Data is Not Oil – Data is Love

Why do we still keep using the metaphors of the industrial age to describe the opportunities we see?

Data is not oil.

Data was not formed over millions of years.

Data was not extracted from deep underneath the earth’s crust.

Data is not derived from the fossilized remains of dead organisms.

Notice the words we use:

We extract data.

We mine data.

We monetize data.

We plumb the depths of the data.

These extractive industrial era metaphors create limiting beliefs, that reduce our possibilities for imagining a preferable future.

In your next brainstorm, trying to wrestle with digital business models – kill the oil metaphor that limits the imagination, upside, and optionality.

Let’s try a new metaphor for use in your next “how do we leverage digital business models” ideation session.

Data = love.

Love can be temporal.

Love can be fleeting.

But enduring love grows richer over time.

To love is to trust, to earn trust.

Love is available.

Love is accessible.

Love is not hidden away from the people that need it most.

Love gets stronger through interaction.

Love can be unrequited.

Love doesn’t always work out, and needs to be unwound.

Love needs rituals.

To feel loved is to feel heard, understood, and cherished.

Then in your next “which workflows should we replace with AI and Machine Learning” customer journey mapping exercise remember:

Humans struggle to love well.

Machines can often predict better than humans.

Most would still rather be loved by a human than a machine.

What if data helped us love.

Alexa, Siri, answer this question:

How do we imagine preferable data-informed futures with more interaction, trust, openness, and love?

How do data interactions help us not just solve problems, but be our best selves, and achieve our human potential?

 

Alphabet: Has Google Solved the Big Company Growth Trap?

This is the third in our series on FANG company business model narratives, including Facebook and Netflix (check next week for Amazon).

Typically, when companies get big, extremely mega big, $100 BN revenues big, they start to slow down.

Google is not slowing down.

Companies built on technology follow an S curve of growth. At the start of the curve, adoption is slow and development costs are high. At the inflection point of growth, a lead solution dominates and growth accelerates. Google is trying hard to find new business models for growth.

3 Years ago, the company reorganized with a holding company structure called Alphabet Financially, Alphabet reports on the progress of and split into two primary units:

  • Google, which includes the search engine and advertising business, Youtube, Android, and hardware like Pixel phones and Google Home. This division comprises 99% of revenue.
  • Other Bets, which includes Sidewalk Labs, Waymo, Verily, and other moonshot breakthrough investments. Other Bets delivers 1% of Google’s revenue

The benefit: Alphabet gets 99.5 percent of its revenue from Google and is expected this year to turn in its highest growth rate since 2011, even though its revenue will be nearly four times greater than it was then.

Google prior to the reorg has appeared to be a company spreading itself thin and over-investing in far-reaching moonshots. But by separating out how Google invests and spends on the core money-making technology (search, Youtube) vs. the future (Waymo, Fiber, Verily) investors now see more discipline and focus.

Particularly with Google’s most recent quarter, which posted outstanding gains in search advertising growth driven primarily by mobile ads.

The downside: Google is so big it’s become a target. Just last week 60 Minutes ran a story about its monopoly power and privacy policies. The stock was following the overall technology correct that started early this year when Facebook was put under the spotlight by regulators. But the day after the 60 Minutes story, the stock didn’t budge.

It’s hard to prove a theory of monopolistic harm in such a competitive industry. Despite the massive growth, Google and Facebook’s overall share of digital advertising declines as Amazon starts to take more share.

Compare Google to Facebook, and you see a company that has had more success incubating new business models in hardware, cloud storage, apps, in-app purchases, and the app marketplace Google Play.

The real test for Alphabet: will the Google dominant logic dominate as the primary mental model for how the company behaves?

Dominant logic is the disease that killed Kodak, Blockbuster, and Nokia, and it threatens every successful large-scale company facing disruption—which is all of them, including Google. The danger isn’t so much the disruption itself, a product of fierce new competition and shifts in the technology landscape; it’s the faulty mindset that hampers senior management when it’s preparing for and responding to non-linear change.

“Dominant logic consists of the mental maps developed through experience in the core business and sometimes applied inappropriately in other businesses.” —C.K. Prahalad, 

Prahalad, a management professor, was researching the failure of diversified conglomerates in 1986, not the Alphabet strategy of 2015. He found that a top executive group’s ability to manage a diversified firm is limited by the dominant general-management logic it already knows.

We’ll only know when Other Bets and Google’s non-advertising business models start to contribute to real revenue growth alongside advertising.

Jen van der Meer is the Founder of Reason Street and is an Assistant Professor at Parsons School of Design Strategies. Jen is on a mission to measure the value of everything. She believes that business models can be designed to build the future we want to see.

The Facebook Narrative: Advertising to the Max

Is there any room for business model diversification?

Yesterday Facebook announced a re-org of their management team to improve communication and put more accountability for privacy decisions. But the company also needed a reorg to deal with the growing complexity of their business.

We all thought we understood Facebook’s advertising business model until it started to reveal itself to us following the Cambridge Analytica scandal. Look under the hood at their business model timeline and you’ll see a company attempting to diversify into other forms of revenue, and business models, but finding that advertising is like bamboo – there’s no room for much else to grow and it takes over the entire back yard.

