Over the past couple of years, the profit gap between top and bottom performing companies has grown significantly. A McKinsey study finds that since 2018 the top quintile of performers grew their “market implied economic profit,” a metric based on profit, market cap and capital investment, by $353 billion, while bottom quintile performers saw the same metric drop by $303B. The trend applies across virtually every sector. The McKinsey study notes that the companies that are winning have “resilient, future-ready business models” that can quickly adapt to the new digital reality: online commerce, telemedicine, online education, etc.
The pandemic has widened this gap and forced every company to consider accelerating its digital strategy. That is why digital transformation became a critical board topic in 2020 and will be even more so in 2021. In this paper, we help board members better understand how companies become digital leaders and how they can best help management during this transition.
The stakes are high. Imagine two competing restaurant chains. The first markets to customers on TV and serves them what they order off a set menu in person at the restaurant. The second lets customers order numerous ways (there are 15 different ways you can order a Domino’s pizza), personalizes the experience (McDonald’s personalizes its drive-thru and app menus based on customer preferences, weather, and the time to cook each item), and uses data to power a highly profitable digital marketing strategy, better manage its supply chain, and improve its menu. Which company’s stock would you rather own? Hint: Domino’s stock is up 760% since 2013 while the restaurant stock index is up 160%.
Other examples: Carvana, an online car retailer, has grown its valuation by $32B in 3 years, while Autonation, the biggest U.S. network of dealers, has a valuation of $5.5B, unchanged in five years. Amazon has a valuation of $1.6 trillion, up 430% over the last five years, while the S&P retail index is up 15% during that time, propped up by digitally-savvy retailers like Target (+119%), Walmart (+146%), Home Depot (+125%), and Best Buy (+234%). In hotels, Booking.com has a valuation of $73B, more than Marriott, Hilton, IHG, and Hyatt combined. In the CPG sector, large traditional brands have been losing share since 2017 to smaller DTC companies.
Based on our work with hundreds of companies, we have seen how companies can evolve to become digital leaders while simultaneously increasing cash flow, minimizing risk to their business model, and delighting customers, even in a volatile and uncertain business environment. These companies often prioritize three things: treat advertising as an investment, not a cost center; use smart data, not big data; and modernize the customer experience.
Focusing on these three priorities can deliver profound results. For example, Best Buy fended off Amazon by shifting its advertising from 70% traditional to 90% digital, using data to personalize emails to over 40 million customers, and creating a seamless, easy and helpful store and online customer experience.
Treat advertising as an investment, not a cost center
Advertising has changed a lot. In the US, 55% of advertising was online in 2019. That figure will likely exceed 70% by 2025. Almost all online advertising is purchased “programmatically,” which means that computer algorithms decide which ad to show which person at which time and at what price based on human or computer generated guidelines. Those computer algorithms are powered by machine learning (ML), which is growing in power exponentially.
As most advertising goes online, companies can measure its business impact much more accurately. And because ML is optimizing ads in real-time, advertisers can set a business goal (e.g. for every $1 we invest we want $5 in revenue) and automatically achieve that goal. Since digital advertising can now practically guarantee results, advertisers can treat advertising as a profitable investment, rather than a cost. This entails changing how ad campaigns are measured, expanding beyond traditional media metrics (e.g., reach) to business impact (e.g., profits), and shifting from a fixed annual budget to a more flexible approach.
Companies that adopt these tactics can get dramatic results. For example, Autobytel changed the KPI for some of its digital ad campaigns to maximum profits and adopted flexible advertising budgets. As a result, profits from those campaigns increased by 60%.
As another example, the US Navy did its first digital-only recruiting campaigns and shifted its creative emphasis based on insights from viewers. After seeing the amazing results, the Navy moved its media mix from 70% TV to 70% digital.
Unfortunately, most senior executives and boards do not prioritize advertising. In fact, only 26% of CMOs are regularly invited to board meetings and fewer than 3% of board members have a marketing background,
Boards can help catalyze a shift to profit-driven advertising by adding more board members with a marketing background, spending more time with their CMO, and asking the CMO and CFO to create jointly-owned dashboards that measure business impact and share them with the board on a regular basis. This partnership is critical: finance and marketing must agree on which KPIs they will use to measure success and believe in the integrity of the numbers. For more details about how CMOs and CFOs can partner together, see this paper. For more details on best practices on profitable advertising, see this paper.
