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Consumption economics master deck

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Consumption economics master deck

  1. 1. Greg Hopper Consumption Economics: The New Rules of Tech !1
  2. 2. Preface: Geoffrey Moore As business categories mature, they split in two: One for complex systems One for volume operations !2
  3. 3. Preface: Geoffrey Moore As business categories mature, they bifurcate: One for complex systems One for volume operations ! Before that, only the complex system existed, shutting out consumers and small businesses (think mainframe computers) ! The rise of _____-as-a-Service business models signal a fundamental shift in markets – to the volume operations IT model !3
  4. 4. Preface (con’t) Role of Information Technology is to provide one or more functions for a business: Differentiation Expansion (growth) Productivity (efficiency) ! The complexity of enterprise IT exists – but responsibility for managing the complexity is shifting from the customer to the supplier !4
  5. 5. Preface (con’t) Implications are profound
 System vendors are commoditized and disintermediated Service suppliers become the central interface to customers The IT function inside an enterprise becomes a service broker rather than a technology operator Barrier to entry for new applications (i.e. “services”) drops to near zero !5
  6. 6. The Growing Consumption Gap !6
  7. 7. ! ! Why do companies 
 
 buy stuff they don’t need
 
 (and don’t use)? ! !7
  8. 8. Let me rephrase that… ! Will companies continue
 
 to buy stuff they don’t need
 
 (and won’t use)? ! !8
  9. 9. Let’s look at how things work today !9
  10. 10. What Vendors Get Paid For !10 Development costs Hardware, third-party software, and licenses Marketing Sales salaries and commissions Pre-sales consulting Service and support Training
  11. 11. Model is Ingrained Vendors organize around it
 Customers buy this way
 Investors value companies this way !11
  12. 12. How Are Benefits Realized? Product must work People must be trained to use it Workflows must be designed around new product
 
 All this before any benefit is gained! Who is responsible for making this happen?
 
 The customer! !12
  13. 13. This creates conflicting interests !13 Financial 
 Gain Length of Product Ownership The CapEx Model for IT Infrastructure Economic value 
 to the customer Economic value 
 to the vendor
  14. 14. Observations The average effective usage rate of enterprise software is only 54 percent.
 Only 14 percent of enterprise software deployments are rated as “very successful” by the IT execs who own them.
 Of the nearly $14 billion in consumer electronics that were returned by customers to retailers in the U.S. during 2008, only five percent were actually broken. !14
  15. 15. Impact on Vendors Software upgrade rates are slowing Percent of features in use are declining Product sales cycles are lengthening Customers struggle to digest all the product features they already own
 ! Bottom line: Technology refresh rates in many product categories are slowing as “good-enough IT” is becoming a reality
 !15
  16. 16. More Problems for Customers High implementation costs (sometimes five times or more than the product cost!) Lack of interoperability Extraordinary complexity Frustrated business leaders High cost of ownership High switching costs Poor end-user adoption Hard-to-measure business benefits !16
  17. 17. But… …it worked (for vendors) ! …customers were increasingly unhappy and looking for something to change: “A steady, growing pile of customer frustration – dead wood waiting for a match” !17 The “match” came via three things over 15 months in 2007-8.
  18. 18. Thing One !18 5 years
  19. 19. Impact of Thing One Short-term Brilliant and brutal execution of major cost reductions ! Long-term Customers do more with less They demand that vendors put more “skin in the game” because they no longer had the staff (or desire) to manage all that complexity ! Which led to Four New Thoughts about IT !19
  20. 20. Four New Thoughts 1. Lower costs = lower complexity 2. There is such a thing as “good enough” technology 3. Customers don’t want to take all the risks They don’t want to pay up front anymore They want to pay ONLY when they capture business value 4. Suppliers need to provide staff to customers 
 Bottom Line: A new tech economic model !20
  21. 21. Thing Two !21
  22. 22. Impact of Thing Two Technology benefits can be delivered when needed, and paid for as consumed Reliable High-performance Inexpensive ! Essentially, a utility model emerged in place of a product model !22
  23. 23. Thing Three !23
  24. 24. Impact of Thing Three Control moved out of exclusive domain of IT ! Apps let you “build your own phone” They called it the iPhone, not the IT-Phone! ! ! Led to the “consumerization of IT” !24
  25. 25. Seven Major Shifts !25
  26. 26. Overview: Seven Major Shifts 1. The risk in the purchase decision will shift from the customer toward the supplier. !26
  27. 27. Shift #1 !27
  28. 28. “No big, fat circle called the product sale.” !28
  29. 29. The Effect of the Risk Switch !29 Financial 
 Gain Length of Product Ownership Aligned interests Economic value 
 to the customer Economic value 
 to the vendor
  30. 30. Microtransactions • New users • Added features • Content downloads • More modules • Extra computing capacity • More storage • More, more, more! !30
  31. 31. Impact Product Sale Model Pay-Go Model Whether the pot gets filled with gold 
 is up to us. !31
  32. 32. The Cloud Completely Shifts Risk Old sales saying: “The most expensive place to finish is second.” All the cost, none of the revenue ! New saying: “Most expensive place to finish could be first.” If customers fail to adopt your consumption model, you make no money. ! ! Bottom Line: Front end costs are now on supplier’s balance sheet. !32
  33. 33. ! How do we develop and sell products
 
