Thesis project

While competing on price, reconfiguring your cost structure is the most obvious road to success.

However, while competing with Free, lowering your costs might give you money to engage in other activities but it won’t give you an advantage in the marketplace.

The result of this is that many companies have stopped focusing on minimising costs and turned to maximising end user value creation. This doesn’t just apply to free, but to all industries where price no longer is as important as it used to be.

Right now I’m trying to figure out how this affects our perception of value, what happens when there is neither price nor cost?

As Chris Anderson notes in Free! it is true that you can’t compete with free in the economy of bits in the long run. If your marginal cost is close enough to zero, either you or your competitor will stop charging for the service. With the cost of storage, bandwidth and processing power halving each year, this day will inevitably come.

So, how do you compete with a good enough service such as YouTube that offers high functional quality, rich features and solves the users problem (a demand for video clips) for free? One thing is certain, price is taken out of the equation. In order to charge your users for a similar service, you would have to offer a hefty amount of extra value and somehow make sure that YouTube just don’t copy your model and offer it for free.

What you need to do is look at each part of the process that adds value to the end product for the users and firstly decide on if you could do it cheaper than your competitor (e.g. if you could stream high quality videos cheaper than YouTube) or, if in fact the customer is adding this value himself. If you can find a value-adding task that is in fact executed by the user in your competitors business, it might prove to be a deal changer. If you are able to carry out this task for the customer instead, that might be just the extra value you add to your service that beats the competition (note that this is without competing on price).

The most classic example of the opposite of this thinking is what IKEA has done to reconfigure the value constellation. By letting the buyers perform a value adding task (assembling the furniture), IKEA is able to sell it cheaper. The genius of this is that IKEA figured out that the customers value their money more than the time it takes to assemble the furniture, therefore customers take on part of the value creation while still feeling that they have done a bargain. This reconfiguration enables IKEA to keep a lower price than the competition.

But, think about what would happen if furniture was free. Would you choose to buy furniture from IKEA where you have to do some of the value adding yourself or would you prefer to get ready assembled furniture? Suddenly, what was a competitive advantage has turned into a major disadvantage.

So, how are users part of the value creation on YouTube? The most obvious example would be in their quest to find relevant and interesting material. Much of the value a user gets from using YouTube actually comes from his/her own ability to find relevant stuff. What if a competitor came up with a recommendation engine that took care of this value adding and served relevant stuff without the user having to participate in the process?

Suddenly we have a situation where the user pays for neither service, but gets more value (as in output of value minus participation in the value creating process) from the new service. That might be enough for a major shift in the competitive landscape.

“…in an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes. What information consumes is rather obvious: it consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it.”
- Herbert Simon on attention economics

Found in Free! by Chris Anderson which seems to be the major inspiration for the beginning of this week

While reading through Chris Anderson’s widely hyped book “Free: the future of a radical price“, I can’t help myself to think that the focus of the book is somewhat misleading.

As Chris notes, free is nothing new, it’s just a way of disconnecting the cost of the product and the customer’s direct expenses. What is new is that where the customer someway or the other always had to pay in the end, when the cost of digital goods approaches zero, there is nothing to pay. The cost of the product is zero and therefore the price can approach zero too.

This is an extremely interesting shift, but it is not driven by price but by cost. Its the cost structures that are changing and that is what has the power to affect an entire industry. Price is something entirely different and even though the end customer pays zero, the costs have to be covered.

New ways of re-configuring the value chain (such as analysing the users behaviour and presenting information accordingly instead of hiring an editor) and lowering costs (such as replacing humans with algorithms) are the real game changers here.

Still, Free is a really interesting book and I’m sure to get lots of inspiration from reading it!