Digitalization has disrupted everything that we once considered to be “business as usual”. The general rule is to take ideal advantage of every opportunity for growth in all company departments in order to respond effectively to customers’ wishes and changes in the market. Companies that succeed at this are also especially interesting to investors. However, profound digital and technical expertise and detailed knowledge of the industry are required in order to be able to objectively estimate the actual potential of a company. For this reason, digital due diligence examinations have become an obligatory tool of investors allowing market opportunities and risks for a company to be assessed precisely in today’s environment – and to measure the digital maturity of the potential investment.
Measuring digital maturity in a Digital Due Diligence
A digital due diligence (or DDD) combines analysis of solid business strategies with digital and technical know-how as well as precise insights into the industry in order to determine if the potential investment is attractive or risky. Companies with a high level of digital maturity achieve exceptional performance, especially in the areas of revenue growth through digital channels or platforms, operational excellence and customer satisfaction. When conducting a Digital Due Diligence, investors should focus on five points above all, in order to determine the digital maturity and potential of a target company.
1. Assessing the digital demand
Today, web searches form an elementary part of the customer journey. For 60 per cent of all B2B purchasing transactions and 80 per cent with end customers, the search for information about products starts with Google, Amazon or directly in other market places. Searches can be measured and provide good indicators about general purchasing behaviour. For that reason, the key for understanding market developments is insight into things such as Google searches based on relevant search words, and this insight is the key for appropriate estimation of a company’s digital potential for growth over time. From the investor’s point of view, it is also relevant in this context how much of the industry’s total revenue currently comes from online activity and how it will develop over the next 5 years. Two-digit growth figures are often seen in the online area, while the entire market sees only single-digit growth at the same time. This indicates that customers are increasingly moving to digital channels. Companies that are well positioned online will benefit disproportionately from this transition to digital channels. Firms that have successfully analyzed their digital demand can accelerate their online growth potential and quickly orient their marketing campaigns to specific, especially attractive segments. Without too much effort, successful adjustments to trends and changes on the markets are made by continually monitoring the search words (keywords) that are the most frequently used. Doing so will increase the efficiency and the return on investment from active marketing campaigns.
Analysis of the digital search market in a digital due diligence is, consequently, highly relevant for investors so that they can properly estimate the market development of a potential target company. If the target company is an e-commerce company, for example, that sells tennis equipment and clothing through a web shop, investigating the digital interest that is represented by Google searches related to tennis would be extremely relevant. To measure this interest, a representative list of key words based on the target demographic, the e-commerce business’ product categories and those of the players in the core market should be created. Developing the digital search market will tend towards positive correlations with the growth of online revenue of that digital business. Developing digital demand is one indicator for the future market and the development of revenue. It will serve as the foundation for the creation of market models and business plans. It will also become a reasonable supplement to classic commercial due diligence processes.
2. Assessing digital performance in comparison with the competition
Competitive benchmarking means comparing digital performance and the potential of the target company against the competition. It serves to evaluate the relative performance of the company and to determine where potential can still be taken advantage of. Companies that perform well in digital benchmarks (such as visibility on online channels, conversion rates of site visitors to completed transactions and ratios of repeat customers to one-time customers) have a strong competitive advantage that distinguishes them in the digital field. Benchmarking the digital performance of competitors is important in order to determine if a potential target business is well positioned relative to direct and indirect competitors, and to identify growth areas.
The online tennis retailer from our example must first analyze their current digital performance in comparison with their competitors in order to increase their share of the digital market. Digital benchmarking has a number of relevant levers. One example would involve examining the online tennis retailer’s organic visibility over the course of time in comparison with their primary competitors in order to determine their relative performance in the search engine optimization (SEO) channel. Another example would involve examining the online reputation, which would analyze how customers evaluate the products purchased from the web shop in comparison to the competitor’s products. Most importantly, benchmarking within a digital due diligence allows identification of areas that exhibit the greatest positive differences or that contain gaps in comparison with the strongest competitors that could be closed and that simultaneously indicate the greatest potential for the company’s digital growth.
3. Identification of trends and customer behaviour
Customer insights, meaning quantitative and qualitative information about the target customers, are essential for measuring digital maturity and for ensuring the future security of the business model. Companies with an especially good understanding of their loyal and target customers are well positioned to optimize their marketing strategies in the upper funnel (such as by social media campaigns, programmed ads, search engine optimization (SEO) and search engine advertising (SEA)), to conduct marketing activities oriented on conversion in the lower funnel (such as through website optimization) and to concentrate on profitable customer loyalty initiatives (such as with the help of a Customer Relations Management (CRM) system).