 optimized for this 
 
 sales consumption model? !33
  34. 34. Overview: Seven Major Shifts 1. The risk in the purchase decision will shift from the customer toward the supplier. 2. Complexity’s long and illustrious reign will end. Simplicity will be king. !34
  35. 35. Shift #2 “Customers are rapidly losing their awe of complexity.
 
 Simplicity is becoming the new hallmark of sophistication.” OR !35
  36. 36. Impact: Cloud Reduces Complexity Huge, upfront capital outlays vanish Step functions of capability is out; variable +/- is in
 Overall IT costs are coming down Commoditization; standards; “software-defined”; open Vendor differentiation becomes minimal
 “Some assembly required” by customer disappears
 Disruptive refresh/upgrade cycle disappears !36
  37. 37. Commoditization Definition: A commodity is some good for which there is demand, but which is supplied without qualitative differentiation across a market. ! “Tech is not immune to commoditization – it is just harder to spot. The phenomenon occurs when one product becomes close enough to its competition that customers start to buy on price alone.” !37
  38. 38. ! How do we deliver products
 
 solutions optimized for this 
 
 sales consumption model? !38
  39. 39. Overview: Seven Major Shifts 1. The risk in the purchase decision will shift from the customer toward the supplier. 2. Complexity’s long and illustrious reign will end. Simplicity will be king. 3. Cloud customer aggregators will shrink the direct market for tech infrastructure providers. !39
  40. 40. Shift #3 OLD VENDORS BUYERS 1,000’s 1,000’s NEW ? 1,000,000’s Cloud SPs Dozens Direct relationships
 + channels !40
  41. 41. Old Way VENDORS BUYERS 1,000’s 1,000’s ▪ Ratio of tech platforms to customer organizations was ~1:1 ! ▪ No two customers ever shared same stack ! ▪ Every customer made independent decisions at every layer Direct relationships
 + channels !41
  42. 42. End User Applications BI Collaboration Application Platforms Databases Security Servers Storage Networking Operating Systems Product Sales (CapEx) Model !42 Enterprise IT Most Decisions Few Decisions Software Platform Infrastructure Macro-Sales Transactions to the IT Department OEM
  43. 43. New Way VENDORS BUYERS ? 1,000,000’s Cloud SPs Dozens ▪ IaaS suppliers insert themselves between suppliers and their customers ▪ Opposite of what Dell did in PCs – this is intermediation at scale ▪ Big IaaS providers will enjoy economies of scale, leaving only niche markets for small IaaS suppliers !43
  44. 44. End User Application Platforms Databases Security Servers Storage Networking Operating Systems Selling to Service Providers !44 Cloud Service Providers Software Platform Infrastructure Mega-Sales Transactions to Huge IaaS Providers OEM
  45. 45. Impact Selling to large IaaS providers will be unpleasant They are very sophisticated They have leverage They are also your competitors with end users (They may choose to build IT themselves, too.) ! This will drive prices and profits down, and minimize differentiation by suppliers !45
  46. 46. ! How do we deliver products
 
