Innovation – Finance – Technology


Finding the sweet spot in the customer value chain

In an age where digital distribution challenges every industry, companies should take their time to understand their position in the supplier/distributor relationship. Should you provide an unprecedented user experience and distribution platform, or should you develop content to those platforms? There is no definitive answer, and depending on your starting point, there are various recipes for success.

Ever since digital disruption became a household term in the business world, fear of disintermediation has been a dominating narrative in every consumer-facing industry ranging from media, retail, and banking. As a result, companies are investing heavily in digital initiatives with the goal of maintaining and solidifying the customer relationship, while still attempting to ride (at least) two horses at once.

There is no definitive answer to which position is objectively the best, it depends on your starting point, prerequisites and ability to build and maintain one or more competitive advantages, ambitions for growth, operating margins and capital returns.

The other part of the equation is your ambition and future strategy. Will you attempt to take on multiple roles, attempt to transition from one state to another or pick a position, and divest any stakes where you decide to abandon? The million-dollar question as you set up and quantify your starting position against your ambition is does the equation add up?

In order to get there. It is important to break down and have an understanding of the different roles in the customer value chain. With the rise of the platform economy, we are now in a time, where distribution reigns supreme as the most favorable position, but the pendulum has swung both ways. In 1996, Bill Gates published an essay coining the term; content is king in stark contrast to today’s incitement towards taking on the distributor role. Some say that content is still king, but distribution is the queen who runs the show, and context is god. Even though this debate is deeply rooted in digital media, it is as relevant whether your content is a video game, musical recording news article, or a home loan, and the list goes on.

For most companies, it is tempting to go straight for the distribution role, as this in many cases is a highly favorable position. This is where customer interaction takes place, and thus forming customer relationships and building brand awareness and potential loyalty. From my point of view, there is a gap between holders of the distributor position and those who actually manage to leverage this position.

In order to leverage this position, one should invest in the right tools and competence to harness customer insight through the collection of data from customer interactions. A well-defined data strategy, as well as a robust API-based technical platform, is at the heart of leveraging a distributor position.  Important metrics for success in this category could be active users, customer acquisition cost, conversion rates, product penetration, and overall customer profitability. A lack of correlation between usage and profitability could lead to a widely used, but non-profitable platform.

It is also important to evolve alongside shifts in technology and customer behavior. There is no lack of examples where incumbents have shown overconfidence in brick and mortar distribution networks that have been outcompeted by digital challengers.

However, a digital distribution platform is also only as good as the content and/or products available on the platform.

This symbiotic relationship between distribution platforms and content and product providers is perhaps best exemplified through the video game industry. The popularity of any distribution platform has traditionally been tied to the available content on the platform.  In order to attract players to your platform, the traditional go-to way of building an audience is by platform exclusives like Super Mario, Zelda, Uncharted, and Halo. This has resulted in distributors investing in their own proprietary content as well as incentivizing game studios to develop exclusive IP for their distribution platforms, thus creating favorable conditions for producers of quality content.

On the other side, traditional game developers like EA and Ubisoft have launched their own distribution platforms to circumvent the dominating position of for instance Steam in the PC gaming segment.

However, the most dominating factor to influence the customer value chain in the gaming industry is the rise of online and social gaming. As players want to interact with their friends, they become platform ambassadors, giving gaming distribution platforms an inherent network effect. New business models have also emerged as game distribution has transitioned from brick and mortar to digital.

Taking on a pure content or product provider role should be seen as an attractive position for those who set out for a product-centric strategy. Depending on the industry, taking on this position should put emphasis on cost-efficient processes, product lifecycle management, creating an aftermarket, and/or proprietary add-ons that ensure cross-sales without the reliance of one specific distributor.

At the end of the day, various positions in the customer value chains are not mutually exclusive. It boils down to setting up the equation that map out your alternative plays. Take into account that there will most likely be combinations of ambitions and prerequisites that will be mathematically impossible. Stay clear of attempting the impossible, focus innovation around your core business, while at the same time, be wary of changes in your surroundings that can create opportunities to make it worth to adjust course underway.

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