Economics Drives Fortune 500’s Shift to Net

When you get past high-profile companies such as Amazon and Ebay and really examine what is happening on the Web, you discover a quiet revolution taking place.

Beyond the obvious categories of books, music and auctions of alleged Picasso lithographs, Fortune 500 companies across the board (business-to-consumer and business-to-business) are leveraging the Web to change their business models. From re-examining their core economics to changing their channel mix and enabling new value propositions, the Web is forcing businesses to re-evaluate how to deliver and capture value.

With all the hype and business promise of the Web, few sites deliver customer value, and therefore fail to capture value in the form of return on their investments. The paradox is that the better companies become at delivering material customer value, the harder it is to be seen and heard. There is desperate competition for eyeballs. And despite the extortionist practices on the part of portal sites, there is incredible excess advertising inventory and a clear buyer’s market for advertising space.

Stranger yet, after years of experimentation, most companies still desperately seek a Web-based business model.

The advertising and media community isn’t helping. At first, the media proposed that the Web was a new form of advertising-supported magazine publishing. Today, they contend the Web is a new avenue of advertising-supported television broadcasting. The truth is that the Web isn’t about advertising at all. It’s about full-fledged alternative distribution – the direct-to-customer business model. The Web would exist without advertising. And if banner performance continues to decline, it will have to!

Companies such as Dell Computer and L.L. Bean know this perfectly well. Their Web value propositions are extensions of their direct-to-customer business model. As a result, they can quickly create competitive advantage without building a new infrastructure from scratch.

What if you’re not Dell Computer? Given these challenges, how can you economically leverage the Web? Beyond building powerful Internet-based brand experiences and focusing on customer relationships, leveraging the Web comes down to the following core principles:

• Exploit Web channel economics. In the new Web economy, fixed costs can be quite high, but the variable cost is either zero or perilously close to it.

This means that once your site is built, you are theoretically indifferent as to whether one customer or millions visit. Your cost structure is exactly the same. For the first time, this means the incremental cost of ongoing relationship management and dialogue with customers is zero.

Even if you’re not a direct marketer today, these economics will turn you into one.

You will focus on the economics of return on investment, one customer at a time. You’ll care more about ROI per customer and per transaction than about how many customers you have.

With this vantage point, it’s easy to see why Dell, Charles Schwab, L.L. Bean and others focus on channel shift. If you succeed in managing customer relationships online, it should theoretically be cheaper than traditional channels of distribution.

• Orchestrate a new channel mix. The theoretical economic advantage of the Web is easier said than done. Channel shift without lift won’t be sufficient. Unless we prove the Web results in incremental revenue (that is, revenue we would not have achieved otherwise) or true cost reduction, all we will have succeeded in doing is adding cost without adding revenue. Indeed, this is probably the case with most companies.

The key to success is orchestrating a new channel mix. For example, the real power of the Web for IBM will be when it can help them reach segments of customers difficult to reach economically through the traditional sales force – while allowing the sales force to focus on higher value customers. For L.L. Bean, the power of the Web will be when customers receive communications via the Internet rather than Bean’s expensive catalogs in the mail.

For your business, the power of the Web will be when it results in truly incremental revenue while also changing the role, nature and expense of your traditional channels of communication and distribution.

• Optimize your organization to exploit the Web. We’ve gone way beyond the early days when the Web could be experimented with as a set of initiatives sitting on the side of the core business. Like it or not, some degree of centralization is required to gain cross-business economies of scale and lower the cost of doing business. The old idea of brands competing for shelf space and share of mind has no place in this virtual world. Some level of coordination and control as well as cross-brand platforms are the price of entry.

For many companies, this is where the pain truly begins. The Web cannot be exploited without significant, sometimes wrenching, organizational change. New management systems, new methodologies and new ways of doing business will take their toll on organizations that want to get in front of this revolution.

This is why upstart companies have the edge. Lacking a vested interest in the status quo, they can quickly and nimbly invent and reinvent their core value propositions and organizational forms.

The greatest challenge for existing businesses is knowing the game has changed and recognizing that the Web is a category killer and a category creator. Most of us will have to transform our businesses to stay in business.

Somehow, if through all of this, your business has escaped the effects of this revolution, brace yourself. For when you see a freight train coming, the choice is to get run over or jump in front and call it a parade. With the Web, it appears only the front-runners will survive.

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