 solutions optimized for this 
 
 sales consumption 
 
 distribution model? !46
  47. 47. Overview: Seven Major Shifts 1. The risk in the purchase decision will shift from the customer toward the supplier. 2. Complexity’s long and illustrious reign will end. Simplicity will be king. 3. Cloud customer aggregators will shrink the direct market for tech infrastructure providers. 4. Big changes will come to the channel ecosystem. !47
  48. 48. Shift #4 Upending the channel ecosystem Today !48 Reseller Category Customer’s Product Business Customer’s Service Business Reseller’s Primary Incentive Reseller’s Service Skills Reseller’s Business Expertise GSI Desirable for tech company to go direct Desirable for tech company to go direct Professional service revenue Sophisticated global multi- vendor High VAR/Dealer Undesirable for tech company to go direct Undesirable for tech company to go direct Product and maintenance revenue Basic, local Low Global Systems Integrator vs. VARs/Dealers
  49. 49. Changes in the Channel Cloud marketed directly to customers large and small ! massive channel conflict Cloud services don’t require what channel provides Vertical market focus and business process expertise become the new high-value offerings IT departments lose control of end user data to suppliers
 Biggest impact is disintermediation of SMB-facing VARs !49
  50. 50. Impact With cloud offerings, tech companies can sell directly to SMB customers
 Channel needs to shift to solving business problems, not technology problems “The one thing [SMB customers] can’t get in the cloud is the attention of a consultant who can diagnose and solve a business problem.” This is not their strength !50
  51. 51. Overview: Seven Major Shifts 1. The risk in the purchase decision will shift from the customer toward the supplier. 2. Complexity’s long and illustrious reign will end. Simplicity will be king. 3. Cloud customer aggregators will shrink the direct market for tech infrastructure providers. 4. Big changes will come to the channel ecosystem. 5. Cheaper enterprise software will emerge. !51
  52. 52. Shift #5 Enterprise software getting cheaper Salesforce.com Google Apps Office365 NetSuite Splunk Workday Amazon EC2 Dropbox/Box Twitter YouTube Etc. !52
  53. 53. Amazon EC2 – Entry Level !53
  54. 54. Amazon EC2 – High Use, On Demand !54
  55. 55. Salesforce.com !55
  56. 56. Impact !56 Price Are there more or less total dollars in the cloud? Size of
 the Market
  57. 57. Overview: Seven Major Shifts 1. The risk in the purchase decision will shift from the customer toward the supplier. 2. Complexity’s long and illustrious reign will end. Simplicity will be king. 3. Cloud customer aggregators will shrink the direct market for tech infrastructure providers. 4. Big changes will come to the channel ecosystem. 5. Cheaper enterprise software will emerge. 6. IT departments will “get out of the way” of end users. !57
  58. 58. Shift #6 IT departments “get out of the way” of end users Centralized buying ! individual buying “Pick your PC” End users drive microtransactions !58
  59. 59. End User Applications BI Collaboration Software Sales (OpEx) Model !59 Enterprise IT More Decisions Fewer Decisions Software Micro-Sales Transactions to the End User OEM
  60. 60. Overview: Seven Major Shifts 1. The risk in the purchase decision will shift from the customer toward the supplier. 2. Complexity’s long and illustrious reign will end. Simplicity will be king. 3. Cloud customer aggregators will shrink the direct market for tech infrastructure providers. 4. Big changes will come to the channel ecosystem. 5. Cheaper enterprise software will emerge. 6. IT departments will “get out of the way” of end users. 7. Tech companies will capitalize on user-level behavioral data. !60
  61. 61. Shift #7 Capitalize on user-level behavioral data ! In a consumption model, the end-user and the tech company are connected in real time Usage is actively collected, monitored, and mined ! ! Monitor it, measure it, monetize it. !61
  62. 62. The New Normal !62 What’s in Trouble What’s in Vogue Complex technology Simple Asset purchases Pay for results Install, integrate, upgrade Business value Maintenance costs Turn on, turn off vendors Hard-to-use software Higher volumes Central IT control End-user preference
  63. 63. Revisit Commoditization Definition: A commodity is some good for which there is demand, but which is supplied without qualitative differentiation across a market. ! “Tech is not immune to commoditization – it is just harder to spot. The phenomenon occurs when one product becomes close enough to its competition that customers start to buy on price alone.” !63
  64. 64. A different perspective !64
  65. 65. The Margin Wall !65 Price of
 Technology Cost 
 Structure Use of
 Technology The Margin Wall ▪ Examples: ▪ PC ▪ Cell phones ▪ Printers ! ▪ When will this model apply to: ▪ Enterprise SW? ▪ IT Infrastructure?
  66. 66. So We Use “The Product Playbook”! ▪ High switching costs keep customers in the fold…
 ▪ …but breed resentment ! ▪ Cloud dramatically lowers switching costs Masters of Complexity !66 Price of
 Technology Use of
 Technology A New Product!
