Digital economy - Examples and explanation of business models
In 2010, Michael Dubin and Mark Levine talked about their frustration with shaving kits, mostly because of the price but also because of the nuisance of having to shave with old and slightly blunt razor blades if they forget to buy new cartridges for razors. Michael has worked in digital media and marketing, and had experience with creating video content for YouTube for big companies, and Mike focused on production. They easily agreed on founding a new company that will deal with a new way of selling razors and spare cartridges and trying to solve three problems for clients: 1) price, 2) customers’ subscription and monthly distribution of new sharp replacement cartridges to their home address without going to the store 3) never having to shave with a blunt blade again.
In January 2011, they founded a company Dollar Shave Club and Mike invested his life savings, $35,000 in the new business. He spent 4,500 on a somewhat sarcastic and comical video in which he participated. Video has been placed on YouTube and quickly became viral. He made a great ad with a good offer: subscribe for one dollar per month and each month you will get new cartridges by mail. You no longer need to think that you will forget to buy new cartridges and you will have to shave with a blunt blade. Log on to our website.
In the first 48 hours, they got 12,000 subscribers and had to call friends and relatives to help packing. Michael used the manufacturers in China and the post service as partners and managed very quickly to become a hit on the Internet.
A large and powerful company Gillette, as the largest producer and seller of shaving kits, could not adequately respond to this challenge because, in addition to production in 26 countries, powerful partners who distributed and sold their products around the world, a huge marketing machine including stars such as Roger Federer, with its multilayered and numerous organization, cannot easily change the way of working and their business culture. And why should they, when they make over $7 billion in revenues with very good profit margins. They have more vice presidents than Dollar Shave Club has employees.
A few years later Dollar Shave Club became number one in the US in sales of shaving kits and spare cartridges via the Internet and became a leading player in this market that is rapidly growing. Gillette tried to compete but so far failed to break into the list of leading companies in selling online.
What is the difference between the two business models, an industrial and a digital one?
Gillette operates in the so-called “pipe” system in which business goes from research and development, from manufacturing and distribution to the end user. Investment in resources is enormous. Gillette has laboratories, research centers, factories in 26 countries, all of which affect the price. Although production costs a cent or two, until the product reaches the customer, all additional costs and margins result in the price of 15 to 20 dollars. Gross profit margin is up to several thousand percent and it represents a danger and, on the other hand, the possibility for introducing a new business model. They use traditional media for marketing because it targets the mass market.
In case of the Dollar Shave Club, they introduced a digital business model. Complete marketing was done through digital media, sales were replaced by subscription, all through the Internet, and the same goes for the support. Production and delivery are on one side and the delivery to end-users is in the hands of partners. The total number of employees is, thus, very small and therefore the cost is small too. The customers enter data about themselves and their address and choose the payment method. Their main resource is information: information on partners, customers and products. The investment is minimal. There is an additional advantage. Since the shaving kit is light and small, it can be easily delivered in a cardboard envelope and dropped in a mailbox, which solves the problem in case the customer is not at home at the time of delivery. After the first registration, they work for well-known customers, while in the second phase, marketing can be targeted, personalized and direct, which still reduces costs and increases efficiency. Michael and Mike used that and after the success with the razor blades, they introduced other products that they offered to well-known buyers. This model does not require a large investment to open new markets, which is why Dollar Shave Club quickly spread to Canada and Australia. Everything is based on the information.
Having become the leading company in internet sales of shaving kit in the US, they became interesting for the big players, when the whole story got an epilogue. Late last year, Unilever bought Dollar Shave Club for $1 billion. Now, Gillette got a really serious competitor in the market for shaving kits and Michael and Mike, as well as other investors, have made good money out of their five-year effort and work.
Even though both models deal with the same product, it is easy to spot the differences between the two models and their characteristics. The first is pipe-like and linear. An increase in sales linearly increases the total cost, and the basic functions of marketing and selling are done in the typical industrial method in the mass media and through distributors and chain stores. A huge difference in price is divided among numerous participants in the supply, delivery and sales chain. It requires big investments.
Digital model reduces the value chain by dropping out certain elements. This reduces the price for the end user dramatically. It does not require large investments. An important feature is that a product is sold to a known buyer that enters data by himself. This digital business model is called a platform model. Platforms that have two sides are especially valuable. They are called two-sided platforms. The best examples are Airbnb, Uber and Amazon. The value of these platforms derives from the fact that they connect two user groups. In the case of Uber, they connect transport users and drivers. The so-called two-sided network effect is achieved by increasing the number of users which increases the demand, and thus indirectly affects the increase in the number of rides and consequently the number of drivers. More drivers reduce waiting time and prices, which further increases the number of service users. And so on. If the platform is well implemented, then the increase of traffic and profits will not affect the operating costs of the platform. This is the reason these models are much more appreciated by investors, and companies that use it reach a very good value, either on the market or in direct sales, as was the case with Dollar Shave Club.
These examples of digital business models show that due to a small number of entry barriers and simple ways of implementation, we can safely predict that every branch of industry and every company that operates on the industrial model will be shaken by the new digital companies that use new business models.
Since Saga and NFG clients are the largest companies in the region that use industry business model, for the last 6 years we have focused on digital transformation process in order to help our clients to first understand the peril, but also the opportunities that open up with the digital business model. We work according to the original methodology for our customers and together with them to find the right combination of models and apply them. In addition to the business challenges, we see this as socially useful work, because our goal is to keep all employees, ensure further growth and initiate employment of new personnel.
Branislav VujovicPresident 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.