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New business models – based on book Consumption Economics

New business models – based on book Consumption Economics by J.B. Wood, Todd Hewlin and Thomas Lah

We can all see how business environment is changing around us. Old models that was controlled by strong corporations that build their power on proprietary technologies and control of competition with complex business solutions that lock customers in is under pressure.

One reason why this is happening is presented in the book Consumption Economics, The New Rules of Tech written by J.B. Wood, Todd Hewlin and Thomas Lah. They claim that previous models where customers are willing to take bigger part of risk and cost of transaction was based on customer estimation that future reward is so high on so appealing, that customer were willing to accept enormous risk and vendors were able to achieve high margins and had control in the market. This formula is probably useful for explanation of status of all high growing industries.

But all this lead to situation where in IT industry customers were actually proud owner of technology that could deliver much more then they were able to use. Because of that we are now looking at the situation that authors of above mentioned book interpret as The Consumption Gap. This means that technology companies are adding features and complexity to their products faster then customers have the ability to consume them. Because of that we are faced with growing gap between product potential and its value to customers.

So because of some changes in business environment – mainly more cost sensitive environment due to global crisis, customers started to look for alternatives to old capex based model where they were taking all the risk. In that time cloud computing and iPhone low cost application models started to grow on corporate and consumer area and that shifted mentality of IT users to better utilise resources and only look for what they need and try to shift risk of success to suppliers.

Suppliers started to work on customer using their solution rather then buying them  – no usage, no money. If before it was known that the most expensive place to finish is second (due to high selling cost and no revenue), now it is changing to most expensive place to finish is first (since cost of winning are there but if there is no usage, there is no revenue).

Because of this move of business models, where IT support is not anymore only domain of IT department but customer end users are gaining more and more decision powers, since business requirements are driving demand, and because general development of technology is so high, that some of the strongest companies in IT area are now consumer focused, more and more customer end user are so aware of technology potential that they demand simple, cheap, transaction based pricing solutions.

All this lead to strong IT companies coming close to their Margin wall, territory where cost of development and sales of solutions are becoming higher then price.

And that is a changing stone where businesses need to think about new business models and so called Consumption model, where risk is shifted to producers and they need to fight for customer usage and they need to bring value with their product to end users in order for them to use their product and pay for it. They can’t just sell something to customer at fix price and earn their money on support charges, because consumers are embracing this pay as you use model, producers need to adopt and work with consumers in a different way. Companies that will be successful at this will on a long run earn probably even more.

But in order for companies to be successful in this new reality, they need to adjust their own organisation, they need to adapt in a way that they will embrace micro-transaction, high volume, low pricing environment. They need to build products that will have adjustment capabilities, they need to increase service parts of their companies, use data they will have about customer for better utilisation of their product and their sales department will need to evolve in high skilled, consultative, business oriented, customer focus team.

But in order to do that, they need to clean their “garage” first. Traditional development of new products in technological companies was based on estimation about potential end user requirements and trying to develop a product that could do “everything”. This usually lead to over developed product with high capability, high targeted utilisation, high price but in reality very low actual utilisation…which lead into big Consumption gap. And in reality since companies tend to keep big product portfolio in order to show strength, this leads to situation where 10% of companies product bring 90% of revenue. You need to prioritise, you need to cut products that are not performing, shrinking, you need to focus your development and funds and sales to winners.

So if you want to move away from traditional development and you want to use new technology capabilities you need to develop based on consumption demand, you need to develop your products into multi-layer machines, with built-in capabilities of capacity or functionality upgrade which can be triggered directly by users, so that you can reduce R&D cost, focus them on what customer wants and in doing so you can substantially decrease your time to market.That is called Consumption development.

By launching products into this new consumption driven market, you are getting valuable feedback all the time from launch. In order to use this feedback, you need to create good Listening spots, that could be already part of product. But in order to use information correctly you need to build Consumption research in a proper way. By using proper segmentation, by defining best value practices for consumer, learning proper adoption practises consumer uses, what kind of offer practices work and how consumer reacts to different feature qualities. And then use this research to drive your growth by enabling customer to get what they really need and when they need it, and then charge them for usage.

All this leads to transformation of sales forces at companies, especially at tech companies, since cloud, complexity and risk shift is forcing them to rebuild their sales force. Sales force that would be capable of winning platform sale, selling new consumption based model to all department from IT to procurement and business and once they do that, they need to continue expanding volumes of transaction by using consumption researches they have.

Why it is important that “new” sales are more business consultants then sales person, since in cost sensitive business environment, new business budgets are usually created by business lines and not cost lines.

One of new methods that “new” sales persons can use in changed environment is called Provocation based selling. You show the problems and you address solutions, you don’t talk about your solution, customer ask for it.

And with shift in Sales organisation we also need to adjust whole company structure, since in new model we need to not only sale main platform, we actually want to grow functionality of this platform at customer, since in world of micro-transactions, revenue comes when consumer are using our solutions and not when we plant it into their environment. So in order to increase companies influence into period after initial sales, we need to transition from traditional model, where sales part of company was finished when contract was sign, and after implementation we only have small support activities, into model where sales is responsible for initial platform sales, but our service guys should take a role of active advocate in the accounts and until we develop complete self-service solutions, move customers into increased usage.

Actually the whole process of solutions adoption should change so that sellers main services are used in the beginning and end (purchase and value realisation) of solution adoption cycle and not in the middle (installation, integration, deployment) as it was done before.

In terms of time..all this changes are happening and new Consumption model will be new reality. For companies to adapt to them, they need to estimate how much time they have before they hit Margin Wall and how high this Wall is.

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