  67. 67. Typical Reaction to Challenge Good in principle…”but you can’t cut your way to greatness.” !67 Price of
 Technology Cost 
 Structure Use of
 Technology New Product
  68. 68. Existential Situation Problem: No usage, no $ ! Solution: Make sure our product gets used !68 Masters of Complexity Masters of Consumption
  69. 69. The Consumption Model “The next generation of profitable growth in tech is about growing end-user consumption and profitably selling micro-transactions to enterprise consumers.” Masters of Consumption !69 Price of
 Technology Use of
 Technology Create Consumption Capabilities
  70. 70. A question !70 Masters of Consumption Price of
 Technology Use of
 Technology Masters of Complexity What do your customers want you to be today? Market Maturity The Margin Wall
  71. 71. Market Maturity Spectrum !71 Masters of Consumption Price of
 Technology Use of
 Technology Masters of Complexity Market maturity drives demand for a consumption model. The Margin Wall Collaboration Mobility Enterprise Apps Networking Infrastructure Desktop Office Automation
  72. 72. Apple Does Both !72 Masters of Consumption Price of
 Technology Use of
 Technology Masters of Complexity The Margin Wall Collaboration Mobility Enterprise Apps Mobile Phones Infrastructure Desktop Office Automation
  73. 73. iTunes would be #130 on the F500 !73 http://www.asymco.com/2014/02/10/fortune-130/
  74. 74. Learn to Love Micro-transactions Needed: A high volume of micro-transactions Per app Per user per month Per feature level Per print or per document Per GB data stored Per hour of resource used Per purchase Per data service subscribed Per content downloaded Tens of dollars per transaction…NOT tens of thousands of dollars !74
  75. 75. New Pricing Models “Per User, Per Month” is just the first, simple foray ! Imagine this: $ = (( Per user
 per month
 fee ) x ( Number
 of
 modules ) + Premium
 feature
 level
 charges + ( Number of
 monthly
 content
 subscriptions x Price per
 subscription + Individual
 content
 download
 fees ) Consumption Driving Opportunities !75
  76. 76. The Entire Value Chain is Affected [See note to slide.] !76 End User Pulling Consumption Economics Intel Flextronics EMC Zynga Farmville Facebook Amazon Web Services Consumption Economics Model Fixed Price Model How far above the
 cloud will the line go?
  77. 77. But Things Could Be Worse [See note to slide.] !77 End User Pulling Consumption Economics Intel Flextronics WD Zynga Farmville Facebook Amazon Web Services Consumption Economics Model Fixed Price Model
  78. 78. Mis-aligned Interests !78 Financial 
 Gain Length of Product Ownership The CapEx Model for IT Infrastructure Economic value 
 to the customer Economic value 
 to the vendor
  79. 79. Aligned Interests !79 Financial 
 Gain Length of Product Ownership The Effect of the Risk Switch Economic value 
 to the customer Economic value 
 to the vendor
  80. 80. Product Development Impacts !80
  81. 81. Why MRD’s are “boat anchors” Customers don’t wait Competitors don’t stand still First Customer Ship (FCS) is just the start Comprehensive list of “requirements” ! ! Result: Massive feature overshoot (and often late) !81
  82. 82. Consumption Development !82 Feature Overshoot
  83. 83. Why we get feature overshoot Customers ask for it ! To trump the competition (The most features at the lowest price wins, right?) ! Because we can do something, we do it Source: Don Norman, “The Design of Everyday Things” !83
  84. 84. Impact ! ! We deliberately impede our customer’s ability to consume our product. !84
  85. 85. The Core Principle !85 Customer Consumption
 of Value Time People-based Consumption Activities Product-enabled Consumption Activities
  86. 86. Inputs !86 Customer Consumption
 of Value Time People-based Consumption Activities Product-enabled Consumption Activities Best Consumption Practices Product Teams Service Teams Usage Data Desired Consumption Practices Customer Priorities End-user Priorities Customer Input
  87. 87. The Big Picture !87 Customer Consumption
 of Value Time People-based Consumption Activities Product-enabled Consumption Activities Best Consumption Practices Product Teams Service Teams Usage Data Desired Consumption Practices Customer Priorities End-user Priorities Customer Input Consumption Roadmap Offers
  88. 88. What Product Management Owns !88 Customer Consumption
 of Value Time People-based Consumption Activities Product-enabled Consumption Activities Best Consumption Practices Product Teams Service Teams Usage Data Desired Consumption Practices Customer Priorities End-user Priorities Customer Input Consumption Roadmap Offers
  89. 89. What Development Owns !89 Customer Consumption
 of Value Time People-based Consumption Activities Product-enabled Consumption Activities Best Consumption Practices Product Teams Service Teams Usage Data Desired Consumption Practices Customer Priorities End-user Priorities Customer Input Consumption Roadmap Offers
  90. 90. The new development model (aka “Lean” and “Agile”) !90 Feature Available Users Use In-Product Upsell Consumption Innovation Intelligent Listening New Feature Units DevelopedRapid Cycle Time
