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.

The Business Model Growth Map

You know you need to clarify where your business model is headed.

Whether you are just starting, scaling into growth, or you are the market share leader, you are always looking new ways to generate value.

The most valued companies today never stop creating new business models.

Profitable innovators change their business models twice as frequently as their peers.

> 90% of all business model innovations recombine existing ideas and concepts from other industries.

This sounds harder than it looks. How many times have you heard from your advisors, partners, investors, or senior management that you should “be more like Netflix.” Or maybe you’ve been told, “Let’s be the Uber of __________.” “You should be the Dollar Shave Club of _________.”

Right, so easy. All you need is 100 million dollars and a dream.

Maybe you genuinely have a vision for how to be the leading data aggregator in your field, the largest 2-sided marketplace, the most profitable subscription company in your category. But you don’t have everything at the start. Startups lack resources and leverage. Big companies lack the digital capabilities to move to new models. How do you get from here to there?

Here’s a tool we’ve been using at Reason Street with startups and corporate innovators with great success: The Business Model  Growth Map.

Business Model Growth Options

On the first axis you have time, and firm value. On the second axis you have the two biggest value drivers in digital business models:

  • Value of Data: creating value through data builds competitive edge
  • Trust of Network: attracting the largest, most engaged, high trust relationships with customers builds category leadership status

The goal is to develop scenarios to help understand which decisions will create the greatest value, measured in insights, data value, and trust.

The purpose of the Business Model  Growth Map is to acknowledge you have more than one path to achieve your vision. You have options.

You can use this tool as a foresight exercise, a competitive analysis tool, and it’s a way to understand business model innovators and how they’ve grown.

The Business Model Options Growth Map Steps: 

Let’s take a look at a startup meditation wellness company: MindTether. The founders of MindTether take meditation seriously, and they are concerned that the current app experiences provided by companies like Calm.com and Headspace are too singular, too self-oriented, too lonely. They want to create a shared experience and build a movement around meditation. Their core idea: a meditation social network.

They host a Business Model Journey session, where they define key scenarios and options for how to get started on the way to their big idea.

5 Steps to Breakthrough Business Model Options

  1. Define the North Star
  2. Explore business model archetypes
  3. Create multiple business model growth options
  4. Backcast to the present moment
  5. Build, measure, learn and generate new options

1/ Define the North Star

The first step calls upon your visioning and foresight skills. What is the ultimate business model in the sky, your big vision, your true north? Imagine 10 years from now. You succeeded and achieved your vision. You attracted the people, the resources, and the runway to achieve your vision. You have the largest group of meditators on the planet who trust you, engage with you and other customers everyday.

What happened? How were people’s lives changed? How many people were impacted by your company’s products, services, and ecosystem?

Business Model Growth Map North Star

MindTether sees a future in which 200 MM customers from all over the world participate in localized meditation groups every day, resulting in better overall health and wellbeing of the communities they serve. They have the largest subscription-based company, while members who cannot afford subscription are subsidized by health plans, workplaces, schools – because their benefit to society is so clear. That’s their big vision.

2/ Explore Business Model Archetypes

Next tour through relevant business model archetypes. Look beyond competitors and your core industry for inspiration to the rising business models of today’s economy. Ask team members to bring ideas to a business model generation session.

MindTether looks at the way business model archetypes are playing out in their core arena – mindfulness apps and meditation groups that meet in person. They look at brain training companies, and business models from health tech, and review multiple business model archetypes.

Remember the best business model innovations are just combinations of currently existing business models – so encourage your team to start sketching their ideas.

Reason Street's Business Model Library of Common Archetypes

REASON STREET’S BUSINESS MODEL LIBRARY OF COMMON ARCHETYPES

Take a tour through our Business Model Library for inspiration.

3/ Create multiple options

After you are inspired by other business model archetypes, host a brainstorming session to generate multiple business model growth options. Encourage ideas inspired by transformer-style mashups of archetypes and companies. Did you ever play garanimals as a kid? Allow for strange sounding combinations in your session.

Call on those with the closest customer proximity to develop value proposition concepts that address unmet needs and pain points.

You can ask for sketches, concepts, use the Business Model Canvas or Value Proposition Canvas, or focus your energy with this “Value Proposition Adlibs” tool.

Value Prop Adlib

Choose the best ideas (use group voting or filtering exercise) based on which business models generate the greatest value.

MindTether considers three primary options:

  1. Real world subscription: people join flashmob-type group meditations in the real world
  2. Virtual subscription: individuals sign up, and there is a discount for groups
  3. Value-based care: selling the benefits of MindTether to insurance companies and get paid for lowering anxiety levels in a population

Business Model Growth Map MindTether 2

They map how all of these options could get them to their true north – but they want to know which first journey propels them there the fastest.

