Throughout most of history, business has taken place in a fairly straightforward way: A company sets a price for a product or service, tosses it out to the market, and then consumers opt to purchase it--or not. Supply and demand largely dictate pricing, though businesses frequently tilt the demand side of the equation by offering promotions, coupons, and discounts to drive sales.
The primary reason this model works is quite simple: In the physical world, a limited number of any particular offering exists.
However, digital technology crumples this framework. In many cases, it allows a business to create or build an infinite number of a digital offering--such as a software app, game, video, music, or book--and then scale it rapidly. At the same, it radically remaps intersection points for both physical and digital processes by connecting people and data far more efficiently. Finally, and no less importantly, it allows a business to measure usage, consumption, and behavior in granular detail--and in near real-time. This makes it possible to adapt quickly, and it redefines the concepts of availability and scarcity--as well as how customers view money and value.
“Digital technology introduces entirely new and different business models. It creates enormous disruption, and it reshapes the value chain,” said Tony Fross, vice president of digital advisory services at Capgemini Consulting, in an interview with CMO.com.
The result? Business models and marketing strategies increasingly revolve around free, freemium, ad-supported freemium, microtransactions, subscriptions, and affiliates. Stated Irene Ng, a professor of marketing and service systems at The University of Warwick in the U.K.: “How we think about money and things is undergoing a fundamental transformation. Digital technology eliminates barriers and friction that exists in the physical world.”
No Small Change
One aspect of digital technology that makes it so powerful is that it extracts data and information from physical objects. For example, a digital book or photograph is no longer confined to paper and ink. A song is no longer tied to a record or CD. In the digital realm, these items are a collection of data points that can be replicated anywhere and at anytime. This makes it possible to scale and distribute these objects rapidly. At the same time, a business can monitor and measure clicks on a smartphone or the actual usage for a car or jet engine. Instead of selling the item outright, it’s possible to charge for exact usage or use a virtual currency. Finally, digital tools connect buyers and sellers far more efficiently--and allow transactions to take place dynamically and in near real time.
The result is a concept that Ng described to CMO.com as “liquefaction.” It essentially separates information from the physical world and, in the process, leads to massive disintermediation and upheaval. Services such as Airbnb, ZipCar, Uber, and Lyft are examples. In some cases, consumers can even bypass all companies through online exchanges that rely on shared economies to buy and sell goods, share things such as vehicles or tools, and exchange various services. Meanwhile, there’s a growing recognition that data is essentially its own form of currency and just as powerful as dollars, Euros, and Yen. The result? A business may give away a seemingly valuable product for free or at a deep discount in return for data. Facebook, the ad-supported Kindle, and a variety of smartphone apps use this approach.
In fact, the data is sometimes more valuable than the actual product. Fross pointed out that in the 1990s, AMR, the parent company for American Airlines, recognized that the data contained in its Sabre flight reservation system exceeded the value of the airline. “Even though the Sabre is an intangible asset that is very different than aircraft and physical assets, it delivers a level of scalability and inexhaustibility that simply isn’t possible in the physical world,” he said. In addition, digital products and services make it possible to build a much larger ecosystem that serves as a multiplier for business and marketing opportunities. Within this framework, partner and affiliate relationships emerge.
To be sure, digital business requires different thinking and entirely different approaches, including the use of social media, gamification techniques, and virtual currencies. Daniel Benton, global lead of technology strategy at Accenture, said that key business questions increasingly revolve around: How do I interpret data? How do I make good decisions around data? How do I think and act more digitally? “There is huge convergence of business and technology strategy. The value of today’s physical and virtual objects--including a wide range of legacy products and services--doesn’t line up with traditional thinking and business practices,” he told CMO.com.
Nowhere is this fact more apparent in today’s business and pricing models. For example, a free or freemium approach makes sense--and can lead to big dollars--for a growing array of businesses. “The concept is effective from a business and marketing standpoint because it allows an organization to distribute a product or service quickly and at a relatively low cost,” explained Peter Krasilovsky, an independent retail industry analyst, in an interview with CMO.com.
For a startup or a larger company testing a new product or service, the approach can also tap heavily into word of mouth or a viral strategy. Of course, at some point, the business must find a way to monetize the product or service. “A lot of companies that start with a free service never get to the point where they can charge customers,” he added.
