Published: 17. 1. 2018 in Blog

Channels and client connection in business model innovation

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Many of these new start-ups use the internet as an exclusive channel for most business activities, because it requires a significantly smaller initial investment, therefore also reducing risk, and it also facilitates offering your solution or service on the global market.

It's clear that the digital revolution influences certain changes in business, and requires the undertaking of activities to defend its market position, margin and profits, but it's not simple to determine how.

The most simple and common way is to delegate the digital transformation to the IT department, which introduces the internet as a channel for some business activities, mostly marketing, but sometimes also sales. Looking at it from a business standpoint, all of the income still comes from the old ways of doing business, and there is no real change, but who likes changes anyway? The common excuse is that the industry branch that the company belongs to is not under the influence of digital economy, and will not be for some time.

This is something often heard when we begin a conversation on digital revolution, transformation and change that is imminent for all the branches of industry. The digital transformation is a process of analysis and careful consideration on how to improve and update all nine elements of the business model canvas, and how to combine them all into a new business model that will enable growth in digital economy.

In the previous part, we have discussed value propositions for different client segments, and this is the next step in business model innovation that relates to channels of communication, marketing, sales, supply, support, maintenance and all other business activities. This is an important step in business model innovation, but only as a part of comprehensive consideration of all nine elements of the business model canvas.

The internet has become a new and very important channel for most business activities. In some cases, such as communication (e-mail, messaging, image and video clip exchange), news access, information, air ticket purchasing, hotel reservations, various bank transactions, shopping and many more, the Internet has become the dominant channel. The latest analyses show that over 90% of ticket sales is done online, and is preceded by detailed searching and offer comparison of internet offers, including the ones that don't end online. Many of these new start-ups use the internet as an exclusive channel for most business activities, because it requires a significantly smaller initial investment, therefore also reducing risk, and it also facilitates offering your solution or service on the global market.

INDUSTRIAL AND DIGITAL BUSINESS MODEL COMPARISON

If we take a look at the industrial - pipeline business model, it's easy to analyze and evaluate how much it depends on a very complicated and expensive supply chain, and what the margins are if you compare the production cost and retail price. Mike has taken advantage of the fact that the production cost of one replacement cartridge is a few cents, whereas the retail price for a pack of three to five of these cartridges is fifteen to twenty dollars.

One of the reasons why the price difference is so large is the massive amount of expenses caused by the supply chain - from the manufacturer, through the distributers to the sales point. Mike Dubin has used this to become an online competitor to Gillette, the ruler of the world market. The image displays Gillette's business model. Just by introducing online sales, and therefore replacing the distributers and dealers, Mike was able to reduce the price significantly, and thus increase the value proposition.

In Dollarshaveclub.com's business model, all the changes that impact the value proposition are represented:

  1. The price is lowered considerably by replacing a part of the supply chain with internet channels for a large number of business activities: marketing, sales and support, and client communication.
  2. Sales have been modified into a subscription, so the clients receive five spare cartridges each month - if they forget to buy new ones, they never have to use old, dull ones to shave. From the aspect of company value, subscription brings a value increase and enables better planning.
  3. Instead of selling to an unknown client through distributers and dealers, Mike sells directly to his clients, and gets a string of important data from them, such as their names and addresses and payment info.
  4. The data gathered on the clients and sales is a good foundation to get more information on sales frequency, conversion of website visitors to subscribers, the success rate of various digital marketing activities, and many other success analyses of marketing, sales and support.
  5. He has changed the partner ecosystem, because he gets the products directly from the manufacturer, and
  6. For client delivery, he used partners such as the post office or some other shipping company.

In addition to the value proposition, it is necessary to analyze the changes in the client segment Mike is addressing by this offer, and if this would be enough for his plans of growth and future development. By all indicators, this segment is growing faster than Gillette's, even though it is still a lot smaller. Sales statistics show that even the clients who used to buy Gillette’s products in stores are slowly switching to online shopping, so in 2016 Gillette's American market share has been reduced for the first time, whereas internet sales have grown, lead by Dollarshaveclub.com.

Mike's investment in this project was minimal. The video commercial clip has cost $4500, but it went viral and achieved great success on YouTube, with millions of views. In the first 48 hours, 12000 people have registered and bought a subscription, which shows the success of the video, but also that he's made good choices regarding the business model and that he's explained the value proposition well to his prospective clients.

