
Digital Transformation — Why an increasing digital sales channel share doesn’t reflect digitalization, increases the risk of being disrupted and even is a barrier to innovation
Outlook
Rising digital sales shares might be a misleading indication when it comes to measuring digitalization. Nowadays various established companies face the risk of being disrupted. This article will be dealing with different forms of digitalization (external and internal) as well as providing three currently very popular initiatives to increase digital channel sales share. Finally, risks and strategic implications of these long term initiatives will be explained suing personal and professional examples.
Internal and External Digitalization
Due to the fear of being disrupted or/and cost pressure almost every company has started digital initiatives. I myself had the opportunity to experience these initiatives in all my positions so far. As a result I attended/ hosted events, where I had the chance to discuss ideas and visions. In general, I would distinguish between internal digitalization (automation through various means of technology) and external digitalization where a digital business model is created e.g. Netflix or Grindr.
External digitalization
The most influential vision about digitalization with tangible examples I have come across so far was held about a year ago at the Oracle Modern Business Day Experience in London. There I was able to participate in a lecture of futurist Ray Hammond with the topic of digitalization as a disruptive force. He provided an excellent and very tangible example I keep using whenever it comes to the impact of digitalization: Grindr and its impact on gay bars in Soho.
Prior to Grindr (a gay dating app), gay bars in Soho provided the opportunity to meet people with the same sexual orientation. Upon introduction of Grindr the amount of bars which sole purpose was to meet people with the same interest decreased significantly as the business model and the purpose of these bars faced competition from Grindr and eventually was disrupted.
Internal digitalization
Internal digitalization is often used as a synonym for automation. Additionally, companies build up customer self service capabilities in order to solve problems on their own. Therefore, they relieve their customer service in shops and on the service line. Internal digitalization allows you to save costs in the long term and reallocate resources to activities, which are designed to create value for the company.
Digital transformation for incumbents is very often a combination of internal and external digitalization. That is why the use internal savings in order to utilize available resources to improve service in order to create entry barriers for digital only services.
Digital sales share does not reflect external digitization and does not lead to cost savings in the worst case
Increasing online affinity and changing consumer habits
Consumer habits are rapidly changing. There are a portion of customers, who for various reasons prefer to purchase products or services online and this portion of customers is increasing significantly. Especially in the US the share of eCommerce sales increased exponentially, while typical brick and mortar presence or footprint decreased or even collapsed (e.g. Toys“R”Us).
Online presence is thus inevitable in order to be ready for the future. The majority of traditional brick and mortar chains consider increasing online sales shares to be critical. However, the question is if the increase reflects digitalization and comes with the expected benefits as cost savings and protection from facing the faith as Toy”R”Us.
Distortion to long term digitalization due to Digital Trinity
Every sales channel (digital, offline or contact center) has its strength and its weaknesses. After doing expert interviews and holding workshops I was able to develop a quantitative model which combined product attributes like the complexity of a product and the strength and weakness of every sales channel. The outcome was that there are primary distribution channels for specific products. In general, products with low value and low complexity — commodity products can be sold online, while products where haptic is critical should be primarily sold in brick and mortar shops to allow customers to “experience” the product. Furthermore, there are a lot of factors and reasons why certain customer groups still want to purchase and get advice offline. Companies have the possibility to influence where the customer journey ends, based on what you want to achieve. I have recently noticed that traditional brick and mortar chains try to shift sales towards digital channel as means or to reflect digitalization.
There are three major initiatives, which I consider relevant when it comes to influencing the customer journey towards an online purchase, which have a negative impact in the long run. I will summarize these initiatives under Digital Trinity ongoing forward, what is more, I will provide examples to make it more tangible:
Exclusive Online Pricing
Exclusive Online Products
Digital Fit Products
Exclusive Online Pricing
Exclusive online pricing is when digital sales channels have a lower price than other sales channels. I have recently noticed that traditional brick and mortar chains use differential pricing with online having a highly competitive price on the ecommerce marketplace, while offline had significantly higher prices.
