While Data Network Effects have been great for companies in other spaces, they promise to be truly game-changing for distributors.
AI creates value for distributors in a fundamentally different way than anything we’ve seen before. It’s going to radically redefine the industry, and if you haven’t already moved to implement AI tools, it may already be too late for you.
I know what you’re thinking. That kind of talk is hyperbolic. Distributors have been navigating an unending line of supposedly game-changing technologies for generations. It’s what they do. Call-centers, email ordering and the advent of e-commerce didn’t put existing firms out of business, so why would AI? Well, there’s an answer for that: Previous tools and novel channels were linearly profitable. AI, on the other hand, creates exponential profitability. And while linear growth is good, exponential growth is, well, exponentially better.
Until now, linear growth has been the only pattern of value creation available to distributors. In linear growth patterns, the value gained by distributors is directly proportional to some input, such as a sale or the acquisition of a new customer.
Take e-commerce as an example. E-commerce created more than $1 trillion in B2B sales in 2019, a number that will increase to nearly $2 trillion by 2023, according to a Forrester report. In order for that growth to occur, distributors will need to double e-commerce revenue by selling more to existing accounts or acquiring new customers. The marginal value of each sale is only that of what is sold. Increases in sales reflect better e-commerce performance but do not themselves create better e-commerce performance.
Also see: “5 Ways You Can Use AI to Win the 2020s.”
This is true of the other “new” channel inventions and adaptations that have helped distributors grow over the years. From call centers to fax orders to e-commerce, distributors have continually created new ways to interact with customers and improve business
By design, these channels have caused distributors to grow in a linear way. When 10 customers faxed in their orders, a distributor reaped the value of those 10 orders, but they did not sow the value of an 11th. Today, when five customers shop online, nothing happens that makes a sixth more likely to do the same. That’s where AI is different.
Because AI is a data-driven technology, it affects an exponential growth pattern for businesses. In an AI-enabled system, each sale adds value beyond itself. These effects, known as Data Network Effects, describe the virtuous cycles that distributors can use AI to enact. Unlike linear growth technologies, AI only gets more valuable over time.
Remember, AI learns from data and becomes better at predicting customer behavior as information accumulates. When distributors use AI to sell something, they don’t just capture the marginal value of that sale, they also gain the data from that sale. That data can then be processed and used to create an even more effective AI-based sales strategy — one that can create even more sales, each creating even more data that in turn creates even better sales and so on ad infinitum.
Also see: “AI Poses a Make-or-Break Challenge for Distributors.”
The fastest-growing companies of the last decade owe much of their success to AI’s ability to ignite exponential growth. Amazon owes 35% of its online sales to AI recommendations, benefitting greatly from data network effects. Every sale that the company makes results in more data, resulting in more accurate AI recommendations that help to achieve even more sales. Likewise, Netflix, Spotify and Facebook all use AI to refine their content suggestions, helping to get users hooked, giving them the data to keep improving their platforms.
While Data Network Effects have been great for companies in other spaces, they promise to be truly game-changing for distributors. As mentioned, distributors have spent decades implementing new channels and tools to connect with customers, scaling linearly all the way. AI will not create another new sales channel for distributors, but will radically improve the performance of existing channels to exponentially increase profitability over time.
Distributors already have access to personalization technology. AI is increasing revenue for distributors by supplying e-commerce sites and sales reps with readymade personalized product recommendations for each customer. As distribution-specific AI evolves to support outside sales reps and marketing teams, wholesalers will be able to create an omnichannel AI engine that learns and collects data from all customer interactions, helping to optimize every customer touch, across every channel.
However, wholesalers cannot wait for omnichannel AI. Winning with AI requires plenty of data, and the best time to start collecting that data is yesterday. The second-best time is today. Distributors are primed to kick-off an exponential cycle of sales, platform improvement and growth. But they must act soon.
Distributors have heard that technology is game-changing before. But this time is different, and that truth should be evident in the simple arithmetic. With previous, linearly-scaling tools a sale made was a sale gained. With AI, a sale made is worth that much and more.
Originally published at https://www.mdm.com/blogs/20-distribution-operations/post/40806-ai-is-the-first-technology-to-create-exponential-value-for-distributors on March 2, 2020.