Consumption economics master deck

Greg Hopper

Consumption Economics: The New Rules of Tech

!1

Preface: Geoffrey Moore

As business categories mature, they split in two: One for complex systems One for volume operations

!2

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

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

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

The Growing Consumption Gap

!6

!!

Why do companies

buy stuff they don’t need

(and don’t use)? !

!7

Let me rephrase that… !

Will companies continue

to buy stuff they don’t need

(and won’t use)? !

!8

Let’s look at how things work today

!9

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

Model is Ingrained

Vendors organize around it

Customers buy this way

Investors value companies this way

!11

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

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

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

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

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

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.

Thing One

!18

5 years

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

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

Thing Two

!21

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

Thing Three

!23

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

Seven Major Shifts

!25

Overview: Seven Major Shifts

1. The risk in the purchase decision will shift from the customer toward the supplier.

!26

Shift #1

!27

“No big, fat circle called the product sale.”

!28

The Effect of the Risk Switch

!29

Financial Gain


Aligned interests



Microtransactions

• New users • Added features • Content downloads • More modules • Extra computing capacity • More storage • More, more, more!

!30

Impact

Product Sale Model Pay-Go Model

Whether the pot gets filled with gold is up to us.

!31

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

!How do we develop and sell products

optimized for this

sales consumption model?

!33



2. Complexity’s long and illustrious reign will end. Simplicity will be king.

!34

Shift #2

“Customers are rapidly losing their awe of complexity.Simplicity is becoming the new hallmark of sophistication.”

OR

!35

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

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

!How do we deliver products

solutions optimized for this

sales consumption model?

!38




3. Cloud customer aggregators will shrink the direct market for tech infrastructure providers.

!39

Shift #3

OLD

VENDORS BUYERS

1,000’s 1,000’s

NEW ? 1,000,000’sCloud SPs

Dozens

Direct relationships+ channels

!40

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

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

New Way

VENDORS BUYERS

? 1,000,000’sCloud 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

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

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

!How do we deliver products

solutions optimized for this

sales consumption

distribution model?

!46





4. Big changes will come to the channel ecosystem.

!47

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

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

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





4. Big changes will come to the channel ecosystem. 5. Cheaper enterprise software will emerge.

!51

Shift #5

Enterprise software getting cheaper Salesforce.com Google Apps Office365 NetSuite Splunk Workday Amazon EC2 Dropbox/Box Twitter YouTube Etc.

!52

Amazon EC2 – Entry Level

!53

Amazon EC2 – High Use, On Demand

!54

Salesforce.com

!55

Impact

!56

Price

Are there more or less total dollars in the cloud?

Size ofthe Market





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

Shift #6

IT departments “get out of the way” of end users Centralized buying ! individual buying “Pick your PC” End users drive microtransactions

!58

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





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

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

The New Normal

!62

What’s in Trouble What’s in VogueComplex technology SimpleAsset purchases Pay for resultsInstall, integrate, upgrade Business valueMaintenance costs Turn on, turn off vendorsHard-to-use software Higher volumesCentral IT control End-user preference

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

A different perspective

!64

The Margin Wall

!65

Price ofTechnology

Cost Structure

Use ofTechnology

The Margin Wall▪ Examples:

▪ PC ▪ Cell phones ▪ Printers !

▪ When will this model apply to: ▪ Enterprise SW? ▪ IT Infrastructure?

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 ofTechnology

Use ofTechnology

A New Product!

Typical Reaction to Challenge

Good in principle…”but you can’t cut your way to greatness.”

!67

Price ofTechnology

Cost Structure

Use ofTechnology

New Product

Existential Situation

Problem: No usage, no $ !Solution: Make sure our product gets used

!68


Masters of Consumption

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.”


!69

Price ofTechnology

Use ofTechnology

Create Consumption Capabilities

A question

!70


Price ofTechnology

Use ofTechnology


What do your customers want you to be today?

Market Maturity

The Margin Wall

Market Maturity Spectrum

!71


Price ofTechnology

Use ofTechnology


Market maturity drives demand for a consumption model.

