2. WHY ECONOMICS IN PRODUCT MANAGEMENT?
¡ What is scalability in a business model?
¡ Can my business compete? How do I compete?
¡ What are the features I should launch which are really valuable for my company?
¡ What do buzzwords like: scale, asset light, rocket growth, really mean?
¡ Align with Organization goal and move to a strategy role.
3. PLATFORMS: AN INTRODUCTION
Examples of Platforms What is a Platform?
Platform businesses are
those which create value
by facilitating an
exchange between one or
more “sides”
“
”
Broad Definition
4. THE THREE FACTORS THAT MATTER
Economies of Scale: Only economies of scale in cost is being considered here.
¡ How much does it cost you to take on one extra unit?
1
2
3
Network Effects: When customer value for the product increases when one extra person
uses it.
¡ What type of network effects do I have?
¡ How can I make network effects more powerful?
Differentiability: When you are able to create a unique space in the user’s mind about
your product. It’s not internal, it’s just about the perception of the customer.
¡ How can I differentiate?
5. ECONOMIES OF SCALE
Demand Supply Curve
Supply Demand
The Demand-
Supply curve
we have all
come to
know so well
What exactly is the supply curve?
The supply curve is just the marginal
cost curve.
Marginal cost? The cost incurred on an
extra unit.
You’d be willing to sell that extra unit at
any value above the marginal cost of
making that unit.
Why is Supply Curve increasing? Where are the economies of
scale?
Economies of Scale do
exist. When diseconomies
of scale start appearing,
the marginal cost curve
goes up.
Drivers: Managerial, Cost of
RM, Cost of Capital, Huge
Capex etc.
Marginal Cost
Scalability -> Size of Company
Are there supply curves like this? Highly Scalable?
Marginal Cost
Natural Monopolies
Most tech companies are
asset light. Most tech
companies have the cost
structure of a natural
monopoly. And are asset-
light (low assets compared
to value of operations)
When the cost falls when one extra unit is serviced/produced
6. NETWORK EFFECTS
When the value of the service increases when one extra person uses it
Cross Side vs Same Side Network
Effects
Global vs Local Network Effects
Which ones are stronger?
Same Side network effects are stronger than Cross side because
there is a continuous cycle while in the other case there’s an
equilibrium
Global network effects are stronger than local network effects
because of higher number of users
Cross Side: When value is created for a user on one side
by onboarding a user on the other side. E.g. Uber
Same Side: When value is created for a user on the
same side by onboarding a user on the same side. E.g.
Facebook
Global: When value is created by onboarding a user
globally e.g. AirBnB
Local: When value is created for a user when the other
user is local e.g. Uber
Strong network
effects exist in case
of most platforms
7. DEMAND CURVE DUE TO NETWORK EFFECTS
What is the Demand
Curve?
Cumulative Willingness
to Pay.
Everyone has their own
demand curve, when all
that adds up, it becomes
a cumulative demand
curve.
Demand Curve
Critical Mass
Increasing Willingness to
Pay due to powerful
network effects
Diminishing Network
Effects, demand curve
returns to normal
8. DIFFERENTIABILITY
When you can create a unique space in the customer’s mind
Unique Value
Proposition
Unique Features
Is making unique features in technology products easy?
Uber launches a
new feature
Product
Managers in Ola
& Lyft will try to
immediately
begin reverse
engineering the
feature
Why do I even want to copy a feature?
Cost of convergence
(copying)
Does Windows go and copy every feature of
another OS?
Customer Switching Costs
Differentiability depends on Customer Switching
Costs & the Cost of Convergence (Copying)
9. Demand Curve Marginal Cost
Decided by the extent
of Network effects
Decided by the extent
of Economies of Scale
PUTTING IT ALL TOGETHER: THE DESTINATION
Can the
company price
discriminate?
Yes.
Theoretically,
they capture the
entire surplus
For now, let us
assume that the
company is a
monopoly
Assumption
Demand Supply Curve
Supply Demand
Natural Monopoly
Supply Demand
These are more powerful than even Natural Monopolies,
which tend to be highly regulated
10. PUTTING IT ALL TOGETHER: THE JOURNEY
For now, let us
assume that the
company is a
monopoly
Assumption
Competition
Scale Economies
Bigger Player is
able to price lower
Bigger player
grows faster
Network Effects
No diseconomies
of scale
There is no space
for competition,
the player
captures the
entire market
Bigger Player adds
customers faster
Bigger player
grows faster
Can you
differentiate in the
space?
If yes, you can still
create space for
yourself.
If no, then the
market turns into
a monopoly
The player which
reaches “critical
mass” first, will
become the
dominant player
Generally, Platforms have high economies of scale, strong network effects and low differentiability.
