by Bob Barr

How companies make money from digital transformation

May 04, 2017
Data CenterDigital TransformationIT Leadership

Value comes when you leverage digital capabilities to drive more revenue and reduce operating costs

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Credit: Thinkstock

Several years ago, I was asked, “How do we actually make money from digital transformation?” In response, I tactfully answered with a question: If you want to put away more money in your retirement fund, how do you do that? The answer is simple: Make more money while spending the same (or even better, spend less), and put the difference into your retirement account.

Deriving financial value from a digital transformation is simply leveraging digital capabilities to drive more revenue and saving on your operating expenses.      

How digital can drive incremental revenue

The first way to grow a business is to acquire new customers who will bring new revenue.

Increasingly, your current and prospective customers begin their product purchasing by searching on the web. For example, small businesses are most likely to find you by searching around on the web simply because you cannot afford to hire enough people to knock on their doors, and frankly they are too busy running their businesses to accept appointments with salespeople face to face or over the phone.

Having a digital presence alone does not lead to acquiring new customers. Unlike billboards, for example, where a potential customer might drive by and potentially notice, searching on the internet requires a degree of optimization/help. That help comes in the form of digital marketing tactics, such as display advertising on a website you might visit for another reason; email, social or search engine marketing; or search engine optimization (SEO).

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For instance, search engine marketing (SEM) helps businesses find you because you’ve purchased a product using a specific search term that allows them to locate you and/or someone like you.

Once this traffic is brought to your website or mobile app, hopefully customers will find your content and experience relevant enough to register and make their first purchase. And with advances in data analytics, customer insights and personalization, digital can be a very effective channel to lift the future average order value (AOV) through upselling and cross-selling while onsite—a second opportunity to drive incremental revenue.

What drives operating expense (OPEX) savings?

There are numerous opportunities to save on operating expenses with an effective digital investment.

For starters, you can simply eliminate physical catalogs and mailers. Some of this information can be done via self-service, including placing and paying for orders, checking status of and tracking orders, generating various purchasing reports, arranging returns, accessing how-to videos, looking up store locations and hours, and tracking warranty expirations.

Automating some of these processes can reduce calls into a call center or field sales representative. Shifting a customer who typically engages using a call center to a self-service model means real money is saved for the bottom line. 

What about new costs?

I would be remiss if I didn’t recognize that it costs money to build compelling digital experiences. While we are looking to simplify the process, important factors to consider include:

  • Design and creative costs
  • Content creation and curation
  • Amortized software and hardware and application development services
  • Fraud detection and prevention services
  • Payment processing
  • Digital marketing and media
  • Change management and communication (to customers and employees)

Value realized is simply the incremental revenue you realize minus, of course, related product costs, plus operating expense savings minus new operating expenses.

Discounting to present value (the sometimes scary part)

To complete our calculation of value realization, we need to discount the value expected into present value (as value realized in the future is not as valuable as value realized in the present). This is the concept of net present value. For our simplistic purposes, we’ll defer that conversation to another time.

To Digital transformation is inevitable for companies wanting to survive and grow a future-ready and sustainable business. Besides the financial prize discussed above, it also allows you to build brand, increase speed to market, manage relationships at scale, reposition your sales organizations, improve both customer and employee satisfaction and lift perceptions for your investors. If done right, an effective digital transformation will help you differentiate your business in your chosen markets.