As the digital transformation wave transitions from theory to deployment, companies traditionally focused on operating efficiencies must adjust their vision to the top line.
Digital transformation is big business — it’s estimated that total spending on such initiatives topped $1.2 trillionin 2019, and all companies find themselves in the midst of some form of digital transformation.
“Imagine a business that’s been making mechanical equipment for 50 years,” says Adam Echter, a partner with Simon-Kucher & Partners, a global strategy and marketing consultancy. “They’ve probably been putting sensors on that product since the 1980s. They long-ago digitized their equipment, but they haven’t taken a scientific approach to questioning how they make money and leverage that same technology to grow their top line.”
Companies trying to figure out how to use their data streams need to change their focus from the bottom line to the top line — price and volume. “The last 10 years was about using data for operations,” notes Echter. “The next 10 years will be about using it to create new revenue streams.”
Echter points out digital transformation has fundamentally changed how customers interact with companies. “Think about how connected devices enable direct relationships with your customers,” advises Echter. “Once customers are in your ecosystem, you can now dramatically alter your relationship with them and make it a priority to keep them there.”
A major challenge for new digital products is monetization. Deepak Sharma, partner and global head of software, internet, and media at Simon-Kucher, has seen successful companies struggle with monetizing their data streams.
“Do you sell your product one time or do you charge on a unit of time, outcome, or value created?” Sharma asks. “You now see a prevalence of subscription models for ‘as a service’ offerings. You never own the product, you license it, you use it for a period of time. It shifts the focus from a capital expenditure to an operating expenditure model.”
“Enterprise Software and Hardware are great examples,” Sharma continues. “You used to spend millions of dollars to buy computational resources — OS, databases, servers. And then Red Hat, MySQL, and AWS came out and completely flipped the model.” Echter adds “That is happening now in industrial businesses. The missing link required to do that is usage metrics and consumption data — IoT enabled that and 5G is going to blow it wide open. Leading industrial manufacturers are already moving from a world of selling you a one-time item to providing you with services for $25,000 a month.”
Mistakes to avoid
Sharma sees customer needs as paramount. “Companies often will not think about the perception of a new feature through a customer’s lens,” he notes. “They don’t ask: Is this truly a ‛lighthouse’ feature that drives stickiness, that customers would buy individually? Or is it a ‘nice-to-have’?”
“Firms also forget that digital transformation doesn’t need to wait for the product,” adds Echter, “Some of the fastest impacts are changing how you interact with your customers.” Another mistake is trying to look too far ahead. Sharma says companies should plan for three years. “Anytime you change your revenue model or come up with new digital assets, it takes functional teams time to implement all of the changes and become efficient.”
The bottom line
What’s clear is that digital transformation isn’t just changing the types of products companies sell, it’s changing how companies make money. “We’ve done this for 35 years,” adds Sharma. “There’s a clear science and an approach to it, not some dark art. That’s why thousands of companies, 35 Unicorns and 20 of the Cloud 100 have chosen to work with us.”