Broadsight Simplified Value Creation Flowchart
We have been asked to be on the Microsoft Business Re-Imagined panel on the 15th of May, looking at the potential impact of Social Media in business. We've been consulting to and building social media systems for clients since 2005, and it seemed like this was a good time to boil down our experience down. Above is a simple value creation flowchart, and we look at how, in our experience, social media can impact value creation. Stripped to it's bare bones, a business creates sustainable value by increasing revenues and/or reducing costs. Social Media is a new set of technologies that can help in a number of ways.
Revenue Increase
Essentially, there are only 2 ways of increasing revenue, which is sell more stuff, or increase the price at current volumes. In my view, Social Media is more powerful (with current technology, anyway) in dealing with Consumer sales, rather than Business sales, as the main cost in a consumer sale is reaching the large mass of disparate consumers. With business sales the target market is much easier to identify, and there are less customers to contact so current approaches work well.
Sell More - Social Media is a potentially very powerful tool to generate new demand - to find new customers, to bring them to the enterprise, create trust, ease their purchasing journey, and help optimise website design to maximise sales throughput. Taking it to greater extremes, Social Media data can be used to start to psychologically profile your customer base to understand what sort of people may also be your customers. It is also a very powerful tool to optimise the product - to discover the features or configurations that customers really value, and you can identify what competitors do well and include those in your product. But it is not a substitute for existing methods today, it is an adjunct, it can't be the only tool. It is not an appropriate tool for overt "hard sell" marketing, for example.
Increase ARPU (Average Revenue Per Unit) - Social Media has two main functions here - to aid in communicating the value proposition of the product, and to improve the perceived value vs competitive offerings. Communicating the value is fairly straightforward, as it serves as an extension of traditional channels, with the added benefit is that it has a strong feedback loop so it is quickly possible to see what is working and what is not. It is also probably better at communicating implicit values than more traditional media. Social Media can also help to improve the pricing point by optimising product differentiation amomg dofferent customer groups, and find pricing points for these different customer groups. That feedback loop, and the data it drives, can be used to to find attractive product combinations, and to optimise the website design to maximise value per sale. Taking it to greater extremes, Social Media data can be used to start to psychologically profile your customer base to understand their hot buttons better
Cost Decrease
Again, essentially there are only 2 ways to reduce costs - reduce operating expenses (Opex) and reduce Churn (Customer defection). I will ignore Capital expenditure (Capex) for now. Social Media in my view is as useful in both consumer and business facing enterprises, as it's power is about increasing productivity and effectiveness in reducing costs
Reducing Opex - In most companies, there are two major cost areas - raw materials and labour, the sum of them is typically the "80/20" of the cost pie (companies with near zero raw material costs tend to be professional service businesess, with very high labour costs). So far in or experience the two major Social media impacts are from:
(i) getting better market information (both pre and after sales) from customer to company, allowing the company to both reduce costs or lead times of raw material while not reducing value, and being able to better place its human resources where it really matters - it can work like a real time value engineering approach. It's not just useful for line operations, social media can be used to influence better design and innovation, and can be used to increase "brain cycle cpacity" by tapping into customers and the overall milieu without having to employ it
(ii) getting a better flow of information between people in the company, so co-ordination is better (less balls are dropped because A didn't know what B knew about customer X) and spped of reaction is faster.
The third cost element, overheads, is interesting. I have some thoughts about using Social Media transaction data to better allocate some overheads, but I don't have a fully formed set of ideas and I haven't seen it put into practice anywhere yet.
Reducing Churn/Increasing Retention
Churn is often not well understood, as many businesses are not aware of the huge differences in cost between retaining an existing customer, and finding a new one. There is often an order of magnitude difference. Thus reducing churn can have a massive impact in cost reduction and revenue increase Social Media can be used to aid customer service, to serve as an early warning for customer problems, to find out what people really value in post sales service, and to improve the product lifecycle. Social media also means bad service is more likely to leave a company's reputation punished, which can also impact sales, as customers typically research online before buying. In saturated industries, having a better churn than the competition can radically alter the market share and strategic positions within a few business cycles.
A brief word on Capex costs - if Social media is helping a busines to make better use of existing assets, in theory it will slow down future Capex requirements - but Social Media technologies do have Opex and Capex costs of their own, and these are typically incurred early up, while the benefits are then gained over a series of cycles. Which brings us to the dreaded Return on Investment (RoI) question.
Return on Investment
For any new technology, ROI is hard to work out, as few case studies exist to allow calibration of cost and benefit. If history is any guide, new and risky ideas are typically implemented first where forces are greater than a pure ROI worry:
- Piloting: trying out the New new thing in some areas of the business, somethimes structurally, often though by "Intrapreneurs" who do it locally out of passion, or seeking promotion etc.
