Welcome back to the 2nd installment of my mini-series on digital transformation (DT). From my previous vlog entry, we learn that DT is hard (~70% failure rate) because it’s a long process to changes the technology as well as the people, process, and culture any company. Despite the challenge, companies are lining up for this process, and there are both defensive and offensive reasons for them to do so.
Many digital visionaries already know the business imperative for DT. However, to gain company-wide support for such a colossal undertaking requires that everyone understand why you are doing it. Today, we will examine a defensive reason from a historical perspective, and next time we will discuss the offensive logic behind DT.
Before we dive in, I just like to emphasize that technology-driven business transformation, such as DT, is not new. It has actually happened before, and we can learn a lot from history. Moreover, a good way to foresee where we’re heading is to understand how we got where we are.
The 2 Gears Model of Modern Business
If we can roll back time about 150 years, how would business operate back then? That was a time where all trades and exchanges happened in one place, and that place is the market. All business transaction, whether it’s pricing or any product related inquiries, happen in the market, face to face, in real-time.
This has been the way of business for a long time. Until technology came and disrupted the market. First, advancement in transportation allowed businesses to deal with others much further away and expanded the market. Communication technologies further extend a company’s reach, and thus the market. They also enabled companies to operate much more efficiently, so companies scaled and grew as well.
While a big market and a big company are all great for business, it also created an artificial separation between the consumer market and the brands. Therefore, most modern day businesses operate under the 2 gears model—they need to acquire customers (marketing) and monetize them (sales/transaction). Companies focus on transactional efficiency, so the faster they can get people from acquisition to monetization the better they perform. Since businesses had over 100 years of practice in this, many large enterprises can do this very well.
Disruptive Technologies Demand New Business Model
However, technology innovation never stops. A new wave of social technologies came disrupted this way of business again. The disruptive power of social media was predicted in Clue Train Manifesto (published in 1999 when Facebook and Twitter didn’t exist yet) based on the simple thesis that the market has changed again. The new markets are conversations. But most conversations today are digital and take place on social channels. A logical response to this new market is to simply acquire digitally on social media. So, even though the market has completely changed, brands are still doing business as usual under the 2 gears model—they acquire and monetize.
The problem is that this is no longer sustainable in the age of social media. And the reason is that digital acquisition is very different from the traditional notion of customer acquisition. In the digital world, you don’t own what you acquire. A seemingly successful marketing campaign may acquire a million fans on Facebook, but you don’t keep any of those fans.
So what are you acquiring with the acquisition gear? In reality, this gear is merely acquiring people’s attention, so you haven’t acquired any customer until you monetize them. Although it’s true that you could monetize consumers while you captured their attention, consumers’ attention spans are short and they are getting shorter. The average attention span of consumers is ~8.25 second, which is shorter than the memory of a goldfish.
The implication of this for your business is that, even though you can monetize your audience when you have their attention, people’s attention shifts away quickly, so you have to spend the money you just earned from monetizing them to re-acquire them back. And you have to do this over and over again. That’s why marketers often find themselves running one campaign after another, and they have to do this again and again faster. Yet the campaigns are becoming less and less effective. That’s why this 2 gears model is no longer sustainable.
The 4 Gears: A Sustainable Business Model in the Digital Age
So can we make this model more sustainable in today’s social and digital world? And if so, how? The good news is that it is possible, but we can’t do it with just 2 gears. We need 2 extra gears, which bring us to the 4 gears model originally proposed by Geoffrey Moore in his famous book Crossing the Chasm.
The first of the 2 extra gears is engagement. At a high level, engagement helps you sustain monetization, because when you engage customers, you capture their attention longer, so you can monetize them longer. In reality, engagement helps you build stronger relationships with your customers, so they become loyal customers. Since loyal customers, by definition, are those who will continue doing business with you, this is how you can monetize them longer—through their loyalty.
The second extra gear is enlistment. Enlistment is still a novel concept in business. In short, it’s leveraging your customer to help you do work that’s normally done within your enterprise. A simple example of enlistment is advocacy, because you are leveraging your customers’ word of mouth to help you do marketing, which is normally done by marketers within your company. There are many other ways to enlist customers.
Enlistment helps you scale your acquisition because there are usually a lot more customers than you have employees in most businesses. Moreover, leveraging customers is also more effective because consumers trust other customers more than they trust brands.
When all 4 gears are spinning, you create a viral loop that feeds back on itself. Since this viral loop is a positive feedback loop, it will be sustainable if we can get all 4 gears to spin. The caveat is that if anyone of the gear slows down or stops, the whole viral loop can’t go faster than the slowest gear. So business must again learn to organize themselves in ways that allow them to spin all 4 gears simultaneously.
It used to be the case that businesses only have to focus on one thing—go to the market and sell. This is basically the 1 gear model that focus solely on monetization. Then transportation and communication technology disrupted this way of business by allowing businesses to do more. So companies have to learn to take advantage of these technologies and really do more with them (i.e. more than just monetization). Over the past hundred years or so, companies have learned to do more with these technologies and operate under the 2 gears model.
Today, many enterprises are organized in ways that allow them to spin both the acquisition gear (marketing) and monetization gear (sales/transaction) synchronously. This 2 gears model has become the new norm today, and it would be absurd to tell any growing company to stop their marketing operation. As history confirms, companies that leveraged technology and did more, also gained a substantial competitive edge in the market, because most companies that did not learn to take advantage of those technologies are not around anymore.
Today, history is repeating itself as social media disrupts the market. Social media allows us to do more, but we have to learn to take advantage of it and do more with it. That means we can’t just focus on the 2 gears (i.e. acquire and monetize). We must also use it to engage and enlist customers. Businesses must learn to operate under the 4 gears model and simultaneously spin all 4 gears: acquire, engage, monetize, and enlist. Those that do, will again have a competitive edge, but those that don’t, will be left behind while others that do move on.
Michael Wu, Ph.D. is Lithium's Chief Scientist. His research includes: deriving insights from big data, understanding the behavioral economics of gamification, engaging + finding true social media influencers, developing predictive + actionable social analytics algorithms, social CRM, and using cyber anthropology + social network analysis to unravel the collective dynamics of communities + social networks.
Michael was voted a 2010 Influential Leader by CRM Magazine for his work on predictive social analytics + its application to Social CRM. He's a blogger on Lithosphere, and you can follow him @mich8elwu or Google+.
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