4/ Backcast to the present moment

Now that you have your vision and core business model ideas – backcast to where you are today. Backcasting is often more effective than forecasting. You start with your vision – your North Star, and then you ask the question: “What do we need to do today to reach that vision?”

MindTether already defined their North Star: 2oo MM meditators connecting together, every day.

They look to the capabilities, resources, and network they have today, and what they don’t have.

MindTether is a 3 person team – an app developer, a designer, and a mindfulness coach, with ability to develop and lightweight app. They live in NYC, which seems to be the primary launching pad for these kinds of wellness meditation apps. They are not hardcore developers. They do not have strong command of artificial intelligence, data science, nor are they highly skilled in making a new wearable device. But they decide that all of those skills are not needed to get started.

What they do know is that they have the right set of skills and resources and network to begin testing their two core ideas – virtual “free for groups” meditation and in person meditation flash mobs or planned meetups.

Business Model Growth Map MindTether 3

5/ Build, measure, learn and generate new options

The MindTether team creates a plan for the next few months to maximize learning.

They don’t just start building the app.  MindTether’s team knows that the real value lies in their ability to connect engaged meditators in groups, which result in a network effect. Their first test is to understand who is in the most pain, what to build, and which business model best delivers.

To understand pain points and jobs to be done, the team starts in the real world, to deeply understand what people are looking for when they seek out meditation. By directly interviewing people in parks and coffee shops and meditation centers, the narrow in anxiety as the primary trigger for people to start meditating in the first place.

MindTether’s second hypothesis is to test how a group meditation solution would be a good match for the pain of anxiety. The team borrows a loft space from a friend and hosting their first daytime retreat. They start an Instagram feed to build interest in the event and to see which core message work best to get people to sign up and show up for the event. Not every message works. They find that anxiety is still taboo, or a lonely experience in search of a lonely solution. Their messages most resonate with a younger generation that is more willing to talk openly about anxiety and share their experiences publicly.

The third hypothesis helps MindTether narrow in on a target segment that has the most pain, but also respond to the call for group meditation and pay for the experience. They started to notice that those that were the most likely to follow up after the in person event were recent college grads, new to the city. These grads are overwhelmed with student debt payments, rent payments, and struggling to bring purpose and meaning to their first jobs out of school. They were also just forming and re-forming their friendships for their newly adult life.

 —

MindTether is now ready for an intense Lean Startup-style validation effort, but their approach is more strategic, and they’ve built up their business model pattern matching skills.

MindTether’s team decides to pursue option 2 as their first business model to start testing through prototypes, and they continue the build-measure-learn cycle until they have the early prototype and marketing messages tuned for product-market fit.

They know that once they find that high signal value-market fit, it will be time to focus their energies and attention on execution, customer development, product velocity, and later customer growth.

For now they need to keep their growth options open.

 —

Have you struggled to make sense of multiple business model options? Are there two or more paths you could pursue? Let us know at Reason Street – we’d love to hear from you.

Will Your Health Business Model Survive?

Stress-testing your business for a new policy agenda

Since the election, US stocks are mostly up. Except hospital stocks. Public hospitals like HCA are worth looking at the stock charts to see how wrong we were about the election – rising high the day before, tanking the day after.

HCA Post Election Ticker

Then there are the health insurance companies like Aetna and Cigna are on the rise. United Healthcare is the best-performing stock of the year.

United Healthcare Ticker

The promised repeal of the Affordable Care Act (ACA, a.k.a. Obamacare) is expected to impact hospitals more negatively than insurers. A recent Barrons survey of C-Suite executives in healthcare found that “MCO (Managed Care Organization) executives are more optimistic than acute-care hospital executives about the outlook for the respective fundamentals in their industries.”

But as of today, we only know which way the winds are blowing. We do not know exactly how the ACA will change, or when, or what it specifically means for any given company strategy.

Do the same trends play out if you are a startup? Were your pre-election business model assumptions correct? Does the recent shift in political stance change your trajectory?

In short, yes. No matter what your political views, it’s time to stress test your assumptions, and determine how dependent you are on policy-driven shifts in your future plan.

First, Re-Locate that North Star

Look up from your to-do list, your weekly calendar, your scrum, sprint, or annual operating plan. Why did you get into healthcare in the first place? Answer that question on a personal level. Convene a futuring session with your team.

Has the ACA been positive for your business or are you still struggling to implement technology and systems to manage and measure care? How should healthcare happen? What are your ideas for a better future?

For inspiration, The Institute for the Future published a Health Futures Map to help navigate the post-ACA decade. The Institute for Health Improvement recently partnered with five foundations to produce the Better Care Playbook to help accelerate system transformation. What questions do these future statements and best practices generate for your team?

