Reviewed by Jon Pittman
Think about how packaged software companies (like Autodesk, Adobe, Microsoft, or Intuit) or enterprise software companies (like SAP or Oracle) deliver capability to customers and are compensated for doing so. In both cases, the companies deliver a large load of software, and the customers pay up front, whether they need all of that capability or not. It is reminiscent of the making of foie gras. Customers are force-fed a bunch of capability, and it is then up to them to digest it. In the meantime, the software companies take payment and don't really have a big stake in customer success.
All of that is about to change with the cloud, which is why this book review is about Consumption Economics, a new book that articulately describes this kind of profound change in the relationship between customers and companies. One big impact of the cloud is to change software delivery and business models to more closely match customer consumption needs. In contrast to the current (foie gras) model, in a term-based model enabled by the cloud, customers can get exactly what they need and then purchase more capability as their needs grow. This inverts the previous economic relationship. Software companies get less compensation up front and get more only as their customers are successful in adopting and using the technology. One consequence of this change is that, in this new model, customer support and customer experience -- two "nice-to-haves" in the foie gras model -- now become imperatives for driving revenue. In other words, software companies will now be successful only to the degree that their customers are successful -- which is as it should be.
Consumption Economics describes these changes.
- Business risk will transfer from the client to the vendor -- a la carte pricing, often pennies per transaction, means tech suppliers need volume.
- Simplicity will be king -- customers want tech products to function neatly and cheaply.
- Tech firms will compete with cloud customer aggregators, e.g., Amazon will sell data storage directly, to the dismay of 3Par, EMC, and Symantec.
- The channel ecosystem will evolve -- tech giants will be able to sell directly to even the smallest of prospects.
- Software prices will decline -- note Apple's 99-cent apps.
- End users will dominate -- the popularity of electronic mobile gadget will dictate corporate IT policy instead of the other way around.
- User data will drive solutions -- information once stored on corporate servers will be in the cloud and handy to tech suppliers who can analyze "every click of every mouse on every screen."
It articulates the impact of such changes on software companies -- changes in financial models, use of customer data, marketing, sales, development, support, services, and more. The authors -- who are affiliated with an industry organization called TSIA -- describe a model of the software business of the future. One author, Todd Hewlin, is a consultant with TCG advisors, a company that has worked with Autodesk.
The power of this book is that it provides an overall point of view and a detailed model of how the cloud is changing business models and -- as a consequence -- entire companies. One might argue with some of their conclusions but that, in and of itself, is actually another positive aspect of the book: it spurs thought and discussion about the organizational and business implications of moving to the cloud.
Some of the potential downsides of the book are, first of all, that it comes mostly from an enterprise software perspective and secondly -- given its connection with TSIA -- it is a bit suspect as a marketing piece. Nevertheless, it is worth reading for Autodesk leaders because it will inspire thought-provoking discussions about how we will need to respond to the opportunity presented by the cloud.
Thanks Jon.
Thinking about business models is alive in the lab.
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