Digital Follies
In the rush to harness the seemingly boundless opportunities of the digital age, many industries inadvertently handed over significant profit streams to emerging players – many of them outsiders to the industry. Some chased scale, while others sought to be early adopters, often without a clear strategy. Here’s a deep dive into these follies.
Media and Publishing: Perhaps one of the most significant missteps in the digital transition was committed by media houses and publishers. Lured by the promise of expansive online audiences, many began offering content freely. This pursuit of ad revenues led to two considerable pitfalls. Firstly, the perceived value of quality content eroded. When audiences are accustomed to free access, convincing them to pay becomes a Herculean task. Secondly, the ad dollars didn’t flow to the publishers but instead to platforms like Google and Facebook, which aggregated content and drew audiences, thereby commanding the lion’s share of ad revenue.
Music Industry: Before the dominance of streaming platforms like Spotify or Apple Music, the music industry was grappling with rampant piracy. Instead of swiftly evolving with user-friendly, digital purchasing options, the industry clung to physical sales and litigious actions. This delay in adapting allowed tech players to step in, fundamentally altering the industry’s profit models forever.
Banking: Traditional banks with legacy systems were slow to recognise the allure of digital banking. Fintech startups, without the baggage of brick-and-mortar operations, rapidly developed and offered user-friendly apps, instant loans, or fee-free transactions, drawing away a segment of the customers seeking convenience.
Digital/B2C/D2C/eCommerce companies have also committed a mistake of similar scale – what I call “eFolly”. The allure of digital brought forth the promise of infinite scale. In this brave new world, every company sought to grow big rapidly, with a strategy heavily skewed towards acquiring new customers. The eFolly: ignoring existing customers. This blunder has many sub-elements, each of which has been devastating for profitability.
- Obsession with Acquisition: The business narrative became about growth figures, often centred on user acquisition. Massive budgets were allocated to digital ads, luring new users with heavy discounts. Ironically, the cost of acquiring a new customer often outstripped the lifetime value of that customer, especially when considering the discounted rates.
- Neglect of Retention: With eyes set on the horizon, many businesses forgot the goldmine in their backyard. Existing customers, if nurtured and engaged, can be sources of consistent revenue and organic growth through referrals. Yet, surprisingly, retention strategies took a backseat.
- Underestimating Word-of-Mouth: In the digital age, the power of word-of-mouth is amplified. Most brands have not leveraged the power of referrals, especially from their Best customers.
- Unsustainable Discounting: Many eCommerce businesses banked on discounts to lure and retain customers. However, this strategy eroded the perceived value of products and services, making profitability a mirage.
Here is what I wrote in a previous essay: “Countless eCommerce companies grapple with slim or non-existent profit margins. On the surface, the hefty price tag of customer acquisition (CAC) seems to be the primary culprit. But a deeper analysis reveals an industry-wide problem lurking beneath the surface. This is what I term as the “eFolly” – the decision to ignore existing customers and almost exclusively focusing on new customers. This eFolly of disregarding current customers pervades digital companies across the board. It is a costly misstep that eCommerce leaders perpetrate, inadvertently (and inevitably) gnawing away at their profitability. In the absence of external capital to absorb losses, this blunder can even lead to startup failures.”
In their pursuit of scale, many businesses overlooked foundational principles, with profitability being the primary casualty. They have lost many battles through the years – strengthening the ads, arms, and access sellers with their eFolly of ignoring existing customers and almost exclusive focus on new acquisition for growth. But there is light at the end of the tunnel. An array of new technologies can help them pivot, reverse their losses, and win the future profits war.
Well said, Rajesh.