IFTF Post ACA Care Models

Ask big questions to frame and reframe your company’s direction. What role do you have to play in healthcare transformation driven not by federal policy shifts, but through connections and partnerships with other companies in the healthcare industry, not-for-profit organizations, advocacy groups, and your local community?

Second, Check Your Customer Target Assumptions

Who are your core customer segments? Were you selling to hospitals? Insurance companies? Pharma? Should your priorities shift in preparation for what comes next?

Even if you’re up and running and executing against your defined plan, it’s worth re-engaging in customer discovery. Pick a selection of health systems leaders, clinicians, administrators, and ask everyone how they envision the shift. You may find that your question is the first time they have stopped to pause and think about what is to come.

Third, Re-Validate Your Core Business Model Hypotheses

It’s time to go back to your original business model assumptions. If you haven’t been tracking changes to your assumptions using a Business Model Canvas tool, now is a good time.

Value Proposition Design

List your target customer segments, in order, and based on your customer discovery findings, consider how your core value proposition may need to shift.

Take a hard look at your core resources, activities, and partners – do you need to think about what you do differently?

Lastly, your biggest and boldest question is to re-consider your costs and revenues and stress-test where you fall in the shift to value-based reimbursement.

Fourth: Take a Stand on Value-Based Reimbursement

The hardest element to predict is how and when we start to shift to value-based care, payment based on outcome, rather than traditional fee-for-service.

The shift to value-based payment and care will cause health providers and everyone delivering to the healthcare system to change the way they bill for care. Instead of being paid by the number of visits and tests they order, devices used, and pharmaceuticals prescribed (fee-for service), providers’ payments will start to be based on the value of care they deliver (value-based care).

This shift is happening, but not everywhere. A number of health systems, not-for-profits and health companies and startups have each chosen where to play; with a number of stakeholders claiming bold stakes and risks, and others avoiding the change for as long as they can.

A rollback of key elements of the ACA will affect the contours of this shift, but the “train has left the station” according to many health leaders. Payers are demanding value-based payment models, integrated hospital systems are taking on population risk, and startups are experimenting with pay-for-outcomes and pay-for-performance models. Will you be a leader? Or a follower?

Finally: Rinse, Repeat and Lead

To be sure, those that work inside of healthcare complain that the pace of change is slow and incremental, particularly in front line health delivery systems. Startups have had to play at the edges, selling solutions consumers who can afford to pay, to workplace wellness efforts where ROI can be proven, or are living off of a derivative data-selling business model. Incumbent technology and service vendors are deeply locked in and want to protect their market share and flows of revenue and profit.

But one thing is certain – there is no comfortable status quo in healthcare. Even in the heart of the most cynical, money-minded hospital administrator, there is an acknowledgment that patients matter. The US is an outlier in health, and “not in a good way:”

US Healthcare System

 

If you believe your initiative or technology innovation can bend this curve away from more cost/worse outcome, then it’s time to double down. Change will come from government, but progress will come from leaders in the patient communities, advocates, caregivers, healthcare systems, and innovative companies that can move beyond our current trend. We only have our health and our lives to improve.

Moving Beyond the Post-Election Confusion in Your Company

An exercise to re-engage and build the future you want to see

“I don’t care what you say about this election, our stock price is at an all time high so it can’t be that bad. This administration might be the best thing ever.” said Rogerio, who voted for Gary Johnson, the Libertarian candidate.

“How can you say that!!! That is so cold. Do you know what it’s like to be a person of color in America right now? I’m more afraid than ever for my family and friends. I am worried about the future.” said Collette, a Bernie supporter.

“Stop it with the election talk. We have work to do. We will all be fine. Let’s get down to business” said Marina, the manager of the group, who quietly voted Republican as she has done in every prior election. She is sick and tired of all of the election noise, and like many people, she justs wants to move on. But she knows she has to respond to recent events, the daily news gauntlet, and figure out how all of this affects the business.

We Were All Bad Predictors

Whether you see the new administration as a crisis, or opportunity, or both, take a moment with your team to think about the future productively. No matter which side you were on pre-election, we all have to admit, together, that we were wrong. The election results were a surprise, especially to the President-elect and the Republican leadership. All of our leading poll indicators, our think tanks, even our guiding hand of the stock market failed to predict the outcome.

We were all wrong.

Everyone except for Michael Moore. He was right. But Michael Moore likely can’t help you with your 2017 annual operating plan.

It’s critical that business leaders reflect on this main point: the entire world failed to predict the future. This means that your underlying assumptions about the economy, policy, culture, and reactions to technological innovation may also be wrong. So take a moment. Take stock. Work with your team to re-envision the future of your project, your plan, and your company based on shifting macro trends.