The re-org divides the company into three main divisions: the Family of Apps group (Facebook, Instagram, WhatsApp, and Messenger), a “New Platforms and Infra” group that includes AR, VR, AI, and exploration of Blockchain technology, and then “Central Product Services” which includes all of the shared services across apps and offerings.

What is Facebook up to?

In the most recent quarterly report, Facebook’s COO Cheryl Sandberg doubled down on the company’s commitment to the advertising business, and the company’s contribution to bridging the digital divide and supporting small businesses.

“We’re proud of the ads model we’ve built. It ensures that people see more useful ads, allows millions of businesses to grow, and enables us to provide a global service that’s free for all to use. The fastest way to bridge the digital divide – in the United States or around the world – is by offering services free to any consumer regardless of their circumstance. Advertising supported businesses like Facebook equalize access and improve opportunity.”

-Cheryl Sandberg, COO, 1Q2018 Earnings Call

Yet Facebook has experienced friction in the model – evidenced by the frequent strategic pendulum swings – tilting the platform in favor of users to encourage more engagement and growth, and then back to advertisers again to provide better service and targeting. See the away Beacon was launched, then canceled, then aspects of Beacon built into the ad platform outside of the public spotlight.

Yet we can see in their company history they have run many experiments to try to expand beyond into product sales and payments. Each time an experiment was run, and then canceled. The ill-fated attempt to launch a Facebook phone happened within one short year. Facebook fell back to tweaking their core product and acquisitions to achieve global domination, and therefore advertising.

Whereas China’s Weibo successfully launched a payments platform off of their core social networking app, Facebook has only seen failed experiments and then modest growth in payments. The original Facebook Marketplaces fizzled out and was recently relaunched. Facebook Credits for games was phased out. Facebook Payments is a small percentage of the company’s otherwise extraordinary growth.

FACEBOOK’S 1Q2018 REVENUE RESULTS

Does Facebook’s launch first, see user reaction, then retreat and relaunch strategy we’ve seen best position them for growth? Is advertising like bamboo – leaving little room for any other species? Will Facebook’s growth be limited by the size of the global advertising industry? Or are they able to do what few in the blockchain world have been able to achieve – successful new business models beyond advertising?

Learn more about the Advertising Business Model in our Library, read another posts preparing Facebook for the end of advertising, or read about the Netflix Business Model Narrative.

The Netflix Narrative: Subscription Superstar

Swerving and pivoting a business model story for customer joy and massive shareholder value 

Thinking of a switch to a subscription model? We have much to learn from the swerves and pivots of today’s leading subscription company: Netflix.

Of the top 5 tech companies, only Netflix depends entirely on a subscription revenue model for success, keeping it free and clear from impending regulatory threats for data usage with advertisers.

“NFLX continues to execute extremely well, emphasizing its case as the best global, secular growth story in tech.” J.P. Morgan analyst Doug Anmuth

The company at first glance appears to be executing the subscription business model flawlessly. But take a look under the hood and you see bold, risk-taking bets and swerves by the founder that continue today.

What you can see in the Netflix business model narrative is how the company adapted and subscription model by adding new levers for growth, customer experience amazement, user lock-in, and world domination.

Driver 1: From Rentals to Subscription

The first big bet was to start the company on a new media type that had just emerged: the DVD. The founders had run a few experiments with the lead technology of the day, the VHS tape, but found the format too bulky and costly to ship. Slim, durable, and lightweight, DVDs could be shipped in envelopes and the founders believed that browsing the internet would be just as effective as shopping in a store. After first attempting one-time rental fees (with no late fees) and shifted to also offer a subscription model by 1999.

Subscription, be forewarned to those admiring the model from afar, is not that attractive in the early years. Netflix had to spend to acquire content, and then spend on huge US Postal Service fees as the service grew popular but before the longevity of customer cash flows arrived. The company was increasingly unprofitable as they grew. In 2000, the founders offered the company for sale to Blockbuster, and in a true Kodak moment, the board of Blockbuster rebuffed to a sale price of $50 MM, only to declare bankruptcy 10 years later.

Driver 2: From Envelopes to Streaming

The adoption of DVDs kicked in and the company continued to grow, but Netflix kept an eye on the rise of streaming technology as the next wave of media use. In 2008, the founders started to invest in streaming as if they were a pure-play streaming company. Most companies going through digital transformation tend to favor the leading revenue generating business. Instead, Reed Hastings demoted the DVD execs off of the core management team and executed a hard shift to offer streaming experiences. Netflix’s famous “culture” philosophy of high accountability originated at this time.

The streaming roll-out was accompanied by increased prices, which caused customer protests and a decline in stock value. In the long run, however, the bet paid off. The company is the global market share leader in streaming subscribers and affords the opportunity for almost limitless global market expansion.

Driver 3: From Licensing to Original Content

As content owners started to squeeze Netflix in content licensing negotiations, incumbent media companies started to increase their investments in streaming offerings such as Hulu and HBO Go. In order to keep their subscribers and attract new customers, Netflix had to up their game and create content not seen anywhere else. The company decided to invest in original content.