- Pressure: A company realises it will not succeed doing "Business as Usual", and has to do "Business as Different". Recessions are for this reason more likely times to see new ideas implemented
- Politics - needing to be seen to be "with it", intra-divisional rivalry etc - all these can drive early day projects
But eventually, for Social Media to take off and scale, believable ROI needs to exist. We are dubious of some of the various "Returns on" currently touted for Social Media, as it is hard to tell which are valid proxies for hard to measure benefits, and which are just Snake Oil. Our test is that if a proxy measure cannot be linked to an underpinning economic benefit logically, its more likely than not to be snake oil.
Other Impacts
So far we have seen 3 meta-impacts of Social Media occurring
Firstly, there is a synergy when multiple of the above areas are pursued. The marketing listening systems can influence the customer satisfaction and product design systems, the customer satisfaction system can improve the marketing message, better staff co-ordination can improve customer service and salesforce knowledge and thus effectiveness. In general as more information flows in a business, better decisions are made throughout the business. But its not a given - if organisation culture is not open, if individual reward structures do not encourage sharing, if management use the new dataflows to further expolit staff, these systems can go nowhere, even potentially accelerate problems as they are just better ways of making sure all the sh*t hits the fan.
Secondly, the same influencing ability that works on attracting potential customers can influence sentiment, and thus share price. But this has always been a temporary game in the past, and its unlikley Social media will be any better at selling the sizzle if there is ultimately no beef.
Thirdly, expanding on this, a basket case will be exposed far more quickly - disaffercted customers, employees, investors etc will make their feelings known. In teh old days, they sued to say one disgruntled customer would on average tell 7 people. Now they will tell tens, hundreds, thousands, will write on review sites, will push negative pages higher in the search rankings than "official" company narraticves, etc etc.
Beware the Snake Oil
There are too many Social Media snake oil merchants promising miraculous cures today. We talk about what Social Media can do above. This is what it cannot do:
(i) Replace the modus operandi of most businesses. Social Media is essentially a communications medium, like telephony or IT. Telephony made a major difference to the cost of selling retail insurance for example, but it did not replace insurance. Web sales has restructured the book industry, for example - but not replaced it.
(ii) Replace existing operating techniques - marketing and sales techniques, service techniques, working practices etc - or not straight away, anyway. This is for 2 reasons. Firstly, existing techniques exist because they still work a lot of the time, and Social Media is not an appropriate complete replacement, but is an adjunct to improve them in most cases. Now it may come to pass that eventually Social Media might replace, say, telephone call centres - it's plausiblee - but than a bunch of other things need to change too so it will more likely be a phased change, not a big bang. Secondly, history tells us that any new enabling technique actually doesn't replace the old, it usually just slowly supercedes it in the pecking order. The revolution will (in the main) be evolutionary.
(iii) Massively replace employees with other peoples' brain cycles - "crowd -X'ing" is overblown, because most businesses do not win the day on one-off surge efforts, but on day to day execution over many cycles, and to do that you need well trained and motivated teams, not an ever-shifting cast of part-time volunteers. Adhocracy is a great way of getting Ad hoc one-offs done, and we are all for it in its place - but its not a great way of delivering reliable, predictable products and services day in day out.
(iv) Be the Silver Bullet that saves the day. It will need to integrate into a number of other existing systems in any enterprise. Social Media is a new layer of enabling communication technology, that makes existing practices and processes more productive, or effective, or both. The degree of just what, where and how it is apporopriate will vary by company and industry.
(v) Ensure that This Time Things Will Be Different, save the Planet, bring Universal peace and Love, etc etc. Humans are humans, with the same foibles as they have ever had. Social media is not going to bring about a Business Utopia, where people give warm personal service all the time, all goods are maximum quality at minimum price, and cheaters never prosper - but because it lowers transaction costs, all those things will become a bit easier to police - and thus new ways of cheating, skiving and flogging lemons will emerge.
If we had to give our sanguine view, Social Media is the sort of cluster of technologies that today can give low % increases to all those areas we cover above - but once you sum up say a 5% increase in sales volume, a 5% increase in ARPU, a 5% reduction in OPEX and 5% reduction in churn, you wind up with a shift from (ay) 5% margin to near 30% margin. That is life changing for any business, but it has to be done within the current business systems to get the full impact. The medium may be the message, but it isn't the modus operandi*.
The Downside Risks
As with any powerful new technology, used improperly it can blow up in ones face. There are two main dangers that have emerged so far
- Leaky Ships: Sensitive information will leak more easily, so there does need to be more attention paid to keeping things tight where required. This is of course in direct opposition to the need to be open, and finessing the systems that handle commercially important data is still an emerging area and in our view is still a limit to Social Media reaching its theoretical potential.
- The Viral Faux Pas: The inappropriate and inopportune tweet that goes viral and pours opprobrium on the company is a frequent enough occurrence to be a Social Media standard trope. Apart from blaming it on the Intern, companies do need to be careful and have checks on their output, and damage limitation measures in place
The devil in doing all of this is of course in the details. So, we hope to see you on the 15th.....
(*With the exception of wholly new businesses that are Social Media businesses, of course - but that is the subject of another post)