Polls didn’t work. Access to the biggest datasets we’ve ever seen didn’t help. The guiding hand of the market was surprised. Those of us who build predictive models (like me) received a wake-up call. Predictive models are based on assumptions. Our assumptions were flawed.

There was a strong desire to go deep into the spreadsheets just after the election. To run the “Trump scenario” that so few thought would happen. But more modeling and analysis won’t get us closer to a more certain future.

Instead, it’s time to get personal and connect with your team. Your fellow employees, peers, and partners are struggling through the same post-election confusion, and trying to make sense of what happened and what will it mean. Invite your team to a futuring session to generate scenarios of the future you want to build.

How to Co-Create a Future Vision:

The things you will need:

1 room that can fit multiple small tables (fitting 4-5 people each)

1 roll of brown “butcher” paper

1 roll of artist tape (sticks easily but comes off without tearing)

3 different colored Sharpie or thick markers for every participant

Rolling white boards + easels

Water, coffee, tea

At least 2 hours of time for your team – no cell phones or emails or disruptions

The recipe described below is adapted The World Café method which provides further resources and ideas for your futuring session.

1/ Invite the team

Look for a minimum 2 hour window that you can set aside without cellphones or laptops. Don’t organize on a critical day for sales or finance or during a big market launch. You want to be able to create space for presence and participation.

Let them know why you are inviting them to a futuring exercise, that your aim is to create a number of possible and preferable scenarios.

2/ Find trends that describe different versions of the future

In prep for your futuring workshop, evaluate and prepare to share trends that derive from different sources and diverse views. Focusing in on your sector can help uncover these ideas: The Future of Media, The Future of Health, The Future of Non-Profits. But there are overarching trends that affect every company and organization.

Here is a selection describing of posts and reports describing The Future of Work – the key here is to show a range of opinions:

Institute for the Future: Workable Futures, Ten Strategies for a Workable Future

The World Economic Forum: The Future of Jobs 2016, and Infographics

The American Enterprise Institute: 4 Possible Futures for US Workers in 2040, America’s Future + Robots

The International Labor Organization: Future of Work, Results-Based Management

McKinsey: The Four Fundamentals of Workplace Automation, The Future of Work in Advanced Economies

Look for compelling quotes, provocative infographics, and surprising visuals. Don’t look for ideas to confirm your thinking, rather look for trends that will challenge your thinking. Print out a selection to kickstart your team’s thought process.

The Future of Work

Institute for the Future

WEF Top 10 Skills of the Future

 

3/ Craft your initial questions

Why are you calling people together? To frame a future you want to see, collectively. You all work together – you have that in common. Choose to ask and explore a big question, a question that matters to the future of the organization. When you can frame your futures conversation as a question (vs. problems, concerns, gripes, or short-term expectations) you engage your team is learning something new together.

You can make it simple: “What is the future of x industry?” You can focus on the organization’s position. “What does it mean to be the world’s leading x?” Make sure your question is open-ended and invite inquiry and discovery. You’ll know you have a good question when is received with good energy encourage new questions, new ideas and new possibilities.

Prepare 3 key questions for the day that build on each other. You don’t have to be right in your question that you ask. Know that the deeper question-behind-the-question that you should be asking will emerge in your session.

4/ Prepare the room

Choose a venue or meeting room that can host several small conversations within one space. Your futuring exercise does not have to take place at a fancy off site – but you do have to set boundaries for no interruptions. You want to create a welcoming space, so pay attention to lighting and find ways to make a dull room more inviting.

You’ll want to have multiple small tables, café style, fitting 4-5 people per table. On the day of the event, cover each table with the brown butcher paper, taping down the edges underneath. Provide enough Sharpie pens for each table participant in each of the three colors on each table. Take your printed out featuring quotes, infographics, and images and distribute them among the tables for conversation fodder.

5/ Facilitate the day

Begin with a welcome and introduction and remind everyone why they are here, with the core questions visible on flip charts in the room. If you choose to follow World Café guidelines and etiquette, post them on flip charts or cards on each table. Create a safe space where participants are encouraged to be open and honest and connected to the people in the room.

If you have a number of people on your team who have expressed their post-election fear, personally or more generally, acknowledge their experiences. Ask everyone to bring their most creative energy to the work of defining the future.

Now comes the hard part: ask everyone to put their phones away for the full 2 hours.

Ask for volunteer hosts: The logistics are fairly self-organizing, but you do want to explain that you are looking for volunteer hosts to remain at each table throughout the 3 rounds of questions. Their job is to welcome people to each round, ask the core question, and review what occurred during the last round.

Ask participants to converse, reflect, capture, and sketch: The role of the participants is to join in the conversation, and use the pens to sketch, doodle, and capture the conversations at the table. Participants can choose to stay at their table, or to continue to circulate for each round.

