Findings to sub-question four

There have been many great examples from other industries of how digital transformation enabled the adoption of completely new revenue streams. In the following, the answers to the fourth sub-question of this paper will be outlined.

Sub-Q4: How do digital technologies impact the revenue streams of retailers?

As discussed in chapter three, sub-question four targets revenue streams as well as the development of revenues resulting from the adoption of digital technologies.

The most sophisticated answers to this question were provided by IV8 and IV10, who believe that retailers have to think more and more in living environments where the retail verticals mix, rather than just channels and touch points. They believe that the industry will develop into a direction where, by paying a fee, the customer receives access to mobility, no matter whether it is BMW or Mercedes, the customer has access to utilities, no matter what the electricity provider is. But in all cases, he always pays the lowest price. A lot of retailers are making the mistake of staying in their own verticals, but it is believed that this is the direction the industry is taking. IV8 explains that the actual companies with the most crucial access to the customers are banks which are operating giro accounts and which function as a financial mirror of a customer. Both IV8 and IV10 explain in their statements, that in the future more and

more will function as-a-service. People will not buy a TV but instead they will buy entertainment for a monthly fee. This fee then can include visits at partner-cinemas, you will receive a TV for your home and beyond that a content flat rate provides you with access to unlimited music and TV shows.

‘The first living-bank just opened, which is operating fully in living-verticals.

Meaning utilities, entertainment, your apartment (...).’ (IV8)

IV8 and IV10 also assume that the mash-up of two or more companies will increase in the future, exploring the opportunities of how they combined can attract greater amount of customers. While banks are functioning as the primary partners, retailers are the suppliers in the package providing the products and services, says IV8. This is an extremely critical development which can already be observed in USA and Asia especially in the younger generations and their hyper-consumption, as IV8 explains.

The generation can be best described as cash-flow-managers, as they are building no new assets but consuming the assets of previous generations. This results in a much stronger buying power compared to previous generations.

IV2, IV4 and IV5 believe that the development will go towards leasing, renting or pay-per-use. With the example of the automotive industry, the interviewees underline that this revenue stream will be of increasing importance in the future. As especially younger generations are not as eager to own a car as earlier generations were, they will increase their activities in terms of car sharing. IV4 explains that for most of the day cars just stand around and are not in use, and are one of the most expensive assets that people can own. Like IV2, IV4 also notes a strong shift in consumer behaviour. As a result, many mobility providers are shifting their business model towards car sharing and pay-per-use or subscription models. IV11 further discusses the opportunity to offer further mobility services, such as taxis or rental services. As assets are already available, the most cost intensive part to offering such services is already taken care off. The interviewee sees great potential in such services, not only in their own industry but also in others.

IV2 then further builds a bridge to the fashion industry where the asset-sale will dominate the industry. In luxury-fashion, however, the interviewee also believes that the potential for subscription and pay-per-use models is realistic. IV5 and IV12 also see a shift towards subscription models but their assumptions are also focussed on the

fashion industry. In this context, the interviewees explain the development towards club shopping. Customers have the chance to become a member of such clubs that often have a limited number of members to make it feel more luxurious. Members are given the opportunity to select a limited amount of products for a certain amount of time from a retailer’s product portfolio. But IV5 also mentions that it is more likely to be the younger generations making use of such offers.

‘(...) That I can say, I am going to use this for one night and then return it.’ (IV2) IV9 agrees with the assumptions stated by IV5 but refers to another industry. After having spoken about Spotify as a prime example for a successful subscription service, the interviewee refers to the book industry. Customers can be granted access to the entire digital book portfolio in return for a monthly fee. Everything, which is digital, is a huge success for the market, the interviewee states, as costs can be reduced and margins for the industry are incredibly high.

IV1 and IV6 focus on the importance of customer service in their assumptions. They explain that a customer does not only pay for the product, but also, and that will become more prevalent in the future, for a great experience and great customer service, through which they find what they were looking for and satisfy their needs. IV6 questions when services, which are usually expected to be free, such as customer service, will cost money again in the future. The interviewee further believes that customers, however, would accept paying for such services, as long as retailers are able to bring to mind exactly what customers are paying for.

‘The (...) product is important, but the customers are coming into our stores because the experience and the service around the product offer additional value.’ (IV6) Regarding revenue streams, IV3 states that selling data will be of increasing importance for retailers in the future, if it is collected and analysed in the right way.

Companies operating the networks for the telecommunication industry see a dramatic reduction in revenues, as services are becoming cheaper from day to day. IV3 explains the idea of free usage of telecommunication, while revenue would come from the selling data about the movement behaviour of customers as well as the utilisation and consumption of a certain product or service.

At the end however, experts come to the conclusion that the asset-sale will remain the most dominant revenue stream in the near future. New revenue streams are often adopted first by the younger generations, which, however, do not yet possess the necessary purchasing power to force a shift in the strategic direction of retailers, IV8 explains. As IV5 further notes status symbols still play an important role in western society in particular. The interviewee believes that there are a lot of opportunities for new revenue streams, but only in niche markets. IV10 also discusses the problem that sharing services only can be applied in urban, but not in rural areas where the access to services is limited. On top of that, numerous customers are not willing to neither share car nor clothing. They prefer having their own, which totally eliminates the success of other revenue streams.