Freemium or premium tiers may include free and paid versions that deliver ad-supported versus ad-free usage models--or they may simply include additional or enhanced features. Other businesses provide a free version but offer in-product purchases or the ability to move to a premium level or conduct microtransactions within the app, product, or service. Many games rely on this approach to attract customers but then, in order to unlock desirable features or capabilities, require additional purchases. In fact, by some industry estimates, about two-thirds of the revenue generated by the top 100 grossing apps online come from freemium mobile games.
At the same time, pay-per-click and pay-per-use models that tie into big data and analytics capabilities can radically redefine the way companies charge for everything from games and software to insurance and jet engines. For instance, insurance firm Metromile offers a pay-for-use model based on actual miles driven rather than a flat monthly fee (a motorist places a metronome device in his or her vehicle and it feeds the company data), and GE and Rolls Royce charge by actual jet engine usage. Similarly, the ability to build paywalls and use a subscription-based model makes it possible to attract visitors and convert some of them into customers willing to pay for richer or broader content.
It’s no small revolution. Said Ng: “When we examine driving, grocery shopping, home automation, and areas such as personal grooming--and how things increasingly overlap and intersect--information has the potential to short-circuit conventional industries and transaction points and introduce entirely new and different models resulting from new linkages and interactions.”
Just as Facebook mines personal data and some parking apps provide free information about open spots in return for data that’s sold to insurance companies, cities, and government agencies, companies may see opportunity in rethinking the fundamentals of the business--and marketing.
‘All About Innovation’
Within today’s digital framework, marketing executives must think very differently. “Today, marketing is everywhere. It revolves around creating new products or services. It revolves around delivering new experiences or insights,” said Jeff Jacobs, a partner at McKinsey & Company. “There’s a need to communicate and interact with consumers in nontraditional ways and look at a business model in an entirely different context.”
Yet, in every instance, the bottom line in business and marketing is delivering value and delighting consumers and customers. “It’s all about innovation and thinking and acting in a less formulaic way,” Jacobs told CMO.com.
Indeed, today’s business environment is both exciting and risky. Fross said that marketing executives must address a fundamental question: What is their role in developing, managing, and overseeing digital business models and pricing strategies? “Is a marketer a new product and service designer or simply someone to manage the digital ecosystem?” he said.
Not surprisingly, the answer typically varies, depending on the organization and the circumstances. However, “As we move forward, some chief marketing officers will play a purely executional role, while others will find themselves involved in product and service development,” he explained.
Either way, this means refocusing marketing to take a data-centric approach and working with IT and other departments to build a platform for innovation. It also involves finding ways to become more agile and iterative in product development and marketing. Three factors ultimately determine whether an organization succeeds, Fross said.
First, “It’s critical to understand what customers want, what they need and what they aren’t getting today,” he said This may involve market research but also a deeper and broader grasp of today’s technology and consumer behavior.
Second, “Marketers must figure out how digital technology changes the shape of the ecosystem and what new partnerships and channels can extend products and services into new channels and geographies.”
Finally, he noted, “You have to ask the question: ‘What is the digital version of my product or service and how can I create real value before someone else does--and I wind up disrupted?’”
A major stumbling point, Fross said, is that a lot of companies view their products and services as digital, but they are actually driven by older media, aging technology, or legacy models. Not only is it critical to evaluate and re-evaluate pricing and find the optimal trigger point for customers, it’s critical to look at products and services in entirely new and far more innovative ways. This may lead to rewarding customers for social input, providing incentives for crowdsourcing of ideas and knowledge, and reducing “friction” at key points in activities and tasks, such as building a digital loyalty program that incorporates rewards, payments, and mobile ordering.
“If you look at the best products and services delivered within a digital framework--businesses such as Uber and Airbnb--they redefine cost, choice, and reliability. They introduce systems that are highly responsive and inspire trust through feedback,” Fross said.
Make no mistake, digital disruption shows no signs of letting up anytime soon. The Internet of Things, increased machine-to-machine communication, and more advanced analytics and algorithms will end many legacy industries and businesses--and force others to radically reinvent themselves. Incorporating new business models and redefining financial transaction models requires new and different marketing methods.
Accenture’s Benton said that marketing must evolve to the level where it’s possible to connect to every customer touch point and understand how to identify value, create value, and measure value. “Only then is it possible to deliver products and services that are in touch with the marketplace,” he said.