As the facilitator, your role is to move around among the tables, encourage everyone to participate, and to remind people to sketch, draw, capture key ideas. Time each round with a smartphone timer set at 20 minutes, and gently move people onto the next round of conversation and the next table.

When you’ve completed three rounds of discussion, it’s time for the hosts to share and for the teams to circulate and review, reflect, and find patterns. Capture the notes and thoughts with cameras and ask everyone to reflect on their own – how will the insights generated today inform the work they do going forward.

The learning that occurs happens in the experience of the people in the room, forming connections and building their own inquiry-based strategic capability to think and explore. What do you do if your futuring exercise is successful? Replicate, and repeat.

6/ Replicate strategic conversations

You can choose to repeat these conversations when you find your team getting stuck, or responding to an unplanned crisis or event that sends all of your predictions off course. In a larger company, you can ask the participants to host their own futuring conversations with their teams.

In an increasingly volatile, uncertain, complex and ambiguous times, we have to get used to the notion that we’ll be mostly wrong, most of the time, when we predict the future. Rather than clamp down and tell people to move on and “just get over it” – it’s time to open up the biggest questions that drive people to do great work every day. Through in person futuring conversations, we can restore trust, remind everyone of their humanity and humility, and become resilient together.

Business Model Myths in the Circular Economy

Today at 11 EST I’ll be giving an online talk for the virtual Circular Economy “Dif” Festival put on by the Ellen MacCarthur Foundation.

What was planned to be a thorough analysis of common business model mis-conceptions has changed in light of recent events.

We will discuss:

  • Equitable outcomes.
  • Ray Anderson.
  • Circular economy. Business model myths.
  • People-centered capitalism.
  • Business model innovation as the strongest tool for survival and resilience

 

Join us online at 11,

Jen

 

Designing for Human Dignity in the New Economy

Competing Design Philosophies in the Two-Sided Marketplace of Time

carme

The Sopranos series was violent. But the most painful scenes for me drew a hyper realistic version of my Northern New Jersey upbringing.

There’s that scene in season one, episode three, when Carmela hires her restaurant owner friend Charmaine to do some catering for a fundraiser. The scene is subtle. You may even miss it. Charmaine witnesses Carmela dressing down Oona, her maid. She beckons her with a hand gesture to come and take a look at fingerprints left on an unpolished glass. She is not pleased.

Later, we see Carmela summon Charmaine, her friend/helper, in the same hyper-controlling gesture. “Come here,” the gesture says, “you are working for me, “do this for me now.”

I remember that summoning hand from my first babysitting jobs in my Northern New Jersey town (not far from the fictional Soprano family). The hand would summon me, the cleaning lady, the tutor, the help. Clean this now. Control this child now. The same long, well-manicured nails as Carmela. It still makes me cringe.

Work is cultural. How we treat people that work for us is based on our own personal experiences, practices, stories, and our cultural norms. How we behave when we are being summoned is also shaped by culture, but also presumably by the fact that we want the money, so we comply.

Work is shifting. Our hours are starting to be shaped by millions of interactions in the so-called new economy. Uber. Lyft. Fancy Hands. Task Rabbit. Honor. Managed by Q. Upwork. Fiverr. 99Designs. Upwork. Instacart, Care.com.

I can press a button, swipe my credit card, turn on my GPS, and I get a ride, a home health aid, an event planner, a virtual assistant, a web designer, a stylist, a massage therapist.

All of these companies run on a two-sided marketplace business model. On one side you have the paying customer: the busy bee in a big hurry who has the disposable income to hire some help. On the other side you have the worker: the driver, the home health, the massage therapist, who is there to give up their time to help you, the customer. These marketplaces are arbitraging expertise, but mostly time – brokering those who have more time than money with those who have more money than time.

I spend a great deal of time with the business model of two-sided marketplaces, recognizing that inherent in these systems are competing design philosophies. I’m wondering, Service Designers, where are you when the big decisions get made?

1/ The Task Rabbit Design Philosophy: Your Time is My Time

You can “book” a “tasker” – just like that. If you have a box that needs lifting, t-shirts that need folding, expenses that need to be organized – just go on to Task Rabbit, select from the vetted taskers, and boom. They are booked.

Taskers can turn down the booking and refuse unreasonable requests, but the default design is to assume the Tasker already said yes.

It’s Carmela Soprano’s come here gesture in app form.

2/ The 99Designs Philosophy: The Crowd Will Help You, But One Will Get Paid

Need a new logo? Try 99Designs. 99Designs takes a practice common in writing, design, and advertising practice – creating work “on spec” and turns it into crowdsourcing.

