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Turning the Building Around: McKinsey on D2C Change Management

This is a story about Kurt Vonnegut’s father and a corporate pivot.

In 1929 Indiana Bell bought the Central Union Telephone Company, along with its headquarters in downtown Indianapolis. Indiana Bell originally intended to destroy that building to make way for a bigger structure, but there was one problem: it was a telephone company headquarters for a reason. It contained all the phone switches.

The lead architect of the proposed new headquarters, Kurt Vonnegut Senior (that’s right – the writer’s father), proposed an alternative: they pick up the old building and move it to an adjacent lot. Oh, and to make it fit better, they would also have to rotate it 90 degrees. So they did it. They turned the building around and moved it. Here’s the time-lapse video.

It took a little over a month. They picked up the building with hydraulic jacks, placed it on wooden rollers, and rotated it about 15 inches an hour, all while roughly 600 employees went to work every day. With no interruptions to local telephone service!

Indiana Bell literally pivoted, and wound up facing a brand new direction.

If you think you’ve spotted a metaphor here, you’re absolutely correct. This has become one of my go-to stories when talking with companies wrestling with digital transformation. What happens when a new set of corporate priorities (say, to achieve 50% of your revenues as recurring) stand in direct opposition to the way things are currently done? How do you shift the collective intelligence of an organization that is structured and incentivized to do certain things a certain way? How do you turn the building around?

The retail sector is one industry that is facing this right now. In the book, Subscribed, we talked about the need to “flip the script” – establishing a digital relationship first, and a physical retail experience second. Well, the pandemic forced every retailer to realize the importance of direct-to-consumer channels. Retailers that establish direct online relationships with their customers will succeed; those that don’t, won’t.

The problem, of course, is that most retail manufacturers currently depend upon a whole constellation of channel partners and resellers, and D2C is all about skipping the middleman. So how do you square that circle? How do you move the building, while also keeping all the phone lines running? While we frequently collaborate with McKinsey on subscription benchmark research, they recently published an article called “The Six Must-Haves to Achieve Breakthrough Growth in E-Commerce D2C” that I thought made me think of the Indiana Bell building story. As always, McKinsey offers a great blueprint for how to pivot your company around. Here are some of the key points of the article, along with my own thoughts.

All hands on deck.

This one is pretty straightforward – the leadership has to be fully committed. I have no doubt that Kurt Vonnegut Senior had the entire backing of the Indiana Bell management before he launched his famous construction project!

As McKinsey puts it: “The job of the CEO, the Board, and the whole executive team should be to shape the details and support the organization’s D2C e-commerce strategy and ambition, and translate these into practical KPIs across different functions of the organization.” The scope of your transformation effort doesn’t have to be totally comprehensive, but as Robert Hildenbrand and I discussed previously, it needs to be clearly defined and properly resourced.

We’re all familiar with the alternative situation: too many strategic priorities, too much timidity in strategic choices, and a general sense of bureaucratic entropy. Here’s a worst case example: “Let’s build a new loyalty program.” According to McKinsey, there are five billion loyalty-program membership accounts in the United States alone, and over half of them are completely inactive.

“Y+1” investment.

You need to invest aggressively in these kinds of projects. As McKinsey puts it, “The ‘Y+1’ concept requires adjusting resources and investment in advance of growth, using allocation rules that calculate the share of investment, with the expected revenue that will be achieved a quarter or a year in the future as input.”

Let me translate that for the rest of us: consider your future revenue when you make your initial investment. In other words, think like a SaaS company and factor in customer lifetime value (CLV) into your customer acquisition cost (CAC).

I would add that this strategy is particularly relevant to retail, simply because the stakes are so high. Think of all the stores you grew up with that have vanished over the past five years! The D2C subscription market will become the dominant retail mode; how much of that channel do you want to occupy?

Don’t fall for the tyranny of either/or.

Here’s where McKinsey tackles the tricky channel question: “It is unavoidable that a good-to-great e-commerce journey will create some tension with retail partners, in particular about assortment, promotions and pricing.”

But at the end of the day, when it comes to channel partners and subscriptions, it’s not a matter of either/or! It’s about both/and:

“Companies must stop seeing cross-channel tension as a zero-sum game, and instead appreciate the opportunity to turn it into a win-win, where collaborations across the channel help drive growth for both the brand and retail partners.”

The more customer insight and behavior data you gain through your D2C project, the more your channel partners stand to benefit. This model is all about sharing data across swimlanes for mutual benefit. Think of D2C like a new superpower that can energize every aspect of your organization.

Go beyond the transaction.

Here McKinsey articulates an optimal retail subscription offering: “There are four imperatives for a successful subscription model: avoiding the “add-on” approach, offering real value, offering a variety of great experiences, and introducing flexible pricing to maintain relationships.”

Instead of selling stuff off of shelves to strangers, you need to meet your customers where they live, and you need to keep them happily surprised on a consistent basis. Look at how Netflix showers us all with new movies every week “for free.”

Think of all the services in your life that you can’t live without, and then apply their attributes to your own project. Don’t nickel and dime people. Don’t depend on zombie credit card charges. Give your customers the option to dial up or dial down. Handle all the maintenance and details.

Here Best Buy offers a great case study. They’ve moved way beyond the traditional big box retail experience with their new Totaltech service, which handles anything and everything related to consumer electronics: deals, installations, insurance, repair, support, etc. It’s essentially an IT department for your house.

And finally, remember that D2C efforts don’t turn around companies within a month! That will happen eventually, after your subscription launch starts generating significant amounts of high-margin recurring revenue.

After that happens, believe me, the building will pivot.

For more information on D2C transformation from McKinsey and Zuora, download the free report: “How Direct-to-Consumer Companies Can Unlock Value in Their Subscription Business.”

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