The introduction of the David Fincher series House of Cards about the charming Underwood couple changed how we watch media. Providing the full series all at once, Netflix gave us the opportunity to watch the whole series in one sitting, an experience now commonly referred to as binge watching. From a subscription model perspective, Netflix amped up their ability to achieve growth and customer lock-in. After last week’s earnings call, analysts estimate Netflix’s current customer retention in the 85%-91% range.

Today the company is one of the top 5 buyers of media and plans to spend over $8 billion next year to develop original content. As you can see in the Business Model Narrative above, the decision to invest in original content was the value supercharger that has driven growth in customers and company value. To be sure, the company has taken on substantial debt in order to fuel this international expansion. One day, revenue generated by customer may start to pay ahead of content required. For now, investors carefully watch ratios of spend-to-revenue and reward Netflix for over-delivering on growth.

Driver 4: From Hollywood to Bollywood and beyond

International growth plans have been brewing for some time, and recently paid off. This past quarter, of the 7.41 MM subscribers, 5.46 million were international, and last year the company doubled its customer base despite raising prices in all regions. Netflix combines local market strategies with an understanding of “taste communities” that the company mines from actual user behavior and determines what you might like based on activities of other people that like similar shows.

Netflix plans to spread the enormous content budget on local market production, while also finding shows to back that would have deep local appeal, giving high talent local creators access to a global market. Thus, Netflix achieves a virtuous circle of subscription lock-in and growth. For now, the rate of growth justifies the costs of original content, marketing in local regions, and global expansion.

Lessons for Future Subscription Business Modelers:

The best practices of business models cannot be easily copied. It’s not just about transforming your business from box or product sales to subscription. Look back to the origin stories of the more successful subscription models and you will see key decisions. How did the company strengthen user lock-in and ongoing investment in creating extraordinary experiences, to achieve massive customer growth and high customer retention? How will your company do the same? Are you prepared for the commitment to continuous investment in the customer experience? What will you do to earn the benefits of recurring revenues – the holy grail of the subscription model?

Learn more about the promises and pitfalls of the subscription model in Reason Street’s business model library.

Predicting the Preposterous: Scenario Planning the End of Advertising

 

One day, Mark Zuckerberg, Sergey Brin, and Larry Page woke up and realized they were in the advertising business.

And they were sad.

All of that technical prowess, all of those high IQ Stanford grads, all of that bold experimentation to optimize people buying more stuff.

Sergey and Larry did something about it. They aimed at moonshots: internet balloons, working Tricorders, self-driving vehicles, eternal life, energy kites. In 2015 Alphabet was born, a creation of a new superstar CFO from Wall Street, Ruth Porat. Investors could now see what the company was spending on moonshots, verses the core advertising business, and suddenly rewarded the company with a big bump in valuation. Google’s brilliant people have the space to tinker, but all within the confines of discovering new business model opportunity for all.

It was fun to get up in the morning again.

“If you’re changing the world, you’re working on important things. You’re excited to get up in the morning.”—Larry Page

Meanwhile at Facebook Mark worked hard with his friend Cheryl to optimize the core business and imagine a better future. Facebook made bold bets on their own, buying Instagram, WhatsApp, and Oculus. Many guessed that Facebook would make the move into payments, and more physical products and other business model moves away from advertising. But  Facebook just got better at advertising.

Facebook has its own moonshot factory, “Area 404,” a reference to the error you get when a Web page can’t be found. Clever to name your innovation lab after something that does not exist. But the lab is structured in the style of the break-fast-move-things developer. Build great things first, find business model later. But that two step process is exactly what got Facebook the advertising model that may be limiting its ultimate growth.

It’s now April, 2018 and everyone who runs a major tech platform is now going to have to testify before congress for leaving their systems open to psychologically manipulative efforts and violations of user data laws. The owners of the systems are now being held accountable for not having safeguards to the full range of human behavior. Much like the car and healthcare industries, it seems that the internet is now going to get regulated. How much regulation?

Let’s prepare by developing an alternative scenario.

In foresight strategy, there are sensible futurists who generate possible scenarios, even preferable scenarios, but sometimes it’s more insightful to generate a preposterous scenario.


Preposterous Prediction: By 2020, Advertising will be outlawed globally.

I proposed this scenario to two groups at Parsons School of Design Strategies  – one undergrad and one master’s degree students.

The undergrads moaned. “What would the world be without advertising.” These students have no interest in deleting their ties to Facebook. They live on Instagram and some help cover their tuition through influencer marketing. “It would be a sad and colorless world.”

The master’s students cheered. “What a wonderful world that would be.” Having already worked in the world, they see a freeing possibility space if we imagine business models unconstrained by the need to persuade.

Yet both groups were quickly able to identify new business model opportunities:

First – ask for forgiveness, and then make a hard pivot to extreme user-centered data ownership in all data policies and internal practices. Here are 5 of 20 we came up with in a mad sticky note ideation process:

Granted, these ideas may have already wound up on stickies, crunched up and thrown on the floor of many a Facebook brainstorm. And to be sure, Google’s Alphabet structure has yet to launch a business model to rival the size and profits of the advertising core. But like Facebook’s and Google’s businesses, moonshots start small. A deliberative exercise to pivot sharply away from advertising may be the best creative constraint for both companies.