You upload a brief, choose a level of designer like you choose a credit card (Bronze, Silver, Gold, Platinum) and your design is disseminated amongst a pool of designers. These designers produce work “on spec” which means for free. You get to choose who wins your logo design contest, and only the winner gets paid.

3/ The Managed by Q Design Philosophy: The Karma System

Managed by Q is a new type of office services company that provides cleaning, IT, and other support services to help companies grow. They follow the advice presented in the book “The Good Jobs Strategy” by Zeynep Ton, professor of operations management at MIT. The crazy concept: pay above the standard wage to keep overall costs low, and earn a profit.

Workers are not a cost, they are an investment, and Managed by Q promotes office cleaners into selling and front-line relationship manager roles, moving up in pay and benefits the more they drive the company’s bottom line.

As The New York Times reported this year, the CEO Dan Teran, “doesn’t see his cleaners as simply cleaners. Instead, they are the essential link between Q and its clients.” The traditional signals of success in this model prove to be not as relevant. Instead, mindsets of optimism and empathy tend to drive the most successful employees.

By being good to their employees, Q’s employees are good to their clients, and good for the company.

Can You Design for Human Potential?

There are certainly more patterns out there than the three mentioned in this post. But you can see through these three examples that the future is in the hands of the people who create and design these systems.

Cameron Tonkinwise wrote an extraordinary reflection on the role of service design as a practice of thinking through the intention and consequence of service on economies and ecology. Most critically, he highlighted the role and influence service designers play in redesigning work and interaction.

“Human-centered service designers must be mindful of these tactical renegotiations involved in service work. Or rather, service designers must be wary of demanding that service workers and customers seek authenticity only within the confines of utilitarian commercial transactions.”

The next time you find yourself at the helm of designing the service of a two-sided marketplace, take a moment. Ask yourself – are you merely automating human behavior, turning the task into a machine-like process? Are you taking advantage of a global, hungry, borderless world. Or are you bringing the best out of the humans engaged in your task?

Do You Suffer From Value Proposition Confusion?

A word battle may be increasing your product fail rate

“I’m not sure if we’ve fully described the pain points for the patient customer, let’s take another crack at that one,” said the product manager. She was trained as a computer scientist and was practicing a method she recently learned at a “Lean Startup for the Enterprise” workshop.

“Customer pain? Why are we talking about pain points? That shouldn’t be anywhere near the value proposition!” – said, the marketer, who was graduated from business school in 1998. “We need to outmaneuver competitors! We need to better define our segments and figure out how we’re different! What are the reasons to believe?” he cried with escalating agitation.

They’d been at this for days.

What’s going on here?

It turns out, one of those business terms that should be well understood by now, with  clear consensus across all disciplines, is still causing regional and generational confusion.

The experts and gurus of strategy, branding, startup methods, design thinking, business models, and marketing are not speaking the same language. Yet.

Let’s go over the two primarily opposing viewpoints on what, exactly, value proposition means.

Reasons to Believe: Strategy and Mad Ave Camp

If you went to business school before the year 2000 (or work for someone who did), your definition for value proposition was more linked to branding and corporate strategy concepts. In the olden times before the internet, companies were thought of as value chain: “a set of interconnected activities that a company performs to deliver a valuable product or service to the market,” according to Michael Porter, godfather of strategy.

Conceptually, this was an industrialized view of how a company works. The arrow starts with the supply chain, with the customer at the end. Most S&P index companies founded before the internet era still operate with this value chain mindset. As one consumer packaged goods CEO told me once, “Our job is to shuffle products out to consumers, and wrap products in a big marketing bow at the end.”

Value Chain

For Porter, a Value Proposition is an exercise in strategic choices about customers, needs, and price. The goal is to compete on uniqueness and differentiation. Strategy is then a set of choices about how value is configured within the value chain.

David Aaker, a prominent brand strategist and author of Building Strong Brands, encouraged marketers at the end of the chain to think deeply about the customer.

He defined the value proposition as a marketing exercise, creating a “statements of the benefits delivered by the brand that provide value to the customer.”

In a classic marketing view of the world, the Value Proposition communicates the functional and emotional benefits that add value, why we are different, the brand-customer relationship, and gives customers an ‘RTB’ or reason to believe.

The method encouraged marketers to define new customer segments determined by demographic studies. Marketing involved generating new feature and benefit promises as the primary strategy for product introduction. Pricing would be set based the right combination of features, benefits, and their intended customer segment.

Value Proposition Porter

In the 1950s and 1960s, when we used to crowd around 3, maybe four TV channels and all watch the same shows, marketers had more power to communicate these messages. and the work of branding was all powerful. Watch Mad Men the Kodak Carousel episode for one of the greatest examples of the value proposition advertising effect on a wonky new technology launch.