How will digital technologies impact revenue growth?

The answers from two experts are missing to this question due to time constraints which led to an abrupt ending of the interviews as they were conducted during ordinary working days. Furthermore, two interviewees did not want to take a position on this as their knowledge in this field was too limited to give an answer valid enough to be used for the data analysis.

Linear Growth

Four out of the nine experts expect a linear development of revenues as a result of the successful implementation of digital technologies into retailers channels. IV8 says explains the development with an example of a retailer which is generating most of the revenues through the physical channel. On average, sales of brick-and-mortars will grow at a rate of a lower single-digit number due to an oversaturation and the highly competitive nature of the market. IV8 believes that with digital technologies, the growth of sales of a retailer will be above the market average, but not much, as digital technologies are no saviour anymore.

‘Going back to Osterwalder: something like an amazing VR-experience will not stand in the centre of the Business Model Canvas.’ (IV8)

The interviewee sees digital technologies rather as a weapon, as a tool against the turn of the tide, the loss of market share. On saturated markets, traditional retailers are not in explore-mode anymore, but in defence-mode. Digital technologies can then be

utilized as a weapon to support the defence against other competitors. Online-pure-players, which already increasingly are penetrating the physical retail in an innovative and efficient manner will further take over the market, as the interviewee explains, because physical retailers often have difficulties understanding the online business.

This is a problem which IV7 also addresses. The retail industry seems to be a very sluggish market when it comes to technological changes. The interviewee believes that humans need a too long time to adapt to such dramatic changes, hence an immediate exponential effect is not realistic.

‘Just because I now implement a new technology, does that not mean, that it will be comprehensively used.’ (IV7)

IV1 and IV12 agree with the statements of IV7 and IV8 and expect linear growth. The revenue of a retailer can be increased, due to personalized upselling and cross selling, as well as an effective targeting of customers, but not exponentially. The interviewee notes the limitations due to the cycle in which existing customers are most likely to repurchase a product they already own. This cycle obviously various depending on the industry and the products sold by the retailer. Through personalized targeting, this cycle can be further shortened, yet limits the efforts of retailers. IV1 further adds that it needs more than just digital technologies in place to achieve exponential growth. On top of that, IV2 mentions that this development is strongly linked to the buying power of the younger generation, as they grew up with digital technologies and would be the ones to make use of it. Hence, the interviewee first expects a linear development in revenues, but further an exponential one as the generation matures.

Exponential Growth

Three experts discuss the possibility of exponential growth in revenues. IV3 is convinced that due to a more precise targeting of customers, enhanced through CRM, Data Analytics and Artificial Intelligence, there is a lot of market share to be acquired by the retailers adopting digital technologies in the right way. IV5 is also convinced that an exponential growth is not unrealistic. Under the aspect, that retailers has get a deep understanding the customers, the entire operations can fully be aligned customer centric and product and service portfolio adapted to customer needs. Furthermore, the customer segment can be extended and revenues dramatically increased. IV5 also

explains that this development would only last for a short period, then it would slow down and go back to a linear growth above the average market growth.

‘You would see an immediate increase in revenues, but as explained, you have to count the costs against it.’ (IV5)

IV6 expects an exponential growth, but only if retailers are willing to take the risk and heavily invest into technology. This could potentially result in a dip in revenues at the outset, as systems could create problems leading to sales shortfalls. The interviewee explains that if a retailer is not willing to take the risk, no exponential growth is realistic.

With experience of working in the automotive industry, IV11 explains that customers who decide to purchase their new vehicle through the online channel are less cost sensitive than customers purchasing at a dealers store. Especially high-tier models are being purchased through the online store. The interviewee explains that internal research has proven that online shoppers are rich and purchase their luxury vehicles online due to time constraints. By improving the online-channel experience through technology, revenues and profits can both be increased.

‘The average price sold online is 35% higher than in normal retail.’ (IV11)

Summary of the findings

In summary, experts are convinced that in the near future, the asset-sale will remain the most dominant form of revenue streams for the retail industry. There is a lot of potential for markets to adopt new forms of revenue streams, such as subscription, leasing and renting models. This however strongly depends on the nature of product sold. With younger generations gaining more and more momentum due to an increase in purchasing power, and because of many successful use-cases that can be seen in other industries, retailers are slowly but surely adopting new strategic directions.

Furthermore, experts are not in agreement about the development of revenues due to the adoption of digital technologies. While some experts see a linear development as realistic, others are expecting an exponential development due to the optimization and automation opportunities of processes that lead to a much greater efficiency in the utilization of resources. Experts perceive digital technologies often as a type of weapon

that can be used for defending market shares, especially against online-pure-players that eventually will enter the physical retail with full force.