Searching, discovering, and nurturing alternative business models won’t be easy. to quote Clayton Christensen:

We’ve gotten locked into Google and Facebook. So we ask them to create a preposterous corner inside of Alphabet and 404 and accelerate the serious search for a future world that may or may not include advertising, but hopefully won’t creep us out so much. We wish them both well in their search for a more human-enlightened business model.

2018: The Year Wall Street Became Socially Active

A call to articulate your long-term view

We have this story we tell in business: a vicious loop of misaligned expectations and unrealized dreams.

  • Investors, we tell ourselves, want short-term quarterly results.
  • Visionaries have no place in large public companies because all decisions are optimized for the short term win.
  • Unicorns, companies valued at a billion dollars or more, shy away from their IPO and public spotlight.
  • Startup founders aim to take advantage of this weakness and disrupt.
  • VCs tell startup founders to aim for an exit – the moment when they are subsumed back into the hamster wheel of public company performance and short-term investor expectations.

But what if investors were to shift their time horizon to the long term, and to society?

On January 6, 2018, activist hedge fund JANA Partners and CalSTRS (California State Teacher’s Retirement System) sent a letter to Apple asking them to take responsibility for children’s cellphone use. Citing expert research the company pointed out that overuse of iPhones results in declining mental health among children and teenagers, and is linked to poor attention in the classroom, difficulty empathizing with others, depression, sleep deprivation, and a higher risk of suicide. Together JANA and CalSTRS own $2 billion in Apple stock.

Yesterday, Laurence Fink, the founder, Chairman and CEO of BlackRock, demanded that public companies must make a positive contribution to society in addition to making profits, or risk losing support from his firm. As BlackRock has over $6.3 trillion assets under management and holds the world’s largest position in companies, his annual letter is taken seriously.

We’ve seen this language before from academia, scientists, the medical community, sustainability experts, social justice advocates. Now it’s coming from an activist hedge fund, the world’s largest asset manager, and one of the largest pension funds in the US.

What’s changed?

On one side of the economy, we have the stock market reaching all-time highs and massive tax breaks creating huge cash flows for global corporations. On the other side, we have low wage growth, inadequate retirement systems, and job insecurity among the majority of people.

Fink calls it the paradox of high returns and high anxiety.

Add the failure of government to adapt and respond to issues of infrastructure, AI and automation, and continuous worker retraining. Acknowledge the sudden awareness that our addiction to technology innovation may have pernicious social and economic side effects.

Who can address these systemic challenges? Companies.

“…the public expectations of your company have never been greater. Society is demanding that companies both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”

-Laurence Fink, Chairman and CEO of BlackRock, in his annual letter to CEOS.

To be sure, the reign of the Friedman Doctrine is not over.

“There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” – Milton Friedman, 1970

Friedman was arguing a point of view, not describing the natural order of the universe, but it was a position widely adopted by investors and regulators over the last 48 years.

Is BlackRock being hypocritical?

It seems that the Wall Street establishment likes the passivity of the ETFs. Matt Levine at Bloomberg called Fink’s threat hollow, “..contribute to society or you’ll lose BlackRock’s support — rings a bit hollow since BlackRock’s index funds can’t sell.” ETFs are just indexes of funds with no active money management, so how, exactly will Blackrock tell company management to do better? Sam Zell, an investor, calls Fink a hypocrite for making what amounts to a public policy statement when BlackRock is a rubber stamping passive investor (who should stay that way, in Zell’s opinion).

Most investors still subscribe to these beliefs, and most company executives and boards fear the arrival of activist investors. Last year Nelson Peltz went after P&G, Bill Ackman went after ADP, and Ed Garen after GE. Acronyms are under attack.

What’s interesting is that BlackRock, typically known as a passive investor as the largest provider of ETFs or Exchange Traded Funds, changed their stance and began siding with Peltz and Ackman in the proxy fights with P&G and ADP. BlackRock also took an active stance against Exxon last year, supporting a shareholder proposal to enhance disclosures on climate impact and long-term strategy.

While the biggest asset manager in the world may be changing the rules of the game, it’s not like short-term activist investors are going away.

Lawrence Fink has advice for executives and company boards:

“Tax changes will embolden … activists with a short-term focus to demand answers on the use of increased cash flows, and companies who have not already developed and explained their plans will find it difficult to defend against their campaigns.”

Companies are at fault for not explaining their long-term strategy so that the context of short-term decisions can be better understood by investors.

While Fink’s letter is worth the entire read, I’ll highlight his words for your next strategy meeting:

“Your company’s strategy must articulate a path to achieve financial performance. To sustain that performance, however, you must also understand the societal impact of your business as well as the ways that broad, structural trends – from slow wage growth to rising automation and climate change – affect your potential for growth.

“These strategy statements are not meant to be set in stone – rather, they should continue to evolve along with the business environment and explicitly recognize possible areas of investor dissatisfaction. Of course, we recognize that the market is far more comfortable with 10Qs and colored proxy cards than complex strategy discussions. But a central reason for the rise of activism – and wasteful proxy fights – is that companies have not been explicit enough about their long-term strategies.

… But when a company waits until a proxy proposal to engage or fails to express its long-term strategy in a compelling manner, we believe the opportunity for meaningful dialogue has already been missed.”

