What would be the right business model for Digital companies

Digital is Disruptive

The new digital era has brought disruption but at the same time an opportunity for companies with a cogent strategy. The digital age will leave behind those who fail to adapt quickly. In this age, speed matters. As Digitization is gaining steam, new business models will emerge that will reshape customer behavior and create even greater shareholder value.

For companies who want to compete with unicorns, they need to radically change their mindset from inside-out to outside-in which implies that they need to start with customer knowledge in detail and work back from that to the internal workings of the business and ecosystem. As this is the era of personalization, we need to understand that personalization cannot be done without digitization. Many companies make the fallacy that digitization is all about cost reduction and automation and less about improving customer experience.

The customer is the center

Digital is all about obsessive compulsive focus on the customer. It is important to connect with customer and collect data about them during every purchase and interaction. This data needs to be analyzed and converted to meaningful insights which can be used to increase sales. These insights gathered would help firms to personalize their offerings to each customer. As this data is integrated with third party data, there is a larger scope to gather better insights on serving the customer.

EPS is no longer relevant

The metric EPS that is based on GAAP has lost its relevance even though the analysts evaluate companies on this metric. A better metric would be to focus on gross margin cash and cash EPS because GAAP based EPS is an estimate that is subject to discretion and accounting assumptions.

GAAP based EPS also does not have any relevance in digital companies because a very large part of their investment for growth is expensed which makes the EPS of digital companies either negative or very low. Traditional companies on the other end create a capital account on the balance sheet to fund their growth.

Amazon – The shining example

Amazon business model is something that can be a blueprint for any aspiring digital company. The company focused on cash Gross margin and increased their gross margin over time so that they can fund growth by spending on technology infrastructure, fulfillment and logistics. This is reflected in their revenue growth, high brand equity and access to tons of customer data points. Despite a low EPS, Amazon has a large cash balance and low debt. Amazon generates billions of dollars in gross margin cash and use these cash reserves to fund opportunities that would yield growth.

Final Thoughts

To become digital company, one needs to focus on the customer, use business acumen to generate cash and then allocate the cash back to serve the customer. All this needs to be done at a higher scale, higher speed and with the use of technology.

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