How digital strength portends shareholder success

Digital has become more than just a channel and, in fact, most activities, especially with brands, are powered by digital. With that, comes mountains and mountains of data that brands sometimes struggle to interpret as it relates to its direct effect on future business growth. Seizing on the opportunity to tell more of the story, Isobar partnered with Alpha-DNA, a data provider to hedge funds, to develop the index.

“They had the same hypothesis as we did, which is, a company's ‘digital signal’ or digital strength is a leading indicator of first revenue and then, ultimately, shareholder value. They were already using the digital signal to predict revenue for hedge funds and we worked with them to create the strength index,” noted Mailing.

What’s different about this approach is that it addresses a business imperative for the long-term and covers five key indicators of digital strength: magnitude (the size of a company’s digital presence), share (Share of digital relative to share of total revenue offline + online), momentum (digital measures with positive sequential acceleration), growth (revenue growth projection based on change in digital interactions) and trajectory (correlation of digital trends to overall revenue trends). That foundation was used to analyze the top 1,000 public companies in the US, using five years of data to determine relative digital rankings.

“No one had ever mapped those before back to the ticker symbol. Take P&G for example with hundreds of brands, sites, Facebook pages, etc. There's no public source of data for that,” noted Maling. “We created all that mapping and we constantly maintain it. Then we bring in every publicly available piece of data on those properties from site traffic, to Facebook likes, to everything that you could imagine — add a lot of machine learning and algorithms on that data to ultimately predict a company's revenue. Then to translate that into the digital strength index across these five dimensions.”

Indeed, in looking at the nearly 10,000 data points, or, another way to look at it, 75 billion consumer interactions a month, across the companies analyzed, those that were in the top decile of the DSI showed a next-year revenue of 10% while the bottom decline company revenues declined by 8%, showing a nearly 20-point difference. Further, companies at the top beat quarterly estimates by 65% over the past five years while those at the bottom beat those same estimates only 45% of the time. According to the study, the long-term impact on shareholder value over a three-year period can be devastating, with a 12% loss in shareholder value.

Tailwinds and headwinds for airlines

The first report, on US airlines, published in July, illustrates the idea in action, and shows how high-performers deviate from those lagging behind.

Southwest Airlines is the clear leader for major airlines, owning a 22% digital share, but also dominates digital across the board, with far more visitors, page views and reach than the other domestic carrier. Though other carriers have more market share, Southwest benefits from keeping most of their activity on their owned platforms, and not relying on online travel agencies, known as OTAs that include Orbitz, Expedia, Travelocity and Priceline. Put simply, Southwest is driving customers to their own site.

Keeping digital interactions within an owned ecosystem is what Maling calls a “quality interaction” and Southwest’s strategy is projecting a revenue growth of 6.1%, tops among the major airlines in the US.

Conversely, United Airlines, though profitable, yet facing reputation challenges, is lagging behind and has the largest gap between market share and digital share. In part, the issue lies in relinquishing a level of control through OTA and other activity, watering down their presence and could present issues in the future.

“25% of their businesses [and all airline bookings] go into the OTAs, so they're already at 75% power from a digital perspective and they don't seem to be building any long-term loyalty and share on their social platforms — and a lot of their web platforms have some issues,” said Maling. “They may be doing well now but they are diluting the opportunity to then have those repeat customers in the future.”

Proof points for the long-term

Indeed, the story of positive short-term headlines and growth for airlines and companies in general can be helpful, but the DSI is all about the long view. In United’s recent news about its PR foibles not affecting its revenue or profit, for example, Maling weighed in whether or not the brand should be worried.

“Our reaction to that would be, ‘not yet’ (in terms of it affecting revenue, profit and shareholder value). First of all, these things don't happen overnight. In our view, in every other industry we've studied, digital share catches up with market share. If Southwest is so far ahead on digital that eventually they will continue to eat away the market share of the others.”

Legacy, and holding on to operating certain ways can come into play and even some of the metrics that have been used in the past to measure success may not be as relevant.

“After having worked with mainly Fortune 500 companies over the past twenty years, they understand the digital economy but they still use old metrics. Digital companies are building share first and then monetizing. There are [legacy] companies that very much get it, but when a CMO needs to go to the board to ask for more in digital, they need proof,” noted Maling.

But it’s not so much about the scale of spending but rather the ability to spend faster and in a more sustained way. One needs only to look at the Blockbusters and Barnes and Nobles of the world to see that being behind can be a detriment. Of course, there are barriers that all brands face — again, going back to the issues of legacy — but there are very public proof points of keeping eyes on the digital prize.

“Grocery has been a sleepy one for five or six years in the digital space,” noted Maling, also pointing out that online groceries have been met with all manner of excuses on why it’s challenging. “Then, all of a sudden, Amazon buys Whole Foods. So what we're trying to do is provide some proof points for clients that they can really understand that this is a much bigger thing that they're dealing with than just one of many channels.”

For Maling and Isobar, the airline category is the tip of the iceberg. Other categories are on tap include hotels (in September), retail, energy, info tech and real estate and, the longer view is to turn the DSI into an investment framework — where a return could be determined on investment made and further understanding what long-term shareholder value could look like.

“We watch digital disruption every day,” said Maling. “With so many boards and CEOs being tied to share holder value, we hope that this being able to prove the link to share holder value, lets them think about it a little bit differently and maybe even gives them a little bit more freedom with their board to build digital share ahead of other things.”