The COVID-19 pandemic has reshaped the way people purchase and consume products and services. In 2020, the US eCommerce industry witnessed a growth of 44%, marking the highest annual growth in eCommerce in at least 2 decades. That’s not all. According to a report by Digital Commerce 360, online sales made for 21.3% of the total retail sales made during the year.
Given the rising popularity of digital interactions, it has become more important than ever for companies to adopt digital-ecosystem business models. This can be a challenge in itself. A report by McKinsey evaluates how companies can develop a digital ecosystem strategy to create value. In this article, we will review how a digital ecosystem business model allows companies to grow their core business, expand their business network, and develop new products and services to generate revenue.
What is a Digital Ecosystem?
A digital ecosystem is based on integrating internal departments, tools, suppliers, systems, customers, and other third parties to share standardized digital platforms, drive business performance and add value to your relationship with customers. These ecosystems enable businesses to interact with their customers, partners, and even their competition.
Companies can decide their digital ecosystem strategy by evaluating market trends and characteristics applicable to their specific industry. They also need to identify their value-creation agenda. There are five key ways that can allow companies to create value via digital ecosystems. These include:
- Using core products and services to improve revenue
- Developing new customer-paid products and services
- Using merchant-paid platforms
- Monetizing data obtained from third parties
- Increasing their operational efficiency.
How Can Companies Use a Digital Ecosystem Strategy to Create Value?
As mentioned above, there are five key ways to produce value. Companies usually employ two or more of these methods to build a thriving digital ecosystem. According to McKinsey, three archetypes emerge here. These include:
Establishing Partnerships to Grow Core Business
This digital ecosystem strategy is relatively simple. Companies can enter into partnerships with other merchants and develop a digital platform that can be used by their customers, as well as other consumers. The company doesn’t have to expand its products and services at this stage. Instead, it can continue to offer its core product and service offerings and earn revenue by making its products more accessible and selling to more customers. The company can also earn money by charging merchants who offer their products via the platform.
Once the company has successfully established an ecosystem, it can grow its product offerings and explore new sources of revenue generation.
A popular example of this strategy is the MobilePay app launched by Danske Bank. The app was made available to all consumers. It allowed the bank to reach more customers while also earning money by charging merchants for transactions on the app.
Generating Revenue New Products and Services and Other Sources
In this ecosystem strategy, companies can develop new products and services and encourage their existing customers to try them out. This can allow them to increase the lifetime value of customers. Like in the strategy discussed above, they can also use a merchant-funded platform. Besides this, companies can monetize data provided by third parties to generate new insights relevant to their target market and use this information to improve their existing products and develop new ones.
A European telecommunications provider, Telefonica, uses this digital-ecosystem business model to create more value. It leverages customer data to develop innovative new services. So far, the company has developed digital content, healthcare services, and IoT to boost revenue.
Developing a 360-Degree Solution to Facilitate Business Customers
Another ecosystem strategy involves optimizing your current technology and infrastructure and offering it as a 360-degree solution to other small and large businesses to create revenue. This type of ecosystem strategy involves the use of advanced analytics and agile operations. Companies must also use a robust digital platform that allows them to offer the solution at hand successfully.
This ecosystem strategy also allows the company to reduce its operational costs and achieve economies of scale. The most common example of this type of ecosystem is Amazon Web Services (AWS). Amazon offered this platform to other businesses and individuals, enabling them to leverage Amazon’s internal capabilities. It lowered the IT and maintenance costs incurred by Amazon. In 2020, AWS generated $13.5 billion in operating profits. It was responsible for over 63% of the total operating profits generated by Amazon.
6 Core Capabilities that Companies Can Use To Create a Digital Ecosystem
As per the report by McKinsey, there are six core capabilities that companies need to focus on for developing a successful digital ecosystem business model. These are:
- Advanced analytics – Advanced analytics serve as a competitive advantage for companies looking to establish a digital ecosystem.
- Agile operations – Companies need agile operations to develop customer-focused and scalable digital ecosystems that offer more efficiency and meet customer expectations.
- Proper governance – Companies will also find it easier to establish an ecosystem by ensuring appropriate governance that encourages innovation and a customer-focused approach.
- A robust middle platform – A digital ecosystem requires collaboration between different parties. A strong middle platform can be useful here as it makes it easier for your suppliers, customers, vendors, and other stakeholders to share data.
- Entrepreneurial talent – As always, the success of an ecosystem relies largely on the kind of team you employ. Companies need to hire entrepreneurial talent with the capability to lead in the future to make the most of this.
- Partnership – Finally, a successful ecosystem requires the company to enter into mutually beneficial partnerships with reliable businesses to achieve business outcomes.
Wrapping It Up
A successful digital ecosystem strategy utilizes a variety of core capabilities to deliver more value to customers. You can evaluate the trends and characteristics of your target market and develop a strategy that complements your business and allows you to leverage new and existing products and services to earn more revenue.
If you are interested in learning more about digital ecosystems, get in touch with EdgeCollab today. We are a software and business development company and can help you find the fastest way to launch your products and integrate yourself within a functional ecosystem.