What does this mean for your company? The hidden killer of innovative ideas and bold visions is the fear of the activist investor. CEOs remain torn between staying the course of predictable performance and taking longer-term bets that increase risks. They believe that investors are wary of this kind of change. But investors are more open to risk than CEOs believe. The principle idea that drives the hedge fund industry is that well-managed risk (and greater risk well leveraged) yields a greater return.

In your next board meeting, innovation offsite, or budget planning session, review whether your company has publicly articulated your vision, your moonshot, and your path to get there. Investors are more likely to want more investment in potentially disruptive business models if it’s part of a long-term play.

Investors are now becoming more active in understanding how you’ll achieve not just shareholder returns, but the needs of society, community, and the environment will If your strategy is not visible, adaptive to the changing environment, and open for discussion, it’s time to act.

Jen van der Meer is the Founder of Reason Street and is an Assistant Professor at Parsons School of Design Strategies. Jen is on a mission to measure the value of everything. She believes that business models can be designed to build the future we want to see.

You can explore the Business Model Library, read about The Business Model Growth MapWhich One Page Strategy Tool Works BestDo You Suffer from Value Proposition ConfusionThe Customer Pain ScaleIf You Have Innovation in Your Job Title, The Non-Linear Growth Competency Gap, and Models that We Live By

2018: The Year We Unlearned

Let’s start this year with a beginner’s mind.

Tap into our rookie smarts.

Shed the crustiest skin.

Slough away the thickest callouses.

Admit, for once, that we don’t know how this year is going to unfold: more unprecedented weather, politics, business transformation, and cultural change.

recent study published by NC State’s Management School revealed key risks and concerns of board members and senior execs in 2018.

#1 on the list: The rapid speed of disruptive innovations outpacing the organization’s’ ability to compete without significant changes to business models.

#2 on the list: The resistance to change might restrict organizations from making necessary adjustments to the business model and core operations.

Tech disruption, business model adaptability, and resistance to change are ranked higher than cybersecurity, weather disruptions, macroeconomics concerns, and global geopolitical risk.

But we can’t address the threat of disruption, #1, without overcoming our fear and resistance to change, #2.

Especially when the fear of disruption is actually more damaging than actual disruption.

A quote from the past from a late futurist tells us how to approach 2018:

“The illiterate of the 21st century,” Alvin Toffler wrote, “will not be those who cannot read and write, but those who cannot learn, unlearn and relearn.”

It’s a double negative to drive home the point.

Alternatively put, those that survive and thrive will be able to learn, unlearn, and relearn.

Let 2018 be the year we began knowing we didn’t know the answer, questioned rigid certainty, and celebrated unlearning.

KPIs: Boxes to Digital Service Models

The Hardest Transformation: Changing What Your Measure

 “If you cannot measure it, you cannot improve it” – Lord Kelvin

“You are what you eat.” – Anthelme Brillat-Savarin 

 “You can’t manage what you can’t measure.” – Peter Drucker

 “You are what you measure.” – Anonymous

Imagine Kelvin, Drucker, and Brillat-Savarin sitting down to a meal prepared from a Blue Apron subscription box. What would they think of today’s digital business models, tapping into troves of data, with more moving parts and seemingly endless opportunities to measure?

When industrial-era companies attempt to start a new business, or transform into digital services businesses, adopting new mindsets is often the hardest part. The primary dominant logic of the firm must change starting with the core unit of economic value.

Shifting from Products to Services

In a box-based business, the box is the primary unit of economic value quickly followed by income statement metrics. In a discussion about quarterly results, you’ll hear questions like: “What’s the order uptake?” “What’s our contribution margin?” “How can we improve our channel margins?” Whether selling through retail or an established sales force, box-based executives going to bed at night thinking about boxes and margins. “How many more boxes can we sell?” “How do we improve our margin?”

In a digital services business, you’ll notice a big difference.

The unit of value is no longer the box. It’s the customer relationship. Quarterly discussions all center around the KPIs of customer health. The questions across many digital service business models are the same: “How is retention trending?” “What’s our lifetime value?” “What’s is the cost of customer acquisition?” Whether selling razors and razor blades, digital storage, online games, cloud-based design software, or subscription clothing-in-a-box, digital services executives go to bed at night thinking about customers. “How do we get people to stay longer, refer their friends, and value us more?”

Customer Drivers to Digital Service Models: 

What’s driving this shift to digital services and direct relationships? A number of technical and cultural trends indicate that customers seek digitally-driven service offerings:

From things to services: In an attempt to simplify and declutter, we seek experiences that are temporary, rather than assets we have to store.

From ownership to rentership: 20-30 somethings who grew up during the recession see cars, mortgages and other big-ticket items as a risk rather than investment. Companies who survived the recession shifted heavy capital expenses (Capex) to lighter operating expenses (Opex), a trend which helped further drive cloud service adoption.

From linear to circular: A younger generation is showing interest in how things are made, re-used, and re-energized, avoiding direct-to-landfill waste. Companies are taking more responsibility for the full lifecycle of their products, and services business models help them create and capture value throughout.

From buying as a pleasure to buying as a time-suck: For daily needs like food and beauty products, we want time-saving convenience which reduces our cognitive load. For business buyers, it’s easier to try a free version of the software and selling up vs. going through extended procurement cycles.

