Research in Cambridge, Massachusetts. Stephanie Woerner is a research scientist at MIT Sloan School of Management’s Center for Information Systems Research.

References

1. ClickFox, “Mobile Apps Consumer Survey,” October 2011 (sample size=650). The survey also found that 78% of the sample reported using apps to interact with companies with which they do business, like banks and retailers.

2. The concept of a digital business model draws on previous research on business models, much of which focused on e-business. The numerous definitions of a business model all include some form of how a business makes money or sustains itself. Our previous work on business models is described in T.W. Malone, P. Weill, R.K. Lai, V.T. D’Urso, G. Herman, T.G. Apel and S. Woerner, “Do Some Business Models Perform Better Than Others?” MIT Sloan Research Paper No. 4615-06, May 2006; performance differences between business models are highlighted in P. Weill, T.W. Malone and T.G. Apel, “The Business Models Investors Prefer,” MIT Sloan Management Review 52, no. 4 (summer 2011): 17-19. Additional recent books on business models include: A. Osterwalder and Y. Pigneur, “Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers” (Hoboken, New Jersey: Wiley, 2010); S. Kaplan, “The Business Model Innovation Factory: How to Stay Relevant When the World Is Changing” (Hoboken, New Jersey: Wiley, 2012); “Harvard Business Review on Rebuilding Your Business Model” (Boston, Massachusetts: Harvard Business Press, 2011); M.W. Johnson, “Seizing the White Space: Business Model Innovation for Growth and Renewal” (Boston, Massachusetts: Harvard Business Press, 2010); and H. Chesbrough, “Open Business Models: How to Thrive in the New Innovation Landscape” (Boston, Massachusetts: Harvard Business Press, 2006).

3. Year-to-year revenue growth, 2nd quarter, 2011. Source: Netflix Q2 2011 Letter to Shareholders.

4. MIT CISR conducted a digital business models survey in 2011 (sample size=118). We measured a number of digital practices that were part of either content effectiveness, customer experience effectiveness or platform effectiveness constructs. The survey included nine questions about content effectiveness, nine about experience effectiveness and eight about platform effectiveness. Effectiveness was measured on a 10-point scale, from 1=Not effective to 10=Very effective. To assess total digital effectiveness, we averaged two outcomes scales: “attractiveness of digital products” and “effectiveness of digital delivery.” In this article, we highlight the 10 practices (out of 27) that were statistically significant (p<0.1) in a regression against digital effectiveness. In other analyses, we correlated content effectiveness, customer experience effectiveness and platform effectiveness with financial performance measures, adjusted for industry.

5. For one of the earliest and most insightful discussions of this move from place to space, see J.F. Rayport and J.J. Sviokla, “Managing in the Marketspace,” Harvard Business Review 74, no. 2 (November-December 1994): 141-150.

6. Framework adapted from P. Weill and M.R. Vitale, “Place to Space: Migrating to eBusiness Models” (Boston: Harvard Business Press, 2001) and Rayport and Sviokla, “Managing in the Marketspace.”

7. C.C. Miller and J. Bosman, “E-Books Outsell Print Books at Amazon” New York Times, May 19, 2011.

8. For more on platforms, see P. Weill and J.W. Ross, “IT Savvy: What Top Executives Must Know to Go From Pain to Gain” (Boston: Harvard Business Press, 2009).

9. Financial growth rate calculated by MIT CISR, based on public data.

10. Reed Elsevier, “Annual Reports and Financial Statements” (London: 2011).

11. For more on test and learn, see E.T. Anderson and D. Simester, “A Step-by-Step Guide to Smart Business Experiments,” Harvard Business Review 89, no. 3 (March 2011): 98-105.

12. Apple Inc., “Q4 2012 Unaudited Summary”; and Apple Inc., “iPhone 5 First Weekend Sales Top Five Million.”

13. Z. Epstein, “Apple Owns 8.8% of Cell Phone Market, 73% of Cell Phone Profits,” BGR, May 3,, 2012.

14. C. Taylor, “Apple Sets All-Time Record for Quarterly App Store Sales: 700K Apps, 275K for iPad, $6.5B Paid to Devs,” TechCrunch, Oct. 25, 2012.

15. Piper Jaffrey estimate cited in J. Lowensohn, “Despite Growth, Google Trails Apple in App Dollars Spent,” Nov. 21, 2011.

16. M. Brian, “Apple iTunes Revenues to Push $13 Billion in 2013: Report,” The Next Web, July 5, 2011.

17. BI Intelligence using sources from comScore, Alexa, U.S. Bureau of Labor Statistics and Flurry: see Business Insider, “BII Report: Why Mobile Commerce Is Set to Explode,” Jan. 30, 2013.

18. Questions include “How often does your enterprise contract with third parties to measure your external customer digital experience?” and “Relative to competitors, how effective is the digital information you provide about your non-digital products and services in retaining or attracting external customers?”

