Sunday
Oct262008
Value Creation in a WWW*
Sunday, October 26, 2008 at 6:58PM
I love using diagrams to help explain concepts which would otherwise be difficult to remember. They make it easier for some people to call up in their minds and immediately recall complex concepts.
I thought of the following model a few weeks ago to describe how value is realized in today's fast-paced, largely unpredictable markets. I've entitled it "Value Creation in a Wild Wired World". Please let me know what you think...
Industrial Age Value Creation:
This V model of Value creation is suited to stable, predictable markets and industries.The consumer doesn't have many alternative choices of products and services to fulfill their needs here. The company needs to recoup their significant investment of cash, time and labour by charging as much as possible, and keeping the product as is for as long as possible - taking it from being a Star product to a Cash Cow eventually. Microsofts OS is a good example of this, but they're slowly shifting to the model below...
Rapid Prototyping, Perpetual Beta
An alternative model, more suited to fast changing, unpredictable, hyper-competitive markets looks more this:
The idea here is to launch with a "good enough" prototype, attract early adopter users, and develop the product according to their needs and feedback. In the software development world, this is known as "Beta" - where the product is in testing mode, and constantly improving according to how people are using it. There is generally less upfront investment required in this model, which is important since many products launched into unpredictable, competitive markets will fail unless they adapt in ways that weren't originally envisaged by the product team. Often times the best ideas here arise to serve an unmet need of the founder - you might hear the founder saying the product was launched to "scratch my own itch" The other motto of firms that operate with this model is: "release early, release often". Google does this well.
Your feedback
What do you think about these models? Do they make sense? Is there anything you'd label differently, add to, or remove from the diagrams?
I thought of the following model a few weeks ago to describe how value is realized in today's fast-paced, largely unpredictable markets. I've entitled it "Value Creation in a Wild Wired World". Please let me know what you think...
Industrial Age Value Creation:
This V model of Value creation is suited to stable, predictable markets and industries.The consumer doesn't have many alternative choices of products and services to fulfill their needs here. The company needs to recoup their significant investment of cash, time and labour by charging as much as possible, and keeping the product as is for as long as possible - taking it from being a Star product to a Cash Cow eventually. Microsofts OS is a good example of this, but they're slowly shifting to the model below...
Rapid Prototyping, Perpetual Beta
An alternative model, more suited to fast changing, unpredictable, hyper-competitive markets looks more this:
The idea here is to launch with a "good enough" prototype, attract early adopter users, and develop the product according to their needs and feedback. In the software development world, this is known as "Beta" - where the product is in testing mode, and constantly improving according to how people are using it. There is generally less upfront investment required in this model, which is important since many products launched into unpredictable, competitive markets will fail unless they adapt in ways that weren't originally envisaged by the product team. Often times the best ideas here arise to serve an unmet need of the founder - you might hear the founder saying the product was launched to "scratch my own itch" The other motto of firms that operate with this model is: "release early, release often". Google does this well.
Your feedback
What do you think about these models? Do they make sense? Is there anything you'd label differently, add to, or remove from the diagrams?
tagged Innovation, Management, business, development, google, microsoft, value Email Article in Innovation, Management, Opensource
Innovation, Management, business, development, google, microsoft, value Email Article in Innovation, Management, Opensource 
Reader Comments (21)
I think this is absolutely brilliant. I really do. Wow. What a clear and unbelievably useful model. Thanks for sharing.
No, I reckon that's a very good way of putting it. I do suppose, though, that it would be importantish to mention that the revenue model for Perpetual Beta is somewhat different to Industrial Age. In the end, firms have to make their money back *somehow*, and with a "flawed" product, and need for "lots of consumer feedback", it'll be a while before decent revenue opportunities arise - you can't expect customers to pay the full price and contribute towards the improvement of the product they're paying for.
@Elaine Yay! What a sterling recommendation from someone who works with these models all the time. Thank you for your positive feedback!
@Wogan Yes, very good point. Thanks for adding it. One great pricing model that applies here is the "Freemium" model, where a product is offered for free initially, but users get limited functionality, they pay extra for better features (down the line).
To add to your model: Jason Fried of 37signals mentions that listening to user feedback and constant improvement can also result in a bloated product. You have to be careful to not over-engineer. I think this is one of the flaws with the perpetual beta model.
@Wogan, users don't necessarily have to be vocal when testing and providing feedback. Web applications allow you to monitor users and their patterns quite easily.
@Neil Good point, obviously you need to be selective. Check this screenshot of Microsoft Word with the toolbar fully displayed: http://huddlemind.net/photo/photo/show?id=1975133%3APhoto%3A7643" rel="nofollow">Microsoft Toolbar Madness
...I think that kind of bloatedness is a result of trying to be all things to all people. On the other hand, Amazon.com only implements changes that have a significant groundswell of support, and they never implement stuff that only the development team thinks is cool. Sometimes the feedback could result in unnecessary features being removed.