But today, the fastest growing companies do not seem to be neatly organized or understood in value chain boxes or marketing promises alone. Airbnb, Google, Facebook, Netflix and Uber did not reach their growth potential by fiddling with the number of people in the inbound logistics box, or buying Superbowl ads.. Something else is going on today, which can be best described by another flavor of value proposition.

Pain Points and Jobs to be Done: The Innovator’s Camp

What’s going on with all of these new companies? It traces back to the father of Disruption Theory, Clayton Christensen. In his  2003 book Innovator’s Solution, Christensen outlined the secret to successful a successful innovation: don’t sell products and services to customers, but help people address their jobs-to-be-done. Once you look at the competitive solutions, analyze the pain points. Have any pain points been overlooked? Great! Now you know where to invest in emphasizing your distinctive strengths.

But he saw a key limiting factor that kept incumbents from adopting the jobs-to-be-done method. In a diatribe published in Harvard Business Review called Marketing Malpractice, Christensen criticized the features-benefits-segmentation model.

“The great Harvard marketing professor Theodore Levitt used to tell his students, ‘People don’t want to buy a quarter-inch drill. They want a quarter-inch hole!’ Every marketer we know agrees with Levitt’s insight.

Yet these same people segment their markets by type of drill and by price point; they measure market share of drills, no holes; and they benchmark the features and functions of their drill, not their hole, against those rivals. They then set to work offering more features and functions in the belief that these will translate into better pricing and market share. When marketers do this, they often solve the wrong problems, improving their products in ways that are irrelevant to their customers’ needs.”

– Clayton Christensen, Marketing Malpractice, HBR 2005

The lowly milk shake is Christensen’s example for how this insight plays out. A fast food company attempted the classic marketing method to increase milk shake sales. They defined their features and benefits, and drew up clear segmentation profiles of customers. When they tested variables of features – thicker, more chocolatey, cheaper, chunkier, they got clear feedback. But the improvements made had no impact on sales.

Milkshake Job to be Done

When the question was turned to ”What job is the customer hiring the milkshake to do?” the answer was revealed. Many milkshakes were purchased in the early morning, by commuters, traveling alone, sipping slowly in their cars. The milkshake offered a cleaner and more entertaining option than a messy breakfast sandwich, donut, or banana. The fast food company then used these insights to make deliberate improvements to the product for these to different jobs-to-be-done, sales improved (along with obesity rates, but that is for another day).

For Christensen, a Value Proposition is therefore a product that helps customers do more effectively, affordably and conveniently a job they’ve been trying to do. He used this theory to explain the rise of eBay and Google. “Pierre Omidyar did not design eBay for the ‘auction demographic.’ He founded it to help people sell personal items. Google was not designed for the job of finding information, not for a ‘search demographic.’”

We can see in this example how two views of the world, both originating from living Harvard Professors, play out in new product development meetings today. While Christensen’s theories are still not as widely accepted in corporate marketing circles, startup disruptors have fiercely embraced disruption theory and jobs-to-be-done concepts for their benefit.

The One Page Strategy School: Lean Startup and Business Modeling Camp

Suddenly, it seems everyone in technology and the startup sector is talking about pain points. Within the past five years, there has been rapid adoption of Christensen’s theories in incubators, university entrepreneurship programs, venture capital firms, and even grant-giving government agencies like the NSF and the NIH. “Jobs to be done” and “pain points” are natural shorthand for everyone in the Lean Startup movement, and are embedded in a widely popular on page strategy “canvas” tools like the Value Proposition Design canvas.

Value Proposition Canvas

Business Model Canvas was introduced in Alexander Osterwalder’s well-designed coffee table book Business Model Generation. Osterwalder observed that business model innovation exercises were often plagued by “blah blah” language, with everyone talking over each other, no clear decipherable path to actually understand and generate new business model concepts. (So true!).

The canvases serve as visual tools, meant to be used with stickies, and sketched. When practiced well, teams work together to understand their current business model and value proposition design, and are freed to experiment with potential new changes for growth.

The original Business Model Canvas was hugely popular in startup circles, and spawned a number of variations and twists on the original canvas as founders and practitioners began to experiment with the tool (see our roundup of popular one page canvas tools). Osterwalder followed up with the Value Proposition Canvas in order to create more clarity and focus to the customer-to-value proposition connection. Osterwalder cites Clayton Christensen for the concept of “jobs to be done.”

A working value proposition is designed to meet a specific customer segment’s jobs to be done. First, you understand that segment deeply, observe and discover what job a customer is trying to do. What are her biggest pains? How does she define gain?