Continuing with the example of the online tennis retailer, let’s say that they try to draw as many conclusions as possible from the data regarding customer transactions, customer demographics or seasonal purchases. Once the transactions have been consolidated, they hold a lot of valuable insights that can be used in marketing and sales campaigns to improve customer acquisitions, conversion and loyalty. The data generated from various points of contact with customers along the purchase process should be collected in a manner that conforms to data protection laws. It should be analyzed and displayed automatically by a key performance indicator (KPI) dashboard in order to ensure that the right customers are being addressed and flexible adjustments to the digital marketing campaign can be made. In the best case, adjustments should be made automatically so that adjustment and positioning of campaigns to the correct target groups will occur automatically based on data like age, gender, media behaviour or purchase behaviour.
4. Identification of the optimization potential of digital channels
The increased reach created by organic and paid advertising measures (such as social media campaigns) is important for ensuring the efficiency and flexibility of the value-creation strategy with a high return on investment (ROI) for each channel. In short, a precise understanding of a company’s own digital channels, knowing the company’s success statistics and evaluating the potential is highly relevant for all companies. By doing this, they will increase their online presence in the current markets and position themselves to reach more customers by increasing their prominence. Furthermore, digital channels can be used as part of a globalization strategy in order to develop an online footprint in new markets with less effort than through physical globalization efforts. For example, online tennis retailer could use their paid channels to increase their visibility quickly, appeal to new customer groups and penetrate international markets with even less organic visibility.
Improving this online footprint by optimizing digital channels is the key to increasing top-line performance. For example, an investor can analyze the performance of the digital channel for the online tennis retailer by evaluating digital success factors or digital statistics in order to determine the efficiency and scalability of individual online channels. Since the traffic and income originate from various online channels, understanding how customers will be reached at that time, how this has changed in past years and which channels are the most important drivers for the company’s growth is important. Another important issue in this context is the insight into how expensive the acquisition of a customer through digital channels is. This includes the number of employees and agency fees arising from this context as well as the advertising budget. From the investor’s point of view, the specific question is: How was performance over the last three years, and what should be expected over the next three to five years? This insight is very relevant, especially for digital business models that acquire customer popularity through social networks and collaborate with influencers. Increases of 10 to 15 percent of the acquisition costs per year are not uncommon due to increasing professionalism and the increased demand for influencers.
5. Evaluating the IT infrastructure and technical scalability
A solid IT infrastructure is based on all of the components that put a company in a position to provide IT services for the employees of an organization. This infrastructure is a decisive factor for speeding up the company’s own digital transformation and enabling it to grow at the fastest rate possible. Companies with a comprehensive IT infrastructure will achieve significant competitive advantages. The quality and reliability of that system will define in the digital due diligence, how innovative the company can be, how much potential it has for growth and how well it can assert itself against the competition. Continuously optimizing the IT infrastructure is, therefore, a basic component for evaluating a company’s potential in the future.
For that reason, comprehensively evaluating the IT system and infrastructure of the target company is recommended before making an investment, in order to understand its dependencies and scalability, to identify necessary investments at an early stage and, of course, to see the company’s digital maturity. The IT infrastructure will differ from company to company and, as a rule, includes physical hardware and equipment (including computer centres), data storage, network systems, legacy interfaces, software, CRM systems, e-commerce shops, content management systems (CMS) and databases. The important issue in this context is that data silos are not used, but rather that the systems have been networked together so that the data points generated by the customer throughout the sales process can be analyzed from every direction. Naturally, the IT infrastructure also includes the human elements of an IT infrastructure, such as developers, development processes, IT technicians and network administrators as well as any dependency on external service providers. All of these components must be considered when evaluating the scalability of the IT infrastructure.
Digital maturity as the basis for investor decisions
In order to be able to use a company’s services from anywhere and purchase products online (regardless of location), digital business models are decisive factors not just for consumers. Their importance to investors is increasing since they significantly affect the company’s future capabilities. Because digital businesses are often complex, it is important to do due diligence testing that combines the three aspects of due diligence: Commercial, digital and technical. In order to be able to make a sound decision about all digital potential for growth, investors should first examine the status quo of the company’s digital maturity in a targeted manner. Focusing on the five points of digital demand, benchmarking digital performance, evaluating trends and customer behaviour, optimization of digital channels and evaluating IT infrastructure will especially reward the informed investor.
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