If a new company were to compete with Gillette by the traditional industrial business model, a multi-billion-dollar investment would've been necessary, with a very high risk of failure and small chance of success. By the power of the digital model and with minimal initial investment, Dollarshaveclub.com has managed to successfully compete in one part of the market.

Even though Gillette has the financial means and capacities, it cannot easily respond to this challenge, because any action that would reduce the price would represent a direct threat to the margins they have today, it would jeopardize the entire ecosystem that took years to develop, and also the many partnerships within the supply chain. Many jobs within Gillette but also their partner companies would be in danger also, and it would be very difficult and time-consuming, not to mention expensive to change the business processes and company culture. In the end, it would also be necessary to change all the IT systems and infrastructure, because the focuses and priorities are completely different. Bringing the clients to the center and focusing on data and activity information harvest from them fundamentally alters the system architecture. The organization and culture of these two companies is completely different based on different business models, so Gillette considers manufacturing, organization, marketing and sales to be corporate functions, and employs a great number of people to manage them, whereas Dollarshaveclub.com does many business activities with a small number of people, using the Internet or partners. This example shows the dramatic shift in traditional organization and structure of companies and it raises questions on whether this form of company has a purpose anymore, if so many business activities and functions can be performed online, with much less expenses and organization.

One of the possible solutions for Gillette is a dual-brand model, where a new brand would be launched, focusing on digital economy solutions, and the old brand would be optimized and focused on achieving maximum profits for as long as possible. Both brands would use some common resources, partners and processes, with the purpose of speeding up the digital brand development and old brand optimization, and increasing the total company value.

The new brand could be connected to the old one, but it is not necessary - it is a marketing decision. The danger of connecting the brands is that the disruption of the old brand could be accelerated, because the clients who trust the old brand would switch to the new one faster.

At the end of 2016, Mike and his shareholders have sold Dollarshaveclub.com to Unilever for a billion dollars, increasing the risk for Gillette's sales, in case Unilever decides to continue developing the digital business model.

Photo by Thom on Unsplash

ANOTHER EXAMPLE

An American company called Warby Parker has realized that in the glasses business, Luxottica from Italy controls 80% of the market through brands like Ray Ban, Prada, Sunglass Hut and LensCrafters, and therefore also controls the very high margins. Luxottica had a turnover of more than 9 billion EUR in 2016, and really resembles Gillette in many regards. Warby Parker founders, Gilboa and Blumenthal have gone down a similar path as Mike, and began manufacturing and selling glasses over their website. Their value proposition is that they offer modern, high-quality glasses at a significantly cheaper price in their web store, and they send up to five frames to their clients to try on. The frames that the clients don't want, they can return free of charge. They achieved early success due to good design, price and celebrity support, but they also realized that they need physical stores and contact with the clients. They started in the living room of one of the founders, then they have adapted a bus into a mobile store that cruised around the city. This confirmed the need of direct contact with the clients in addition to the Internet channel, so they started opening stores across the USA, and the number of glasses sold grew fast.

Luxottica has tried to respond to this challenge by purchasing Glasses.com, which resembles Warby Parker in price, way of doing business, sales model, and which even has a 3D mobile app that enables the clients to try on the glasses virtually, and is rated higher that the Warby Parker system. Luxottica also opened a store chain called Pearle Vision, which resembles the Warby Parker stores. They are applying the dual-brand strategy, and their plan is to stop the fast growth of Warby Parker, and preserve their dominant position on the market.

Gilboa and Blumenthal have made a statement that they were following Luxottica's actions, but that they were not worried, due to its immense organization and cost structure that supports their traditional successful business, and that if they would want to compete directly (to apply the Warby Parker model to the entirety of Luxottica's business), they would cannibalize their own sales much faster and to a much greater extent than they would jeopardize Warby Parker's business. Much of this can be applied to Gillette's model as well.

Branislav Vujovic

Branislav Vujovic

President New Frontier Group
Strive to become better

Branislav Vujovic is founder and also president of New Frontier Group and has overall responsibility for the New Frontier Group, with special focus on Innovation, M&A strategy, group strategy and investor relationship.

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