Then when you develop the value proposition, you are defining your core features, and prioritizing which ones to build first, based on this architecture of pain and jobs to be done. Which features alleviate the pain? Which create a new unexpected gain?

pain points

The focus on pain is critical for a startup. The status quo is the biggest competitive barrier for any new technology or innovation. Customers are unlikely to change their behavior and try a new untested brand without experiencing identified pain or discomfort in their routine. By making strategic choices about which customers, which jobs, and which pains to solve for, a startup can turn on the engine of growth.

How does differentiation play into the mix? The radical idea is that competitive advantage is “transient” – according to Rita McGrath of Columbia Business School in her book The End of Competitive Advantage. The world is too volatile and uncertain to base strategy on competitive advantage.

“..Virtually all strategy frameworks and tools in use today are based on a single dominant idea: that the purpose of strategy is to achieve a sustainable competitive advantage.” She argues that executives need to stop this, and offers to explain the alternative of transient competitive advantage. “..To win in volatile and uncertain environments, executives need to learn how to exploit short-lived opportunities with speed and decisiveness.” In fact, the deeply ingrained systems and structures “are outdated and even dangerous in a fast-moving competitive environment.”

– Rita McGrath, The End of Competitive Advantage

What does that mean for competitive differentiation? It means that it may be a bit of a trope. The best companies compete not with each other, but for a core customer. By understanding the rapidly shifting world of the customers, companies do well when they can constantly reconfigure their strategy and structure to deliver a well-defined proposition.

You still have to understand competitive moves and explain how your strategy differs from your competitors when you build a business case or ask a venture capitalist for funding, but your core strategic activity no longer focuses on competitive chess moves. Instead, the entire organization is built and constantly rebuilt to identify, predict, and deliver new value propositions to the customer. Whew!

Know Your Mental Models

So you’re back in that windowless room, and Jasmine from R&D is still yelling at Tom from marketing. Tom wants to focus on differentiated features and selling tactics based on outmaneuvering competitors. Jasmine wants to talk about pain points. How do you help them resolve their differences?

Recognize the benefits of holding multiple mental models, and encourage a moment of cross-silo communication and understanding.

Building your strategy on competitive differentiation alone may be dangerous, but spending time thinking about competitor moves, shifts, acquisitions, and combinations could be a helpful exercise to jar thinking. Even more fun, bring in companies from outside your narrow competitive set and see what happens when Google, Target, Coca Cola, Uber, Netflix, Ford or Tesla move into your territory.

The jobs-to-be-done view of the world is a useful starting point for a product that do not yet exist, and has the added benefit of uniting everyone’s focus on customer needs (rather than competitive moves). That’s a good thing. But jobs-to-be-done is an awkward starting place for many to wrap their heads around.

The best move? “Get out of the building,” says Steve Blank, the godfather of the Lean Startup movement in his Stanford Lean Launchpad course. Go observe customers. Listen to customers, Ask key questions. Don’t pitch your idea (yet). To get to jobs-to-be-done, ask them to tell you about a typical day. To understand pain points, learn what keeps your customer up at night. Dig under the known and obvious challenges in your customer’s life to uncover unarticulated needs and pains.

Iceberg

Then you can reconvene your product launch team with quotes, artifacts, photographs and observations about your customer to create a valuable value prop. And don’t stop there – go back out and test your value proposition directly with your customers.

Now, you’re rolling. You’ve stopped a turf war. Tom from marketing and Jasmine from R&D are colleagues. You’ve built your team to focus on customer needs. Build a rigorous commitment to deep customer centricity, ongoing learning, and the opportunity for meritocracy-based high accountability culture. You will have to shift from the false comforts of planning through Powerpoint, and learn to build markets and demand. And I promise you’ll have much more fun.

So start now. End the language war in product launch rooms everywhere. Get out of the building, Feel the fear, and learn a new way of working.

Here’s an armchair MBA reading list of books mentioned in this post:

Competitive Advantage: Creating and Sustaining Superior Performance by Michael Porter, 1998.

The Innovator’s Dilemma, by Clayton Christensen (first edition 1997 but read the most recent from 2011).
The Innovator’s Solution by Clayton Christensen,

Business Model Generation  by Alexander Osterwalder and Yves Pigneur, 2010

Value Proposition Design by Alexander Osterwalder, 2014

The End of Competitive Advantage by Rita McGrath, 2013

Here are previous Reason Street articles that relate to this post: 

Can You Define Your Strategy on One Page? August 2016

Customer Delight is Elusive – Focus on Customer Pain, May 2016

Finding Your Customer Pain Points: How Far Do You Go? November 2015

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Business 101.1 NYU ITP: Values, Value Proposition, and The Future of Business

We recently covered competing value proposition mental models as they relate to The Business Model Canvas and Lean Startup.

We also took a pause to uncover the core motivations, values, and inherent friction in starting a social purpose-driven company.

And customer relationships, customer channels, and running your first test: