Marketing Expert's Corner
This article written in 2010
A Question of Boundaries
When a company introduces a new product or service, there's the fundamental belief in two things: it's new, and it's a product (or service, or maybe both).
Most times, however, it's not fundamentally new. The feature set is probably better, easier, faster, or cheaper...but it's rare to have something that's completely new. A truly new product can be quite difficult to market, because the target customer doesn't know what to compare it to or how to evaluate it. Think about the iPad: is it something really new (in which case, what's it for again?) or is it an outsized iPod touch (in which case, when would I choose it vs the original)?
What we're focusing on here, though, is not "newness" -- we're looking at the product or service itself. It's all too common to believe that what you're coming up with is worthy of a discrete purchase decision and transaction. After all, you've made the business case with the idea that customers will spend because of the value of your new offering. Trouble is, the boundaries of what you think is a complete product may not correspond with what the customer is really willing to pay for. This way lies trouble...so let's see what we can do to avoid it.
Is It Really a Product?
In high tech, we like to think that a technology is a product. As soon as we're done with making the core technology work, usable, and economical...we're done. For peripheral devices, software, or add-on technologies, that may work out. But with feature sets that are inherently infrastructure, operating system, or platform, a new feature set is not a product. The customer will perceive your "product" as an attribute of something bigger. Even if you get away with selling it as a product for a while, the platform or infrastructure you are extending will eventually expand to wipe out your opportunity. You don't have defensible boundaries. Think of DOS virtual memory managers and PC media players last century, or outboard HDTV adapters more recently.
How do you know whether you've got a product with defensible boundaries? Here are a few tests:
- Is there already a product category you fit in to? Are there industry analysts or reporters writing articles about your feature set as a product category?
- Are there competing products with very similar feature sets and boundaries?
- Can an ecosystem of partners and services grow around your offering so that customers will view it as a complete product? Will that ecosystem be economically sustainable?
- Is your feature set the basis for a discrete purchase decision? Is it something you can really charge for?
- Can your feature set be used in isolation, and does it produce fundamental value (from the customer's point of view) independent from a larger product?
- Will other products or services come to depend on your feature set?
- Can your product be the host for other smaller add-on products?
- If your product depends upon some other product (most do), would your product still have 80% of its market opportunity if the platform you depend on were to expand its feature set a bit?
- Is there a clear pricing model or transaction type that fits well with your feature set?
- From the customer's perspective, is there a business case for using your feature set, or is there a clear basis for an ROI calculation?
- If you project forward 18 months, is it likely that the answers to most of these questions will be roughly the same?
What About Services?
The same problems can be worse, and more prevalent, in services.
Services are inherently invisible, so it can be difficult to understand where the boundaries are. Nearly all of the questions listed above can be applied to services as well, but the answers just won't be as clear. Further, many very successful services are intimately linked to products, with the boundaries deliberately blurred (think iPhone + iTunes). So let's explore an example to highlight the issues.
Think about WiFi internet hot spots. Several startups were founded on the notion that this was a discrete, chargeable service. Under special situations (such as a captive audience), that would be a sustainable model. But WiFi quickly became an adjunct to a larger experience, such as a coffeehouse or a hotel room. Even though Starbucks and T-mobile were trying to charge for the coffee cum internet experience, their competition quickly realized they could grab customers by giving WiFi away. For a fully-loaded cost of maybe $75 a month, a cafe could do substantial damage to Starbucks' traffic. Hard to think of a better marketing ROI. After only 4 years, Starbucks got out of their pay-by-the-hour deal, setting up a perceived-as-free model with AT&T.
Even some airports (such as Oakland and Denver) started giving away WiFi for free, even though they'd previously contracted with WISP vendors who were supposed to be a source of tax revenue. WiFi isn't a discrete service any more: it's a freebie that makes another service (air travel) more attractive (or maybe "less annoying").
Now think about WiFi service from a different perspective: it's one of many alternatives for wireless internet access. Up to now, it's been easy to ignore 3G -- WiFi has been so much faster and reliable -- but upcoming coverage improvements will give 3G a huge advantage of ubiquity and ease of use. 4G goes way further, and will permanently marginalize WiFi. Fast forward 3 years, and WiFi will be almost impossible to charge for...but it will be used as a freebie to keep 4G at bay.
The Ultimate Service is Entertainment
Games, movies, and media total over $50 B in revenue. Many companies in these industries have historically confused their distribution media (a product) with their actual value: information and entertainment (a service). So now that the service can be delivered separately from physical distribution (magazines, newspapers, CDs, and DVDs), the vendors are re-thinking their offerings. Technologically, they've completed the process. But their cost structures and business models anchor them firmly in the past.
Of course, the customers aren't helping any: willingness to rip off content and the expectation that "downloads are free" mean that the real value is tough to charge for. For over a decade, vendors have been experimenting with the formula for the "exchange of value:" freemium, ad-supported, pay walls, subscription. And the experimentation will continue indefinitely, as there won't be a universal answer: there will only be a "best model" within a content category, an industry, a geography, and a purchase context. Like I said before, it's a question of boundaries.
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