Why Digital Business Models Bring Higher Valuations

by Kevin Dobbs

If you didn’t start your own digital transformation pre-COVID, it’s not too late.

© metamorworks/iStock/Getty Images Plus

The world is becoming more digital every day, and it’s apparent that this evolution has created a change in how Wall Street values one company from another. It’s not uncommon for a digital business to have every dollar earned be valued at 90X or more than that amount. In contrast, companies that have held out on transitioning to digital as-a-Service business models are stuck at a dollar-to-dollar valuation.

This change in how Wall Street values an earned dollar is a problem for many C-suite executives. Certainly no one could have planned for COVID-19 to strike, but when it did, the companies that were already becoming more digital were more resilient and better set up for success.

The good news is that if you didn’t start your own digital transformation pre-COVID, it’s not too late. With a few initial steps, solid plan and strategic vision, many companies can still participate in this modern day gold rush.

Start Small – Become More Resilient

Many executives think that digital business models are all or nothing. Not true. A company doesn’t have to go fully digital. They need to balance their revenue streams so that if their physical supply chain is disrupted, they still have ways to make money through the digital side of their business. This makes your overall business much more resilient.

Building a company that can be forecastable in times such as COVID-19 is a major factor in singling out those that will be valued at higher levels over the long-term. Clearly, a company’s core business is important, so you have to be careful not to disrupt it. However, there are digital ways of doing business that can be easily embraced in order to grow faster and be more resilient. This could be as simple as offering online orders, curb-side pick-up or contact-less delivery.

Going more digital also means less dependency on physical supply chains and services can become more flexible and more dependable. This in turns creates a buffer where companies can more easily scale their business up or down in response to unpredictable market conditions. This durability is valued highly by Wall Street. During COVID-19, companies that had digital supply chains flourished because they had the resiliency to scale their businesses as demand for their products increased.

Where to Start?

Here are some tips for getting started, or for continuing the journey you may have started:

  • Take a good look at your company to determine if you should be building digital into your model. Two ways to determine this are to look at either your company’s Z Altman Score, which measures a company’s financial stability, or the Rule of 40 which looks at a company’s tradeoff between growth and profitability. Using these metrics can help illustrate the impact digital capabilities can make on your overall business.
  • Look at your in-house capabilities to see if you have the expertise needed to pursue these new digital growth opportunities. If you don’t, start looking at partnering with a company that does have the expertise, or outsource that capability.
  • Examine your business as a whole, carefully looking all key functions. You may find that some of these functions can be easily outsourced to free up internal teams to focus on building differentiated digital products and services.
  • Make sure you encourage and instill an agile culture company-wide with employees that are ready to embrace a digital business model.
  • Look for areas to free up cash so you have the ability to pursue new growth opportunities.

One thing that COVID-19 has taught us is that digital business models are more resilient. They enable companies to generate consistent recurring revenue streams for their products and services. The sooner companies start adding these capabilities, the better off they will be long term, even if they start small and build up their digital model over time. 

Plan, Make Decisions, Take Action

It’s important is to recognize that every company is different. That’s why a critical piece in the journey should be a short- and long-term business plan.

Things included in a company’s plan should include a self-assessment of current capabilities and potential market opportunities. At the same time, companies need to carefully look at their core businesses to make sure they are investing in the right capabilities and talent to pursue the optimal digital strategy. Ideas around freeing up cash flow, what offers to use, pricing and monetization models should also be included.

There’s a reason that Wall Street is valuing these digital companies at a significantly higher rate. These digital models provide high growth and resiliency that is really needed in these challenging times. After the effects of COVID-19, there has never been a better time to jump in and test the waters. 

Kevin Dobbs is Managing Director and As-a-Service Business Leader for Accenture.