Why Services Are Eating the Universe
Tyler Shields | Serial Entrepreneur & Coach
2015 is seeing another disruption that will shape how business and the global economy operates going forward. In this new paradigm, software has already changed how we create business value for our customers, and now we are focused on fundamental business model shifts that will again change how businesses execute. Tyler Shields, serial entrepreneur and coach will break down:
- How-pay-as-you-go Opex will overtake Capex.
- Why the concept Of ownership is now longer valid.
- How products will cease to exist.
- Ways businesses must adapt to new internal and external service models.
Tyler currently works for Forrester Research as an analyst and he also coaches startups. Industry analysts are future oriented as they try to predict the changes that will happen 10 years from now. Tyler definitely fits the bill of a futurologist as this presentation is filled with broad assumptions and somewhat grandiose statements, so please take this recap with a grain of salt; or simply read it for the enjoyment, not so much actionable marketing advice.
Tyler led off the presentation with homage to Mark Andreeseen’s seminal article published in 2011 by Wall Street Journal, Why Software is Eating the World. Andreessen, co-founder of Netscape, and one of the most influential venture capitalists in the world, co-founder and general partner of the venture capital firm Andreessen-Horowitz argued back then that software will run the business of most companies, regardless of the industry vertical they operate in. Today, we can see that he was absolutely right as we all use a number of software solutions to automate our process flows, regardless of the business size we support. As a followup step, Tyler made a parallel that in 2015 “Services will eat the universe” as part of the 2nd phase of a business transformation where businesses will move from selling of products to selling of services. His prediction is that in 10 years, companies will sell only services, not products.
To explain the concept of “services eating the world” he used electric lightbulb. Today, we go to the nearest store and we buy a lightbulb when we need to and pay anywhere from $3 for CFC to $10 for LED bulb. In the future, we will be getting new bulbs as a subscription to our electric bill. In other words, our electric power provider will expand its service and not only sell us electricity, but also sell us monthly subscription for light bulbs. Sure. Personally, I am too tired of monthly subscription service plans for anything under the Sun, so as a consumer, I am not buying in this vision. In fact, I think that subscription model will actually increase consumer prices, so regular people will have to carefully chose what they get for on a recurring basis. Yes, subscription business model is absolutely awesome for startups, but I still prefer to buy my physical products form a brick and mortar store in a real time when I need them instead of overpaying monthly for something I may not use or need.
OpEx beats CapEx
Few technological changes have allowed for acceleration of innovation and the rate new business could be formed. Internet of Things (IoT) is changing the world, as billions of devices are communicating with each other underpinned by the Cloud infrastructure. Because it is easy to use AWS to implement a software solution for under $0.5M, startups have dexterity and flexibility to produce things faster. Because of the Always-ON, always connected to network features, global mobile traffic is taking over. This is the Age of the customer. Before, institutions had all the power over 4P (product, price, placement, promotion) but now 4P is being controlled by customer! Customer is in charge of 4P? OK, I will not argue this assumption at this time and let my readers form their own opinion. All of this is a perfect storm for moving towards service model over products. OpEx over CapEx.
OpEx is ongoing cost of running the business, CapEx is almost one time deal, buying equipment needed to run the business whose costs is deducted and depreciated over time. On the other hand, buying cloud computing capacity is payable trough OpEx. OpEx is better because it’s fully deductible, unlike CapEx. OpEx: pay as you grow model, spend less at the beginning when you are smaller company. As you grow, pay for more OpEx. It’s great for SMB, don’t have to estimate your future capacity, just buy it when you need it. No long term commitment, try it, if it fails, get rid of it. Yes, I completely agree that OpEx is much better than CapEx, purely from accounting point of view, but I do now buy into reasoning that services will eat the world.
What will happen when you pay for light bulb as your electric bill? Not buy it directly? Today we have Zip car, eliminating the need to own an expensive car for people living in urban areas such as NYC. Some startups are turning Art into service.Subscribers can change your paintings on their walls. Play as a service, rotate your Lego pieces. The concept of owning a thing is changing. This is the change for destruction of ownership and could have undesirable societal impact as it could widen the gap between have and have nots. He also believe that most products will become free under this concept. Well, that sounds too good to believe.
Financial Sophistication: what your customer lifetime value?
Startups would need to evaluate the inbound/outbound model as part of their financial analysis. What service do you need to buy and what service do you need to create that people will buy. If lightbulb is part of electric bill, you get immediate feedback on the service use and what makes sense to bundle, i.e. how often does an average customer replace light bulbs in their home. With that information, startups can reach the goal to fail fast, lower the churn and find a business model that works.
He recommends that new businesses focus on the number of repeat customers, recurring revenue stream. From that perspective, there’s something that Tyler calls SMN, Service Magic Number that takes into account Lifetime Value of a Client and Customer Acquisition Cost (CAC). Then:
- SMN = LTV/CAC > 1 = Win
- SMN = LTV/CAC < 1 = Lose — burn too much cash over time
For example, Delta airlines decided to signigicantly increase their LTV. They had a lot of cancellation problems in the past. Because of that VP of OPs decided minimize the number of cancelled flights because customers hate the cancelled flights the most. They hired Travelport to get more data to decrease cancelation percentage and became customer obsessed. With all off this, they increased LTV, and Delta’s has 0.3% cancellation rate vs 2% for industry average.
Key takeaway for startups: Build annuity based service model where LTV/CAC >1.