From passive consumption to outcomes-based performance: Evolving in the health and other sectors, key stakeholders are demanding tighter partnerships and pay-for-outcomes contracts. Digital service models are better prepared for plug-and-play multi-partner combinations.

Decoding the KPIs of Digital Business Models:

]The # 1 You Need to Measure: Retention (and its Opposite, Churn)

In the leading digital business model archetypes of today, retention is the name of the game. Companies ranging from Netflix to Dropbox to Stichfix to Dollar Shave Club make more money from existing customers staying with the service than from net new customers. One of the drivers of such aggressive exponential sales growth for these companies is the later stage result of compounded loyal, repeat customers returning for more.

The metric for measuring churn: the # of churned customers / the total number of customers in any given time period.

Retention curves come in different shapes and sizes. In a healthy business, the retention curve flattens out as customers get value from repeatedly using the service. A few people cancel after the first month. Then some more people cancel in the following months as they decide whether or not to keep paying. Then at some point over the next 12-18 months, those left become long-time committed customers and the churn stops.

In an unhealthy business, customers find ways to cancel and get out of their contracts until there are no long-term customers left. Blue Apron, the subscription box company mentioned at the start of this post, is suffering from poor retention rates.

The Growth Metric: CAC to LTV Ratio

In the first dotcom era, companies famously paid a fortune to acquire “eyeballs” but failed to turn users into paying customers. In the digital business models of today, you do want to know if you can make more profit from your customers than it costs you to acquire them. You’ll need to determine two basic numbers:

LTV = the Lifetime Value of a typical customer

CAC = the Cost to Acquire a typical Customer

Lifetime Value: Best viewed through the lens of churn and retention rates following cohorts of customers, lifetime value estimates the average: Lifetime = 1/Customer Churn

Cost of Customer Acquisition: Understand the total costs you spend to acquire users and turn them into customers. Add up all of the critical sales and marketing expenses, including the cost of salaried salespeople, content creators, external SEO specialists. In your calculation, only count net new customers that can be attributed to that period’s acquisition efforts (don’t count your lifetime value returning customers). CAC = Total cost of Sales and Marketing in a period / # of Net New Customers Acquired.

While many debate the formulas, methods of measurement, and heuristics, a number of fast revenue growth companies have followed some variation of the following ratio:

1:3

CAC: LTV

This means for every $3 in lifetime value, $1 is spent on customer acquisition, to achieve a successful sales growth curve.

Cohort Measurement:

In digital business models, cohort measurement is how you determine patterns and trends over time, and attributing key acquisition activities to the effect on lifetime value and payback period. A cohort is a set of customers grouped by common characteristics.

Google Analytics now shows customer cohort by time period (when users first came to your site). Other marketing analytics dashboards give you the ability to group by size spend, acquisition channel, and other attributes.

The Perils of Digital Service Models:

Digital services revenues from models like SaaS or subscription box sales are slow to build at first, with cash outflow far outpacing cash inflow in the early stage. You can kill a digital service business model by stepping on the gas before you’ve achieved high customer retention rates. In the startup world, there is natural attrition- companies fail to get Series A or survive the jump to Series B if they cannot prove they have created a service that customers love.

Strong digital service businesses make sure they’ve achieved service-market fit measured in lower churn or higher retention.

When larger incumbents invest in digital service models, they often miscalculate the growth phase, imagining that the launch phase is similar to the product launch of a box or product-focused market scale-up.

Net Present Value is hard to calculate accurately before you begin because of the high likelihood of failure at the moment of scale-up. Retention and marketing leverage (CAC: LTV) are such critical drivers in the model you will benefit from funding those businesses that demonstrate their ability to deliver the best metrics and tinker over time, rather than trying to predict these results ahead of time.

Worse, incentives stay aligned to product-first box-centric KPIs, with stronger carrots for short-term larger-ticket sales rather than recurring revenue contracts.

The most successful incumbent strategies have involved carefully planned licensing-to-services transformations, for example, Adobe shifting to SaaS models and Microsoft shifting to SaaS, PaaS, and IaaS models.

The Promise of Digital Service Models:

Once the business is established and takes off, it can grow very quickly as new customers are added to cohorts of returning customers, and recurring revenue predominate. Companies need measurable systems in place to track all of the moving pieces.

Product development is not an upfront-only spend, but instead becomes a steady and increasing investment in new service development. The work of agile service development is accompanied by agile marketing, with fully connected systems in place, product and marketing teams have strong visibility into the business.

Growth becomes a function of achieving customer milestones, and the business focused on how to perpetually create value through the customer’s view. Digital service companies thrive when they love their customers more than they love the product and service they are delivering. They aim for a North Star vision that improves the lives of the customers they serve. Ultimately, in a digital service business, she who amasses the largest tribe of high lifetime value customers wins.

Continue on to read more and to learn how to decode the KPIs of digital business models.

Jen van der Meer is the Founder of Reason Street and is an Assistant Professor at Parsons School of Design Strategies. Jen is on a mission to measure the value of everything. She believes that business models can be designed to build the future we want to see.

KPIs: Apples vs. Orange is the New Black

Ratings, Subscribers, and Netflix vs. the Media Execs

Do industrial era executives have blind spots when trying to understand the success of disruptive digital-first competitors?

