You need to hug customer first, if you want to reduce costs (change margin).
With the existence of innovations such as artificial intelligence, automation, machine learning or crowdsourcing platforms, cost management takes on a completely different dimension. Probably for the first time in its history, the business world has received so many opportunities to influence the level of costs and cost management with the promise of quick optimisation. The innovations mentioned above cause that the level of customer service costs, barriers to reaching customers, designing and creating new products, introducing new services to the market requires overcoming smaller barriers than before. Thanks to digitalisation, there is the possibility of working out lower costs and more effective cost structures.
According to the report presented by Deloitte (Figure 1), the vast majority of companies in the world intend to reduce costs. It would not be surprising if it was not for the fact that the digital transformation plays a greater role in these activities.
Figure 1. Likelihood of cost reduction over next 24 months (Source: Deloitte, “Thriving in uncertainty in the age of disruption).
However, intelligent cost cutting is not based on a simple cut of costs (procurement pressure, lower quality of services, less comfortable workplace or debt restructuring). In the era of the digital economy, cost reduction should involve wise use of opportunities brought by digitisation. The proper use of digital opportunities reduces costs and increases value for the customer at the same time.
A great example of cost reduction through digitisation can be the European insurance corporation (reduced churn, increased profit).
The company performed an comprehensive analysis of business models by executing extensive scouting among startups. It was quickly noticed that some of the analysed companies are able to scale very quickly (eg in one of the companies there were 30 employees per 750,000 policies). It was also noticed that another company can smoothly update policies prices every 15 minutes giving users feedback almost in real time. This increased the time spent in the company’s ecommerce tool, which resulted in a greater conversion of customers.
The knowledge gained through such analysis allowed the company to design several critical factors affecting the level of costs. Among them was:
- the cost of tracking applications,
- the cost of updating information that was scattered and hard to find.
The latter element had a negative impact on the conversion of customers.
As a result, company introduced a one-stop shop for claims, claims tracking tool and few other solutions. Thanks to this, the costs were reduced, while the company increased the level of customer satisfaction (added value to the relationship with the customer). The restructuring of the product portfolio is one of the best activities that can reduce costs by providing value. Thus affecting the margin.
More and more companies focus on introducing digital services around existing physical products or on creating new services and digital products from scratch.
Figure 2 explains what are the priorities of big companies in the area of digitisation. The top two include digital services and digital products ideation, design, experimenting, development and launch.
Figure 2. Digital products and services are the highest priorities of the management of large companies (Source: McKinsey, Cracking the digital code).
So if we combine the need to reduce costs with the possibilities offered by digital transformation, it will turn out that the result will be the creation of digital services or digital products. In these two elements, the restructuring of the margin and the increase in value for the consumer are closed.
Therefore, closeness with clients, understanding their needs, testing services and products at the prototype stage with clients of the company, become a source of changes in the margin. It should be noted that building a proper and properly designed digital service requires precision. This precision is expressed in matching the service to the customer’s requirements.
A great example of this is Michelin.
The tire manufacturer soon realised that its margin would be very stable or diminishing. Company team has therefore made an effort to create a digital service around tires. In this way, a digital service was created for owners of logistic companies and truck operators.
The service aims to monitor the fleet status, warning drivers and operators about possible future failures. The solution ecosystem uses data to plan fuel consumption. Using advanced telematics techniques, the system provides eco-driving by monitoring driving style in real time. There are no tires here as a central element of business. This central element is a digital service in which the life-giving bloodstream is data.
Arek is a co-founder of K2 Digital Ventures which helps large companies build innovative products and services thanks to cooperation with global innovators. Arek works with senior executives on designing, incubating and scaling innovative initiatives. Clients we have helped: Danone, Shell, Discovery Networks, P&G, LaGardere, Roche, IKEA & more.