19. We measured financial performance using an equally weighted combination of revenue growth and net margin percentage adjusted for industry. We asked respondents to provide their revenue growth and net margin percentages and then subtracted the respective industry average from each company’s data (to industry adjust). Then we took z-scores of both measures (to place the different measures on the same scale) and summed the two to get a combined measure of revenue growth and profitability.

20. A. Zimmerman, “Showdown Over ‘Showrooming,’” Wall Street Journal, Jan. 23, 2012.

i. J.W. Ross and C.M. Beath, “USAA: Organizing for Innovation and Superior Customer Services,” MIT CISR Working Paper No. 382, December 2010.

Acknowledgments

The authors wish to acknowledge, with gratitude, that important contributions to this research came from Jeanne Ross, Peter Reynolds, Michele Vivona and John Sviokla, as well as the many executives who enthusiastically provided feedback during MIT CISR workshops.

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Comments (10)
Md. Shaheen Sohel
Its really significant that helping me for web optimization i hope you will write more about the post for us.
Margarita Lopez
Peter Weill mentioned that the best margins are from the companies who chose to excel in platform from among the 3 components of a digital business model.  Any more detailed examples to support this?
Jacques Gaumond, ACC, Acc.Dir.
Excellent article. As I am thinking about applying this to a university, I would suggest to enrich the concept to "from place to space and time".
Liliana Duffy
@tim great post. I never heard of Centralpoint by Oxcyon. We’ve been looking for an alternative to Sharepoint for a long time. I checked out Oxcyon’s website and it looks good. Do you have anything else to share about SharePoint?
Tim McMann
The Digital Users Experience is undoubtable one of the most important things that can be thought of when designing a Content Management System. Microsoft has made this easy with their cool to use Office products that integrate with each other. As the years go on MS products get better and leave other technology based system in the pass. Products like SkyDrive, SkyDrive Pro, SharePoint, Office 365 and other key products that integrate with the software giant are becoming more and more popular to consumers.  
One thing Microsoft has thought us all is that it is a leader in enterprise technology software. We’ve learned that at times products like these are restricted to limited areas. This makes it hard to customize towards a company’s overall need. With products that are designed to integrate with one another at an individual rate with no room to modify the software beings problems to a company. This means the company has to wait for updates, hotfixes, third-party software and even new versions of the product for change. The company is force to grow when the product grows. The Digital User Experience decreases in time from a familiar interface to a less productive Content Management System.
In business we have far too long ignored User Experience. Within our company Centralpoint by Oxcyon has addressed this issue. We operate with dealers and customer. The system allows for enhanced communication by offering tools for dealer incentives, order entry, and Reporting. With this portal, manufacturers can provide all of their dealers and distributors a self-service login to access and download information personalized just for them. This experience met our needs.
Stephanie Woerner
Thank you all for the comments. Peter and I are extending our work on digital business models.  We're examining in more detail the importance of customer experience, specifically looking how mobile apps can be used to engage customers.  We've also done additional statistical analyses, showing in more detail differences between top performers and the rest. Our colleague, Pete Reynolds, is studying how enterprises are involving their customers in the design of digital products and services and how that impacts the customer experience.  You can look for more of our digital business models research at the MIT CISR web site, cisr.mit.edu.
Mike Tiburzi
Excellent article which effectively describes the digital business model across all strata from small start up to billion dollar businesses. Forgive my excitement, but I was  energized by the construct of the authors and the relevancy of the case studies; very engaging. Well written.
Christopher Rollyson
@Peter @Stephanie, thanks for a succinct description of "the digital business model." I love your "three areas," which draw attention to organizational issues. Can you refer us to your further thoughts on them?

I think there's another "area" that's building, mostly off the radar. Although it depends on the enterprise and its stakeholders (customers + employees, media, regulators..), my client work in social business transformation has consistently shown that, when organizations engage their high-priority stakeholders in digital social venues, a new cycle begins, and marvelous things happen, but they beget a transformative change requirement. First, if the org is focused on stakeholder outcomes, not trying to constantly hawk its wares, stakeholders feel validated and they start caring about the org/brand. This means they start sharing more about themselves (trust is increased) and suggesting ideas to the org. This kicks off a constant open innovation cycle. This will culminate in "brands/orgs" rethinking themselves as platforms to bring stakeholder ideas to market. So the point is, stakeholders become intimately involved in the org over time. Orgs that don't develop that capability will lose relevance very quickly, and since it's a profound org change proposition, they won't benefit unless they start sooner rather than later. Markets will be remade. This post drills down on this: [http://bit.ly/sochan1]
Anderson Uvie-Emegbo
Thanks for this thought provoking and well researched article. It lays the argument for building digital competitiveness convincingly. Very relevant case studies. It would be a mistake for discerning executives to ignore the take outs here.
kathleen.held
A well written and beautifully designed article.  Thanks!