Hence, conditional to the above, the stable equilibrium of platforms is a monopoly
11. IMPLICATIONS
Why do you want Rocket Growth? Why the cash burn?
To reach the critical mass faster. To ramp up growth like crazy so that you reach the point
where your network effects fire up.
1
2
3
Is my company/product scalable?
Look for unending economies of scale. Make your company scalable.
As a smaller player in such a market, what should I do?
Create a differentiator. Try to increase switching costs for customer. Introduce features that
would make it costly for another competitor to copy. Create space for yourself.
12. EXERCISES
Which company does it make sense to expand overseas at an early stage?
AirBnB or Uber?
1
2
3
You are thinking of starting up. In your chosen market, a bigger player already
exists. The switching costs are low and the convergence costs are high.
Should you enter the market? Can you create space?
You are thinking of starting up. In your chosen market, there is no new player.
The switching costs are low and the convergence costs are low. What should
you do?
13. EXERCISES
When should go for a cloud service provider and when should you not go for a
cloud service provider?
4
5
You are a PM in Flipkart. Amazon has approached you with a potential
collaboration. They want to partner to create a tool which lets suppliers
manage their inventory and pages etc. through a common portal on all e-
commerce platforms. What do you do?
14. CASE STUDY – GOOGLE & THE SEARCH MARKET
1
2
3
Economies of Scale
Network Effects
Differentiability
Yes, there are economies of scale. Google File System is
highly scalable.
Yahoo was "unable to keep up with increasing demand
due to complex & inefficient infrastructure and rising
vendor costs“ : Techcrunch
Strong Global Network effects exist.
Same side network effects exist: Every additional
search improves results for everyone
Cross side network effects exist: More people
searching, more the businesses are interested
Convergence costs? Low
Switching Costs? Low
Even though Google was not the first move or the bigger player, higher scalability ensured that it
overtook Yahoo. Google is a monopoly in the search market.
15. CASE STUDY – AMAZON & E-COMMERCE
1
2
3
Economies of Scale
Network Effects
Differentiability
Amazon is not exactly asset light. Warehousing and
supply chains are expensive. However, compared to the
normal retail business the economies of scale are still
better and reaches diseconomies later. It has great
economies of scale in procurement however.
Amazon has country-wide Network effects
Amazon has Strong Cross Side Network effects:
One side needs to be continuously incentivised.
Convergence costs? Low
Switching Costs? Low, but High for Amazon
Amazon over the years has made some very smart decisions. First is Prime. Second is Cloud. Third is Ads.
16. CASE STUDY – UBER & RIDE HAILING
1
2
3
Economies of Scale
Network Effects
Differentiability
Yes, there are economies of scale. Higher capacity
utilisation of cabs, and software that can be deployed
globally means the economies of scale exist. However,
economies of scale are not as strong as Google.
Uber has very weak Global Network Effects
Uber has Strong Local Network Effects
Uber has Strong Cross Side Network Effects: One
side needs to be continuously incentivised hence
it undermines the Economies of Scale. Negative
Same Side network effects
Convergence costs? Low
Switching Costs? Low
There will be local monopolies or duopolies (specific cities will have a dominant player). What should Uber do?
17. PRICING
Flat Rate
• Single monthly or annual price
• Pros: Easier to sell &
communicate
• Cons: No price discrimination
and no nuance to sway them
Pay as You Go
• Pricing scales with usage e.g. AWS.
• Usage could be anything- time, memory
etc.
• Pros
• Reduces usage barriers
• Accounts for “heavy user” costs
• Cons
• Harder to forecast costs and
revenues
• Disconnects value from the product
Tiered Pricing Strategy
• Make number of packages appealing
to various segments
• Pros
• Appeal to multiple personas
• Price discrimination (lesser
money on the table)
• Upselling Route
• Cons
• Too much choice can be
confusing
• “Heavy User” risk
18. PRICING
Per User & Active User pricing
• Charge per user and active
user
• Pros: Simplicity, Predictable
revenue forecasts, revenue
scales with adoption
• Cons: Doesn’t reflect real
value, users have incentive to
cheat and higher churn rates
• Active user pricing reduces risk
of high adoption for the
customer, however, it doesn’t
matter for small businesses
(Slack does this)
Per Feature Pricing
• Use features as your value metric
• Pros
• Upgrade incentive is clear
• Some features may require higher
resource delivery
• Cons
• Packaging problem (Do you know
which customer values which
feature most?)
• Are you paying for features you
don’t want?
Freemium Pricing
• Free to use software supplemented by
paid packages
• Pros
• Foot in the door
• Viral potential
• Cons
• Revenue killer (packaging
problem)
• Devalue core service
Entirely referenced from: Link
