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%.
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.
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.
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.