Prioritize smart data vs. big data
Many companies are pursuing projects to break down data silos and develop a 360 degree customer view. This sounds great but can take a long time, and such a complex project can preclude your company from working on simpler, faster solutions. Often, using just one new piece of data can add significant profits.
For example, for most companies, a small percentage of customers drive a large chunk of profits. They can use data about which customers have the highest customer lifetime value (“CLV”) to find more of them. Dish Networks, for example, increased profits from one of its digital media partners by 43% by sharing CLV data with that partner.
As another example, when Red Roof Inn realized that flight cancellations were leaving 90,000 passengers stranded every day, they developed a way to track flight delays and advertise to these stranded passengers in real-time. Their ads said, in essence, “Stranded at JFK? Come stay with us!” They delivered highly relevant ads at a time when people needed them the most, driving a 60% increase in bookings.
Look for opportunities to share data across internal as well as external partners. For example, the customer acquisition teams for each Allstate product line share a list of existing customers to better enable cross-selling (e.g. the home insurance team gets a list of current car insurance customers and vice-versa). This didn’t take a big effort, but led to a 400% improvement in their customer acquisition strategy.
Board members can play an important role in helping management, which is sometimes nervous about sharing data, to be more open with trusted partners. A great way to do that is by sharing an example that helped a company significantly improve its business without causing any privacy or competitive concerns.
Modernize your customer experience
Board members can play a critical role as the voice of the customer, challenging management on assumptions (e.g., customers will never buy a car online) and pushing the company to design a better digital and omnichannel experience. To do so, spend more time as a customer of your company, comparing the experience to that of disruptors in yours and other industries.
For example, try to buy a car from most companies (which usually involves a dealer visit) and compare it to buying a Tesla (buy, finance, and insure a new car, and trade in your current vehicle, online in under 10 minutes). Bestow allows customers to purchase up to $1M term life insurance online, without requiring a medical checkup. It takes less than 5 minutes. 35% of mattresses are now purchased online. This sort of “digital first” experience is increasingly common across industries and will become only more so in 2021.
The two issues that typically hold management back from improving the digital experience are channel conflict and low profitability of online sales. How can you help management solve these issues? For example, we worked with an insurance company that transitioned successfully to a hybrid model of agent and online sales by first leveraging its online platform to send high quality leads to agents, for free.
Great digital experiences typically share some common qualities. Best practices include:
• Speed. Alibaba improved conversion rates 76% by making their mobile site faster.
• Simplicity. Don’t make customers register or enter a lot of data to buy something. For example, let them register and buy by using Paypal or Google Pay.
• Personalization. Verizon lowered churn by 10% by creating a recommendation engine that provides customized suggestions to customers coming off their introductory rate plan.
• Seamlessness. Unify the customer journey across channels so that customers who begin their journey online, for example, don’t have to start from scratch when they call your call center or visit a store. Ensure consistency on pricing, policies (e.g. returns).
Getting an unbiased, fact-based opinion of the quality of your customer experience may be another great way to drive action. Many independent third parties can analyze your customer experience and compare it with your top competitors (in the broadest sense).
First steps every board member can take in 2021
If you have fellow board members who are steeped in digital, terrific. But you don’t have to be a digital expert to accelerate transformation. By amplifying the topic within the Boardroom and encouraging your CEO and management team to take the following steps, you will make a big difference for your company and its shareholders:
1. Treat marketing as an investment. Ask the CMO and CFO to agree on business KPIs for marketing, and to create dashboards that track them in real-time.
2. Increase use of smart data. Ask the CMO and CIO to work together to identify the one piece of data that could be used and shared to most improve business results quickly.
3. Modernize the customer experience. Examine the company’s digital customer experience first-hand and/or with third parties, challenge previously held assumptions that may no longer apply, and help management to be best-in-class.
Measure progress by tracking digital performance metrics at every board meeting, just as you do other finance and operating results. Example metrics could include online profits, online sales as a percentage of overall revenue, or digital NPS.
2020 accelerated the digital trends that were already underway and increased leadership urgency, attention, and progress. Bringing to life the principles in this paper will help all boards – and their companies’ leaders – to fully realize the opportunity that digital transformation represents – not just for 2021 but for years and decades to come.