The Margin Wall

Collaboration Mobility Enterprise Apps Networking Infrastructure Desktop Office

Automation

Apple Does Both

!72


Price ofTechnology

Use ofTechnology


The Margin Wall

Collaboration Mobility Enterprise Apps

Mobile Phones Infrastructure Desktop Office

Automation

iTunes would be #130 on the F500

!73

http://www.asymco.com/2014/02/10/fortune-130/

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

New Pricing Models

“Per User, Per Month” is just the first, simple foray !Imagine this:

$ = ((Per user

per month fee

) x (Number

ofmodules

) +Premiumfeature level

charges+ (

Number ofmonthlycontent

subscriptionsx Price per

subscription +Individualcontent

downloadfees

)

Consumption Driving Opportunities

!75

The Entire Value Chain is Affected

[See note to slide.]

!76

End User Pulling Consumption Economics

Intel

Flextronics

EMC

Zynga Farmville

Facebook

Amazon Web

ServicesConsumption Economics Model

Fixed Price Model

How far above thecloud will the line go?

But Things Could Be Worse

[See note to slide.]

!77

End User Pulling Consumption Economics

Intel

Flextronics

WD

Zynga Farmville

Facebook

Amazon Web

ServicesConsumption Economics Model

Fixed Price Model

Mis-aligned Interests

!78

Financial Gain


The CapEx Model for IT Infrastructure



Aligned Interests

!79

Financial Gain


The Effect of the Risk Switch



Product Development Impacts

!80

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

Consumption Development

!82

Feature Overshoot

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

Impact

!

!

We deliberately impede our customer’s ability to consume our product.

!84

The Core Principle

!85

Customer Consumptionof Value

TimePeople-based Consumption Activities

Product-enabled Consumption Activities

Inputs

!86




Best Consumption Practices

Product Teams

Service Teams

Usage Data

Desired Consumption

Practices

Customer Priorities

End-user Priorities

Customer Input

The Big Picture

!87





Product Teams

Service Teams

Usage Data

Desired Consumption

Practices

Customer Priorities

End-user Priorities

Customer Input

Consumption Roadmap

Offe

rs

What Product Management Owns

!88





Product Teams

Service Teams

Usage Data

Desired Consumption

Practices

Customer Priorities

End-user Priorities

Customer Input

Consumption Roadmap

Offe

rs

What Development Owns

!89





Product Teams

Service Teams

Usage Data

Desired Consumption

Practices

Customer Priorities

End-user Priorities

Customer Input

Consumption Roadmap

Offe

rs

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

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

Sales Impact

!92

The Core Principle

!93




Inputs

!94





Product Teams

Service Teams

Usage Data

Desired Consumption

Practices

Customer Priorities

End-user Priorities

Customer Input

The Big Picture

!95





Product Teams

Service Teams

Usage Data

Desired Consumption

Practices

Customer Priorities

End-user Priorities

Customer Input

Consumption Roadmap

Offe

rs

What Marketing Owns

!96





Product Teams

Service Teams

Usage Data

Desired Consumption

Practices

Customer Priorities

End-user Priorities

Customer Input

Consumption Roadmap

Offe

rs

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

What Sales Owns

!98





Product Teams

Service Teams

Usage Data

Desired Consumption

Practices

Customer Priorities

End-user Priorities

Customer Input

Consumption Roadmap

Offe

rs

More Use

rs per

Month

Growth Models

!99

More Apps per User

Mor

e Fe

atur

es p

er U

ser

User #1 App #1

Three Dimensions of Growing Microtransactions

More Use

rs per

Month

Three Critical Sales Tasks

!100

More Apps per User

Mor

e Fe

atur

es p

er U

ser

User #1 App #1

#1: Win the platform sale

#2: Sell the pay-for-consumption modelto the IT and procurementdepartments

#3: Expand the platform agreementand consumption volumes by armingSales with consumption research

New Account Management Model

!101

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

Customer Support Impact

!103

The Core Principle

!104




Inputs

!105





Product Teams

Service Teams

Usage Data

Desired Consumption

Practices

Customer Priorities

End-user Priorities

Customer Input

The Big Picture

!106





Product Teams

Service Teams

Usage Data

Desired Consumption

Practices

Customer Priorities

End-user Priorities

Customer Input

Consumption Roadmap

Offe

rs

What Professional Services Owns

!107





Product Teams

Service Teams

Usage Data

Desired Consumption

Practices

Customer Priorities

End-user Priorities

Customer Input

Consumption Roadmap

Offe

rs

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

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

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

!!

Greg Hopper gregoryhopper.com

Thank you

!111