Book review: Consumption Economics

Consumption Economics, The New Rules of Tech, paints a detailed picture of the future of the technology business, combining vision with practical steps to realize it.

Chapter 1, How Good We Had It, observes that purchased tech products are traditionally paid for up front, while usage starts (much) later, which means the risk is on the buyer to derive value from the purchase.

Since vendors add features to their products faster than customers can consume them, we have a Consumption Gap: the difference between the potential value of a product and the value that is actually realized.

Customers are changing their attitude towards the Consumption Gap and its risk. The economic downturn encourages businesses to cut costs, cloud computing shifts the buying model from CapEx to OpEx, and the iPhone’s App Store has brought choice to computing.

Chapter 2, Shifting Clouds and Changing Rules, explains that the risk of monetizing the investment in tech products will shift to vendors, who will have to survive off micro-transactions (MTs). The cloud will bring prices down to the point of retail-like price wars. Vertical market focus and business process expertise will become the new high-value service capabilities.

Influence will shift from IT departments to end users, who are the ones making the MTs. Tech companies are not used to deal with them, but real-time usage data will change that and lead to the discovery of best-practice utilization patterns.

Chapter 3, Looking Over the Margin Wall, explains that tech is not immune to commoditization. Price competition will kick in and margins will decrease. When we hit this Margin Wall, the only viable strategy is to start over with a new product. The cloud’s low switching costs are decreasing the runway to commoditization.

Things look differently on the other side of the Margin Wall. Revenue is based on MTs, so no usage means no money. The Consumption Gap is now the provider’s problem: they need to make sure their product’s advanced features get used. They must build sophisticated Consumption Models.

Chapter 4, Learning to Love Micro-Transactions, argues that in an OpEx model, volume matters and vendor must learn how to drive MTs. This means more features per user, more apps per user, and more users per month. Even on-premise solutions will move to OpEx models.

We’ll need automated ways to sell electronically in the context of the user’s workflow. We can learn a lot from games, where users get constant feedback, are recognized with rewards and status, and are part of a community in which to share and compete.

Customers must learn this new model as well. Their costs will become less predictable, and purchasing power will trickle down to end users. The role of the IT department will change with new policies like Bring Your Own Device (BYOD).

Chapter 5, The Data Piling Up in the Corner, argues for aggregating and analyzing usage data to build Consumption Models that drive usage. Cloud computing enables that, since all user interactions are recorded on the server.

We need to identify Consumption Roadmaps, best practices for consuming value from our products, and we need our product to guide the end user according to priorities set by the customer.

This requires an e-commerce layer in our products and our organization. Service and field staff will be armed with detailed usage data to better help customers.

Chapter 6, Consumption Development: The Art and Science of Intelligent Listening, explains that with deployment in the cloud, we no longer need to get every thing right from the start, but we can also no longer sit back after a release. We need to actively drive usage based on usage statistics.

Intelligent Listening predicts new wanted features from usage data and monitoring of social media. Consumption Innovation executes on this learning through capabilities to simplify usage and guide users along predetermined paths. In-Product Up-sell bakes in recommendation engines and offer-management capabilities to present users with new features they are likely to want.

Implementing these changes cost money. To fund them, get rid of products that don’t generate profit, as they take up development time and effort.

Chapter 7, Consumption Marketing: Micro-Marketing and Micro-Buzz, describes how the shift to decision making by end users and the data we have about their behavior will change marketing.

Usage data must be combined with information from services, development, and road maps to form Best Consumption Practices.

Marketing must segment users, identify high value capabilities per segment, figure out what sequence of adoption worked to get there, how to guide others along the same paths, and when and where to trigger offers. Offers need to bring real value to the users to drive trust.

Chapter 8, Consumption Sales: After a Great Run, the Classic Model Gets an Overhaul, posits that the old sales model that was based on standardization breaks down with increased complexity of the product and individuality of its users. Instead we need consulting skills and service-oriented compensation models and salespeople with business expertise.

The new sales steps are: win the platform sale, sell the pay-per-use model, and expand the platform agreement by arming the sales force with consumption research.

Chapter 9, Consumption Services: Will They Someday Own “The Number”?, describes how most current revenue from services is in activities like installation, implementation, integration, and maintenance, and how those will largely go away in the cloud.

The customer service and support team is our best bet for driving MTs, because of their cost structure and remotely operated tools. Their role will have to change from minimizing cost to maximizing customer value by adding new inside sales capabilities.

The Account Services Organization (ASO) will closely tie support with professional services and customer engagement. Expertise will shift away from the technical and towards the business to better help the customer gain value from the system. The ASO will need to learn how to sell MTs and build the Consumption Road-map.

Chapter 10, Customer Demand vs. Capital Markets: How Fast Should You Transform?, talks about the balancing act between transforming ourselves and meeting Wall Street’s short-term expectations. Timing is crucial, as we need some runway to fly over the Margin Wall.

The chapter describes some ways to “buy runway” to get you through the transformation period.

Chapter 11, The “S” Stands for Services, argues that the future of technology is in services and that the cloud is all about services.