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Contributed on May 4, 2016

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CEM Top Ten #7: Digital Transformation Must Deliver Unique Capabilities Up and Down the Customer Pyramid

Blog: The Tibco Blog

Successful digital transformation evolves value creation exactly where you would expect, but revolutionizes value creation in areas historically ignored.

Lately, the topic of digital transformation has been buried by too many pundits, salespeople, and academics haphazardly throwing around the term to mean any change in efficiency, cost savings, or connectivity that is enabled by technology. And to be fair, throughout the past decade, digital technologies have had significant impact on how we interact with companies, the degree to which they understand our preferences, and the organizational structures and costs associated with providing service and developing and delivering products.

But to speak of digital transformation, the bar of must be set higher. The expectation should be on major impact on business design (the cumulative ways in which companies go to market, engage with their customers, provide services, enable their processes) versus genuine and important changes to business models (the core economic levers of revenue, cost, and profitability).

The global strategy consultancy Oliver Wyman just published a great white paper on the plight of incumbents in a digital world. To be clear, the message is one of hope— in competition with digital natives who began their journeys unbound by legacy systems, customers, channels, and workplace culture. The OW team poses a few important customer questions on readiness for digital transformation:

• Will customer expectations change and what will be the impact on the relationship?
• How will customers make decisions and what must be done to ensure consideration?
• Where will a better understanding of customer behavior have real impact on sales, retention metrics, and efficiency?

There is a steady theme that suggests that digital transformation efforts are of such magnitude that innovative business designs should focus upon the highest-value or persuadable segments of customers. However, this is a traditional ROI focus in a time of massive change.

For example, what scale would Über have achieved if they limited themselves to city-dwelling twenty-somethings? Digital transformation allows conventional modeling of target customers and expected metrics to be thrown out; and while the ability to accurately model the outcome three years out is likely a futile exercise, the impact may be spectacular.

I believe that the customer focus on digital transformation is no focus at all.

Let’s look at a traditional customer pyramid where a small number of highly-engaged, highly-loyal customers occupy the top, a moderate number of brand-switching but repeat customers sit in the middle, and a very large number of single purchase and disengaged customers constitute the large bottom layer. A traditional view of marketing or product strategy might focus only on the top 20% (yes, they represent 65-80% of all revenue and profit). The rational logic is that preservation of those customers and moderate growth of those not at their purchase potential is the safest, smartest, and most sensible business strategy. I can’t really argue with that, I’ve been known to pontificate that exact point many times.

Digital transformation, therefore, should be focused on understanding and anticipating their needs and delivering products and customer experiences that surpass their expectations.

However, I’ve begun to think differently.

For the top of the top (1% or fewer of the customer base that might represent 20% of revenues and profits), maybe digital transformation is the enabler of remarkably non-digital customer experience. Digital tools provide the identification, the insight and the means of enablement, but maybe the solution is actually more human than digital. While I’m not suggesting that we take tools of speed and convenience away from elite shoppers, travelers, or investors (there would be a revolt if airlines took away self-check in), I am suggesting that a level of high-touch service, surprise, and delight that vastly exceeds expectations and super-relevant engagement are incredibly compelling to the top of the pyramid.

The bottom 80% of customers—should I really call 80% of a customer base “the bottom”?—have traditionally been ignored by many strategic marketing and technology initiatives as their contribution per person is relatively small. But, here’s the difference today: the key to growth actually lies among those who are either minimally engaged today or not yet even customers. The ability to convert a small portion of them into repeat customers drives a meaningful lift in shareholder value. The ability to convert a large portion by transforming their customer experience, and their perception of benefit minus cost, drives billions of dollars in value creation.

The lesson: digital transformation is changing the rules and forcing us all to think differently about customers, their experiences, and our priorities. Steady and impressive profitability remains an achievable goal for legacy thinkers. Explosive growth and vast value creation is in the grasp of a small number of inspirational leaders.

To catch up on the first six posts in the Customer Experience Marketing Top Ten series by David Rosen on The TIBCO Blog, click here. Join guest industry analysts from Forrester Research—and TIBCO customers, thought leaders, and experts—for a four-part online roundtable series that explores the business and technology requirements, best practices, and fast-track steps for transforming to digital business here. And to start your own journey and get on the road to digital business, attend TIBCO NOW in Las Vegas and learn everything you’ll need to know about making the transformation.