Let’s take the case of media and the metrics of ratings vs. subscribers.

Traditional TV and cable execs are still struggling to understand content consumption habits from video-on-demand, gaming consoles, cable set-top box, streaming, app-based, and old school broadcasting. If they can’t keep an accurate track of ratings, they don’t get paid by their advertisers.

Just yesterday Nielsen announced they would supply ratings data for subscription video-on-demand (SVOD) services. Now, SVOD companies can report ratings to their advertisers, and get paid. The ratings data won’t be made public, however.

While 8 major network studios will get the data, Netflix is opting out. According to Variety, a Netflix spokesman said: “The data that Nielsen is reporting is not accurate, not even close, and does not reflect the viewing of these shows on Netflix.”

Why does Netflix not want to know the ratings of their shows?

1/ Different Economics Drive Netflix

Netflix just ended their third quarter with astounding revenue growth.  The company reports subscriber info alongside their financial performance, topping out at 104 MM subscribers, adding 5.3 MM in total (blowing past the 4.4 MM projected). They plan to raise prices, as well, because they believe the value they are creating for customers is increasing.

The company will use the money from subscribers and increased prices (and lots and lots of debt) to increase in original content spend to $8 billion next year.This is more content than any media company has ever acquired in the history of media. More than ESPN, even, and they don’t buy sports viewing rights.

We’ll have to rely on Nielsen for this data, which shows that Netflix is the juggernaut amongst VOD companies:

% of US Households that subscribe to VOD.

51.2% Netflix

28.6 % Amazon Prime

12.7% Hulu Plus

Why don’t they report ratings?

Because ratings don’t matter in a digitally-delivered subscription model.

It’s not their business.

Netflix has different economics.

The formula:

(existing recurring subscribers + net new subscribers) x increased prices / ($ 8 billion of content)

“Generally speaking, these kinds of traditional ratings don’t matter in a world where success isn’t measured by specific time slot. They are especially irrelevant on a subscription service that doesn’t sell ads. We measure success by subscriber numbers and hours people watch, and we do release those figures quarterly.” – a company spokesman from Netflix said in 2016, the last time old media tried to out Netflix’s ratings with dubious measurement technology.

Their revenue growth is driven by more subscribers, more valuable content, and now higher prices, a virtuous circle.

Competing against Netflix’s phenomenal growth is hard. Competing when you are using different metrics makes it near impossible.

But there is another reason why Netflix may shy away from ratings.

2/ Ratings = negotiating power

Content creators, actors, writers, and producers still operate in both worlds: Netflix AND ad-supported content.

The Duffer Brothers of Stranger Things, Aziz Ansari of Master of None, Jenji Kohan of Orange is the New Black all have to negotiate their contract renewals along with cast members and other talent. In the traditional TV world, ratings translated into increased contract values for producers, directors, and actors.

Do you remember the multi-million dollar salary negotiations for the Friend’s actors or for The Sopranos?

We have to go back in time to the Golden Age of Hollywood to remember how this all started out. Actors had year-long contracts and were part of a “stable” of rotating cast members on the sets of Metro Goldwyn Mayer, Warner Brothers, RKO and other studios. The studios controlled all of production and became dominant, with actors, producers, and other players in the system unable to negotiate better salaries or fees if their content was a huge hit.

When the studios were broken up following antitrust negotiations, these types of yearly contracts fell out of vogue. The star system was born, and major actors, producers, directors, and othertalent became free agents, free to negotiate higher pay for bigger audiences.

To demonstrate how big your audience is, however, you need ratings.

I recently spoke with a young content creator who had a small production deal with Netflix. He is desperate to know the ratings of his show. Knowing the ratings is a KPI from his perspective, and would help him then negotiate with Netflix, and also with other more established companies who factor ratings into the value of his work.

When Nielsen announced ratings data for streaming video on demand content, Megan Clarken who oversees video measurement products said, “Being able to follow assets across all these forms of consumer consumption, being measured apples to apples by a third party independent measurement is incredibly important for the studios, for the licensors or the rights holders of content.”

Perhaps, then, Netflix the newest newest thing that is based on the oldest idea in the media industry, and takes us back closer to the Golden Age, when the studios had all of the power.

What does this mean for incumbents trying to understand digital disruption?

It’s critical not to be blinded by the dominant logic KPIs that drive your growth. Netflix is a powerful disruptor in the media business. Subscribers x prices / content is truly the best game in town right now.

At the same time, all industries are transforming digitally, and power is the name of the game. While ratings fit the business model of ad-supported business models, ratings also gave creators more power to negotiate. Be wary of digital saviors who stamp on the metrics of the past.

Negotiating New Business Models and Culture in an Age of Connected Machines

What do these recent events have in common:

In all of these cases, connected devices are reshaping business models. These new models are in turn shaping the cultural expectations for what we expect of the things in our lives. We used to just think of things as we bought, owned, controlled. Things that were silent. Things that didn’t talk back. Things that didn’t keep a record of everything we say and do.

But now these things are things of the internet. The concept of the internet of things, #IoT, is misleading. It sounds like we’re still in charge of these things, who now are connected to the internet. Instead, the nature of these newly connected device business models questions the nature of ownership, access, and who’s in charge.

