From substitutes to complements

We are used to think in terms of substitutes (one product/service replaces another). So our competitors are those with similar products and our pricing needs to be lower than our competitors’ (or our quality needs to be better).

In the digital world, however, complements (products/services which complement each other) play a much more important role. This has significant consequences on who our „competitors“ are, how to form our relationship to these „competitors“ (or partners) and how to set prices (complements influence each other).

Digital Business defined

What makes a business a “digital business”? In order to justify a new category of businesses, such a category needs to be substantially different from the existing ones (otherwise what value would a new category have?). And in fact, I claim that digital businesses have two economic characteristics which make them profoundly different from “traditional” businesses:

  1. All digital businesses work with near-zero marginal costs in an important part of their business.
  2. Very often digital businesses are exposed to network effects, indirect and/or direct network effects.

Digital businesses deal with goods or services that are completely or partially digital. Even an online shop wich sells physical products operates on a digital platform. And the main feature of digital goods is that they have near-zero marginal costs. Zero marginal costs have a very profound and far-reaching impact on many business decisions.

Digital goods or services are offered in digital markets. Very often such markets show network effects, wich often play a crucial role for the business. More and more digital markets are not only built by two parties (buyer and seller), but by multiple parties. These multi-sided platforms require a significantly different management and represent definitvely a new type of business.

Data are the digital fuel

As many have pointed out already, data are at the core of the digital economy. Data are the digital fuel, they drive digital businesses. The more and better data you have, the more and better services you can offer.

Whether it is personalization, predictive actions or matching, all require data. What is important is not so much the amount of data you collect from each single user, but the combination of the data of your (and maybe even partners’) users.

The customer is key

Customers can easily switch vendors in the transparent and often global digital marketplace. They are often hunting for the best deal and whichever vendor can offer this best deal will get the business (spot market).

The best deal is not necessarily the one with the best price, there are other values as well (e.g. convenience). And sometimes network effects are important and platforms are developing.

My thesis is that owning the customer is the central success factor in the digital economy. Whatever the specific situation looks like, vendors should not compromise on keeping their customer relationships. Otherwise they may end up as interchangeable subcontractors to dominating platforms.

This is just a first exploration into a plethora of topics. More elaborate thoughts will follow.