Create value for your customers first

In a digital business, switching costs are generally low (some might say frictionless) and the barriers to entry are also generally low. It really only takes a credit card and an Amazon account to bootstrap a new digital business that could, in theory, scale globally. This is changing the economics of the way that digital businesses compete.

So, what do you do? How do you create and maintain a competitive advantage that is difficult to replicate? What strategy options are there?

In my view, successful businesses, digital or not, start with a simple adage, “create value for your customers first”. You need to be constantly creating value for your customers or you will get dropped pretty quickly. If your customers don’t recognise or see the value of your product or service, then it will becomes a grudge purchase at best, or more likely, yesterday’s news / fad / product.

I really like Astro Teller’s view that if you create value for the world, then some of that value, at some point, will make it’s way back to you. This is kind of similar to a “grow the pie” economics strategy rather than “redistribution of wealth” economics strategy. Or similar to the way that negotiation theory would refer of Win-Win strategies.

The second trick is figuring out how to capture a some of the value that you create.

I think this is at the heart of the culture of a great digital business – thinking about “what value are we creating for our customers” first before thinking about “how are we capturing some of that value”. But you do need both components to be a successful digital business.

 

The economics of digital strategy

IMHO there are two fundamental components to a business strategy. A business strategy can be simplified down to one of these below, or sometimes both. (Plus, depending on the market, sometimes a strategy on how to divide the value created e.g. Does the buyer or seller capture the value created?)

Strategies that don’t refer to either of these aren’t really strategies. (They’re just tactics.)

  1. Increase a customer’s Willingness To Pay for your product or service, or
  2. Reduce the Opportunity Cost for that product or service.

 

Another way to describe this is as follows:

Value Created = Willingness To Pay – Opportunity Cost.

The economics of digital strategy, value created = willingness to pay - opportunity cost

Economics of digital strategy explained

Examples of some different digital strategies

  • Sharing economy. The sharing economy is an example of lowering Opportunity Cost through asset utilisation. Airbnb can bring on new rooms at a fraction of the Opportunity Cost that Hilton Hotels can.
  • On Demand. Increasing a customer’s Willingness To Pay through customisation and immediacy. The Iconic is an example of this.
  • Unbundling. Increasing a customer’s Willingness To Pay through choice plus reducing Opportunity Cost by decreasing the unit size. Apple iTunes Store is an example of this
  • Long tail. Access to new, previously unattainable markets, through lowering of Opportunity Cost.

 

Create feedback loops 

Another important component of the economics of digital strategy is to create feedback loops. A feedback loop is a way of monitoring the Value Created.
Customer feedback is an absolute gift. You can’t build a great digital product or service without getting customer feedback. We get lots of customer feedback all the time… the real question is what do we do with it?
  • Sales. Sales is a form of feedback. Are customers forking over money for your product? What price are you setting? What features drive that pricing?
  • Customer forums. What are users saying about your products? How are customers using your products? What do you do with that feedback?
  • Customer contact centres. What are the top 5 queries / calls about. Do you change your offerings based on these calls?
  • Social media. What are people saying on social media about your product? Do you change your product based on social listening?
  • Customer loyalty. How is your customer loyalty going? Are you retaining your customers? What are you doing to make your existing customers see the value in your products?
In a digital business, taking customer feedback and automating a feedback loop back into your product also makes it much more difficult to replicate or imitate. (There are lots of new technologies that allow you to create, and automate, feedback loops at scale with relatively minimal cost. e.g. product ratings, user ratings, product recommendations, next best conversation, personalisation, marketing automation).
Some great examples of feedback loops in digital businesses are…
  • Uber is a feedback loop. Users rate drivers. Drivers rate users.
  • Apple iTunes. Ratings and feedback on each app, song, movie, digital product.
  • Airbnb has a feedback loop about renters and owners.
  • eBay has a feedback loop about buyer and seller experience in a trust model.
  • Amazon has a recommendations feedback loop about what other people who are like you have purchased.
Finally, if you don’t act on the feedback then it’s actually worse than not getting it at all. I think it’s best summed up as it’s only a mistake if you do it twice.

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