We change the business model first, without thoughtful intention for how these connected things change our lives.

How do we expect the things in our lives to behave?

In this first post, let’s take a look the Police Body Cam, and how this connected device business model and how new behaviors shape our ethical understanding of people and things.

Police Body Cameras brought to you by Taser

The business model pitch: give police departments free body cameras. We’ll collect the largest dataset in policing to create and own the digital evidence market. Freemium devices meet data-as-a-service.

Taser is changing their corporate name to Axon, which will continue to sell Tasers under the Taser brand, but is reinvesting cash to become a software and data company. The freemium camera product is an opportunity to sell “evidence seats” within their growing services: Evidence.com, records management, fleet services. Axon found that the adoption of their body cameras was slowed down by inertia and regulatory issues. They are offering the camera for free, for one year, including infrastructure to handle the footage and online training.

The customer experience: the promise of the body cams is not just the opportunity for evidence collection. The founder and CEO Rick Smith  told Techcrunch that the real opportunity is in reducing dreaded desk work. “Cops spend two-thirds of their time as a data entry clerk,” Smith said. “And when it comes down to it, no one trusts those reports anyway! We have much better information coming from the camera. It contains everything you would put in the report.“ “We believe we can cut that bureaucratic load, and if we can do that, we’ll effectively triple the world’s police force.”

The cultural implications:  The rise in body cams was in part fueled by controversial police shootings, the Black Lives Matter movement, and was proposed as a way to hold police accountable. Michael Brown’s family campaigned for every police officer wear a body camera after a grand jury acquitted the police officer who shot their son.

Yet the cameras are on the cops, facing us. “The reality here is that the camera is not pointed at the police. It’s pointed at the public,” Malkia Cyril, Director of the Center For Media Justice told The Verge. Local NYC community groups have protested a recent plan to start a bodycam pilot program. “Structurally, it provides mechanisms to protect abusive police officers and not the public,” said Joo-Hyun Kang, director for Communities United for Police Reform, as reported in at PoliceOne.

We can look to philosophers from two centuries ago and futurists to describe the cultural conundrum of today. In 1838, philosopher Jeremy Bentham imagined the Panopticon: a system of perpetual surveillance. Bentham imagined changing the architecture of prisons, schools, factories, and hospitals. How it works: in a central tower the watchman can turn and view everyone in their cells.

Panopticon

In 1975, Francis Foucault described the asymmetrical power dynamic of the Panopticon. For the prisoner, “he is seen, but he does not see; he is an object of information, never a subject in communication.”

Jump forward 40 years + later and the panopticon is present in nanny cams, NSA data surveillance, security cameras, and CCTVs.  But the advent of handheld video cameras and cellphone cameras happened. From Rodney King to Philando Castile, bystander videos turned the cameras on power itself, filming police action and killing for all to see.

Futurist Jamais Cascio described this multi-way surveillance the Participatory Panopticon. In 2005 he envisioned a world where “what we see, hear, and experience will be recorded wherever we go… We will carry with us the tools of our own transparency, and many, perhaps most, will do so willingly, even happily.”

From Culture back to Business Model

There is no evidence of senior executives of Taser / Axon referencing Bentham or Foucault. The cultural implications of the free body cam pose new questions for our growing panopticon. The business model choice to give the cams away for free is significant: for shareholders and citizens.

To be sure, not all shareholders are buying the business model story. this shift which involved a huge increase in R&D spend and a potentially long and expensive path to breakeven. Gary Milne penned a warning at Seeking Alpha, saying the company was, in fact, building a hugely sticky product with a competitive moat, but that with poor expense management Axon keeps pushing out the horizon of return for the long-term investor. The recent choice to give cameras away for free only extends that horizon.

Nor are all police departments. Taser / Axon failed to win the NYPD’s open bidding process for a pilot program of body cameras. After Mayor Bill de Blasio prohibited “stop-and-frisk” procedures by the NYPD, he then promised that every NYC officer on patrol would be outfitted with a body camera by 2019. Taser / Axon lost the most recent bid for a pilot program of body cameras, which went to Vievu, a startup. Vievu promised more stringent, encrypted and secure cloud storage of evidence, outside of the confines of the NYPD.

In NYC, the choice of startup Vievu has not mollified community activists, who continue to ask tough questions about the technology, methods, procedures, and implications through legal opposition.

The freemium device move from Taser / Axon is a move aiming to disrupt the disruptor from within. These business model moves between Vievu and Taser / Axon pose new questions. If digital evidence data is stored outside of government in private company clouds, who owns that data? Who can access that data? Who pays each time evidence is subpoenaed from law enforcement, the courts, or requested by citizens?

In sum, connected devices will change how we connect, communicate, govern, and live.

The business model choices we make have inherent cultural implications.

Companies with foresight will need to think several steps ahead in their business model moves. The desired to give the hardware away today may prompt strong community and activist responses regarding data ownership and access. As Facebook struggles to govern violence footage on Facebook Live, how will companies like Taser / Axon and Vievu respond to public criticism of digital evidence gathering?

How are you planning ahead in your business model moves? Is there a cultural shift that implicates your business model innovation process? What foresight or sensemaking activities do you practice as a company to understand these cultural shifts? We’re curious to hear your thoughts.