@Dave From what I've been hearing, Freemium's on the way out - the case mostly being that there's so much competition, chances are your app/service is already available for completely free somewhere anyway.
And Google.
@Neil Maybe site activities, yes, but for new apps, they're not good at guessing what suggestions you were about to make ;)
I think those activity watchers are more useful when the app's sort of stable, and it's more critical to pare down workflows, figure out how the majority of the userbase thinks and works - when you're brand new, manual suggestions probably have more value.
You are right that this is how things are being done and it makes much sense. However it also creates a sense of constant "movement" and never reaching the final "product". I think this can lead to a type of fatigue as you are always waiting for the final product that never comes. Perhaps that is how we view our world but I do get the sense that this constant change lowers the expectations of the end user and leads to a type of "tyranny of the incomplete".
Just my passing thoughts.
@Wogan and @Saul I think that in this information and product overloaded marketplace, the value for any company trying to be sustainable is not in the product itself, but in the relationships and trust that people form with it. So products have a shorter "shelf-life". I think this means that they need to get to market quickly and inexpensively, and achieve profitability before they are rendered obsolete by the next person offering the same thing free/cheaper. Scary stuff, but also wonderful for people who love to Create!
This feedback is really useful guys, it helps me think of all the issues that could arise from this way of innovating. Thank you!
@Dave I agree that this is how we are beginning to view the market place and that the idea of "short" and "rapid" are huge parts of the current system. I think relationships are important - as is so obvious about this current economy. However, I think that this type of "rapid" and "adrenalin" driven approach to creating products also creates incredible uncertainty and insecurity in many companies and in the products that are created. Often leading to crappy products or a loss of actual commitment to a product or company.
I think the idea of value is really what is being challenged in all of this - and that is where the rapidity is coming from - we are not sure what has value and what does not. And, we are not sure really how to create value from stuff. So - you are spot on in that value is more about relationships then products yet we are not sure how to integrate this value into our economic structure. I think ultimately we are going to have to reconsider our concept of economic value.
Love the model and so get it, Apple comes to mind when i look at the www model, the iPod is a constantly evolving product through feedback (look at how the nano has changed from being tiny to big again :)) I would also say the same about our products or most wine producers as we constantly see what the market likes and change wines to suit the demand for the day (as much as pos anyway).
Your a legend Sir Duarte
As a virgin-entrepreneur trying to enter the business world where everything seems to be "talking in foreign", I really like your models. Since my product is in the birthing stage, your models seem to indicate two distinct paths that I can take. I can either start off with a top-of-the-range product, or invite my clients to be part of a cheaper prototype in order to grow the product together to best serve my company and all the stakeholders. I think I prefer the latter because it invites relationship building and brand buy-in by those who see their suggestions put in place, who could eventually become my brand ambassadors. It also takes some of the pressure off of having to create a perfect product!
Thank you for clearing away some of the fog in my thinking. :)
Great discussion here Dave. I think that the perpetual beta model, hooked in with freemium services, is the future.
Perpetual Beta - It's totally awesome to see Facebook making tiny incremental improvements to their system on an almost weekly basis. It makes us - the users - feel that we "own" part of the product, because our actions are helping to determine the ongoing improvements.
Freemium - Facebook and Google have got this dead right. They've created and offered such solid services, that more and more we can't imagine life without them. I doubt I will be paying Google or Facebook one dime in the near (or even distant) future - and both of them know that there are millions of people like me - people who don't like to pay - but who like a good service. At the same time, both these companies realise that there are companies - with advertising budgets - that want access to the millions like me. So the circle is complete. I don't pay Google or Facebook, but Google and Facebook need me in order to complete the circle.
I always say that Google's many services are worth thousands and thousands of bucks each month - and we get them for free. This creates value. And I start to love these products and services. I don't feel that they've created something simply for high traffic so that they could sell ad space. They do sell ad space, yes. But because of the value they offer, that is not apparent, so I am hooked, emotionally.
Years ago, Anthony Robbins said that we buy the products that make us feel the best, not necessarily the best - or cheapest - product.
On the flip side, offering a service that is free, can be to your detriment if you cannot complete the circle. Twitter comes to mind here. To my knowledge, Twitter has no sustainable revenue model at this stage. While the service grows in popularity, I shake to think that it'll crumble simply because the circle could not be completed. We saw some of the US elections advertised, but that didn't work well, particularly to us not in the US, and also because it came back every time you went to their site. People complained. It left a bad taste.
Dave, your diagrams are *excellent* - well done!
(Sorry for writing a blog post!)
Jamaal, thank you so much for sharing your insights! I wish you well for your workshop on Saturday, it's gonna rock!
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