Amazon as a platform supplier (a variety of different products) has a market share of 49% in the US. While initially it had highly competitive prices, the pricing has changed. Nevertheless customers including myself still buy from amazon because of convenience and familiarity with the processes. Through amazon prime the convenience was even taken to the next level. The dominance of amazon in ecommerce has led to an increase in its advertising revenues because it was able to establish itself as the dominant platform when you are willing to buy a product online- instead of using google to search for the product.
The impact of exclusive price pricing for traditional brick and mortar chains can be devastating, if the only reason customer buy online is the price. You might achieve an increase in digital sales share or even an increase in market share in the short run, but impact on overall profitability and long term customer loyalty is ambiguous. A price driven strategy to compete against amazon or other online only shops will be costly for brick and mortar stores in the long run. The convenience amazon is able to offer, combined with the variety of products or the price by other niche online only suppliers will be difficult to beat.
Exclusive Online Products
An exclusive online product is when a product is only available/sold online e.g. a special product line. I have recently bought a present for a friend and in this case the company offered a combination of its most popular products in smaller sizes in one small suitcase. The experience I faced purchasing this product online was horrible. It took me two hours, three calls to the contact centre spread over two days in order to eventually purchase the product.
As long as you have a product which has a high differentiation factor a customer will go through the awful process to purchase this product online, although the process is cumbersome. However, we currently see that products become more and more comparable. Thus, in the long run when the product loses it exclusivity/can be substituted by products of other suppliers online sales will decrease as customers are not willing to invest the time to go through these hurdles. Therefore, your online sales might increase because of the availability of products, which cannot be purchased somewhere else. However, this might only white wash other problems of your online presence.
Digital Fit Products
Digital Fit Products is a term used for products, which can be sold online. On the contrary, products which are considered to be complex need explanation, are novel or need high investment and commitment are considered not be ideal to be sold online. For example I think of cars and the endless possibilities to make adaptions to the basic model. Other examples are insurance or banking products which are too complex to be explained due to the variety of tariffs. In order to increase the digital sales share, complexity and commitment needs to be reduced.
There are currently several highly successful start-ups/unicorns who have been able to succeed in the above mentioned industries. The fintech N26 has limited amount on tariffs and an almost self-explaining app. Netflix and Spotify offer you a variety of different products (movies and music) which have been previously sold separately and the ability to terminate the contract at any time. The convenience, usability but mainly the tariff structure in combination with flexibility (reduced commitment) have been the reason these start-ups/unicorns have become so successful.
For incumbents simplicity and flexibility can be achieved by a reduction of tariffs and flexible contracts. However, this puts pressure on the cost base on the one hand and on the other hand includes also a risk to revenues from the existing customer base, which might switch to a cheaper tariff. In addition, as competitors change their pricing structure, the market becomes price driven or more for more while the digital sales share increases overall company performance might get impacted.
Long term Impact and strategic implications
Strategic Implications
Above statements on long term impact hold true unless there is longer term strategy behind these steps.
Exclusive pricing and exclusive products might lead customers to register online and reduce entry barriers to repurchase ongoing forward. The repurchase needs to be triggered by using provided data and customer behaviour to retarget customers.
In order for customers to choose you also ongoing forward as supplier independent of exclusivity and pricing, there should be a high exit barrier or a lock-in effect — similar to that created by amazon through its usability, convenience and the ecosystem or Spotify with its seamless integration in the life of the customer through compatibility with other products.
Digital fit products might lead to an overall increase in revenue due to additional customers, but in order to avoid a price driven market the exit barriers as mentioned previously need to be high.
Summary
An increase in digital sales channel share does not necessarily reflect digitilization. Benefits associated with digitalization are a decrease in costs and long term viability. Companies can take measures/kick off initiative to influence the end of a customer journey towards digital channels. These initiatives can in the worst case whitewash problems why customers don’t want to purchase online in the short run, while the long run impact might be devastating.