  91. 91. Intelligent Listening vs. MRD MRD – Anticipate every need 2-3 years away – Customer surveys – Focus groups – Advisory councils Intelligent Listening – Based on actual usage – Need to fully instrument our systems – What gets used? – What else gets used? – In what sequence? – What doesn’t get used? – Are there linkages? – Can we drive usage? !91
  92. 92. Sales Impact !92
  93. 93. The Core Principle !93 Customer Consumption
 of Value Time People-based Consumption Activities Product-enabled Consumption Activities
  94. 94. Inputs !94 Customer Consumption
 of Value Time People-based Consumption Activities Product-enabled Consumption Activities Best Consumption Practices Product Teams Service Teams Usage Data Desired Consumption Practices Customer Priorities End-user Priorities Customer Input
  95. 95. The Big Picture !95 Customer Consumption
 of Value Time People-based Consumption Activities Product-enabled Consumption Activities Best Consumption Practices Product Teams Service Teams Usage Data Desired Consumption Practices Customer Priorities End-user Priorities Customer Input Consumption Roadmap Offers
  96. 96. What Marketing Owns !96 Customer Consumption
 of Value Time People-based Consumption Activities Product-enabled Consumption Activities Best Consumption Practices Product Teams Service Teams Usage Data Desired Consumption Practices Customer Priorities End-user Priorities Customer Input Consumption Roadmap Offers
  97. 97. The new marketing model !97 Feature Available Users Use In-Product Upsell Consumption Innovation Intelligent Listening Customer usage priorities Product management priorities Customer Service Learning Usage data analysis Rapid Cycle Time Consumption Roadmap Offer Development Targeting Strategy
  98. 98. What Sales Owns !98 Customer Consumption
 of Value Time People-based Consumption Activities Product-enabled Consumption Activities Best Consumption Practices Product Teams Service Teams Usage Data Desired Consumption Practices Customer Priorities End-user Priorities Customer Input Consumption Roadmap Offers
  99. 99. M ore U sers per M onth Growth Models !99 More Apps per User MoreFeaturesperUser User #1 App #1 Three Dimensions of Growing Microtransactions
  100. 100. M ore U sers per M onth Three Critical Sales Tasks !100 More Apps per User MoreFeaturesperUser User #1 App #1 #1: Win the platform sale #2: Sell the pay-for-
 consumption model
 to the IT and procurement
 departments 
 #3: Expand the platform agreement
 and consumption volumes by arming
 Sales with consumption research
  101. 101. New Account Management Model !101
  102. 102. Implications for Sales !102 What’s Hot? What’s Not? The Business Buyer The IT Buyer Selling into OpEx Budgets Selling into CapEx Budgets Business Expertise Technical Expertise Vertical Territories Geographic Territories Selling Results Selling Features Outcome-Based Contracts Fixed-Price Contracts Business Process Slides Demoing Features Your Consumption Model and Service Capability Your Complexity and Underlying Architecture “Apps Market” Maintenance Contracts Social Media Knowledge Social Graces
  103. 103. Customer Support Impact !103
  104. 104. The Core Principle !104 Customer Consumption
 of Value Time People-based Consumption Activities Product-enabled Consumption Activities
  105. 105. Inputs !105 Customer Consumption
 of Value Time People-based Consumption Activities Product-enabled Consumption Activities Best Consumption Practices Product Teams Service Teams Usage Data Desired Consumption Practices Customer Priorities End-user Priorities Customer Input
  106. 106. The Big Picture !106 Customer Consumption
 of Value Time People-based Consumption Activities Product-enabled Consumption Activities Best Consumption Practices Product Teams Service Teams Usage Data Desired Consumption Practices Customer Priorities End-user Priorities Customer Input Consumption Roadmap Offers
  107. 107. What Professional Services Owns !107 Customer Consumption
 of Value Time People-based Consumption Activities Product-enabled Consumption Activities Best Consumption Practices Product Teams Service Teams Usage Data Desired Consumption Practices Customer Priorities End-user Priorities Customer Input Consumption Roadmap Offers
  108. 108. Sample Temporary Measures: Planning !108 • Business objectives • Segmentation model • Competitive analysis • Consumption model development • Change management plan • Implement temporary measures • CRR economics • Customer migration • New customer adoption • Investment and revenue projections
  109. 109. Sample Temporary Measures: Planning !109 • Business objectives • Segmentation model • Competitive analysis • Consumption model development • Change management plan • Implement temporary measures • CRR economics • Customer migration • New customer adoption • Investment and revenue projections
  110. 110. Summary Radical changes in customer behavior and expectations of technology underway Move to utility: “Microtransactions” and risk-sharing Aligns vendor interests with customer interests !110
  111. 111. ! ! Greg Hopper gregoryhopper.com Thank you !111

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