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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
Length of Product Ownership
Aligned interests
Economic value 

to the customer
Economic value 

to the vendor
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
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
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
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
Shift #3
OLD
VENDORS BUYERS
1,000’s 1,000’s
NEW ? 1,000,000’s
Cloud
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’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
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
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
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
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
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 of

the Market
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
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
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
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 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
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 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?
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!
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
Existential Situation
Problem: No usage, no $
!
Solution: Make sure our product gets used
!68
Masters of
Complexity
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.”
Masters of
Consumption
!69
Price of

Technology
Use of

Technology
Create
Consumption
Capabilities
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
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
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
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

of

modules
) +
Premium

feature

level

charges
+ (
Number of

monthly

content

subscriptions
x
Price per

subscription +
Individual

content

download

fees
)
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
Services
Consumption
Economics Model
Fixed Price
Model
How far above the

cloud 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
Services
Consumption
Economics Model
Fixed Price
Model
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
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
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
Consumption

of Value
Time
People-based
Consumption
Activities
Product-enabled
Consumption Activities
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
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
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
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
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
Customer
Consumption

of Value
Time
People-based
Consumption
Activities
Product-enabled
Consumption Activities
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
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
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
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
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
M
ore
U
sers
per M
onth
Growth Models
!99
More Apps per User
MoreFeaturesperUser
User #1
App #1
Three Dimensions of Growing Microtransactions
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
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
Customer
Consumption

of Value
Time
People-based
Consumption
Activities
Product-enabled
Consumption Activities
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
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
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
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

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Consumption economics master deck

  • 2. Preface: Geoffrey Moore As business categories mature, they split in two: One for complex systems One for volume operations !2
  • 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. 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. 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
  • 7. ! ! Why do companies 
 
 buy stuff they don’t need
 
 (and don’t use)? ! !7
  • 8. Let me rephrase that… ! Will companies continue
 
 to buy stuff they don’t need
 
 (and won’t use)? ! !8
  • 9. Let’s look at how things work today !9
  • 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. Model is Ingrained Vendors organize around it
 Customers buy this way
 Investors value companies this way !11
  • 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. 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. 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. 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. 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. 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.
  • 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. 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
  • 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
  • 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
  • 26. Overview: Seven Major Shifts 1. The risk in the purchase decision will shift from the customer toward the supplier. !26
  • 28. “No big, fat circle called the product sale.” !28
  • 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. Microtransactions • New users • Added features • Content downloads • More modules • Extra computing capacity • More storage • More, more, more! !30
  • 31. Impact Product Sale Model Pay-Go Model Whether the pot gets filled with gold 
 is up to us. !31
  • 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. ! How do we develop and sell products
 
 optimized for this 
 
 sales consumption model? !33
  • 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. Shift #2 “Customers are rapidly losing their awe of complexity.
 
 Simplicity is becoming the new hallmark of sophistication.” OR !35
  • 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. 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. ! How do we deliver products
 
 solutions optimized for this 
 
 sales consumption model? !38
  • 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. Shift #3 OLD VENDORS BUYERS 1,000’s 1,000’s NEW ? 1,000,000’s Cloud SPs Dozens Direct relationships
 + channels !40
  • 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. 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. 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. 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. 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. ! How do we deliver products
 
 solutions optimized for this 
 
 sales consumption 
 
 distribution model? !46
  • 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. 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. 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. 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. 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. Shift #5 Enterprise software getting cheaper Salesforce.com Google Apps Office365 NetSuite Splunk Workday Amazon EC2 Dropbox/Box Twitter YouTube Etc. !52
  • 53. Amazon EC2 – Entry Level !53
  • 54. Amazon EC2 – High Use, On Demand !54
  • 56. Impact !56 Price Are there more or less total dollars in the cloud? Size of
 the Market
  • 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. 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. 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. 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. 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. 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. 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
  • 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. 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. 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. Existential Situation Problem: No usage, no $ ! Solution: Make sure our product gets used !68 Masters of Complexity Masters of Consumption
  • 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. 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. 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. 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. iTunes would be #130 on the F500 !73 http://www.asymco.com/2014/02/10/fortune-130/
  • 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. 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. 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. 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. 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. 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
  • 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
  • 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. Impact ! ! We deliberately impede our customer’s ability to consume our product. !84
  • 85. The Core Principle !85 Customer Consumption
 of Value Time People-based Consumption Activities Product-enabled Consumption Activities
  • 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. 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. 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. 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. 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. 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
  • 93. The Core Principle !93 Customer Consumption
 of Value Time People-based Consumption Activities Product-enabled Consumption Activities
  • 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. 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. 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. 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. 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. 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. 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. New Account Management Model !101
  • 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
  • 104. The Core Principle !104 Customer Consumption
 of Value Time People-based Consumption Activities Product-enabled Consumption Activities
  • 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. 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. 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. 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. 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. 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