Mark McDonald

A member of the Gartner Blog Network

Mark P. McDonald
GVP EXP
8 years at Gartner
24 years IT industry

Mark McDonald, Ph.D., is a former group vice president and head of research in Gartner Executive Programs. He is the co-author of The Social Organization with Anthony Bradley. Read Full Bio

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Enterprise Economics, one of the dimensions of digital disruption

by Mark P. McDonald  |  April 17, 2012  |  1 Comment

Digital technologies open new avenues for companies to disrupt competitors and markets.  The prior post outlined three dimensions of disruption: access, enterprise economics and performance.  This post focused on enterprise economics as a dimension of digital disruption.

Digital technologies disrupt economics at multiple levels by upsetting the balance between volume and value by creating a geometrically higher volume of transactions, with each transaction having a geometrically smaller value.

 

 

This is the basis for digital disaggregation of analog resources and assets that drove the first wave of eCommerce.

The music industry is often used, but helpful example.  Take a single record album — the Beatles’ “Abbey Road” — as an example. In brick-and-mortar stores, the physical album’s original 10 songs existed as a single bundle worth, say, $12.99.

This is a low-volume item with a high value compared to its digital counterpart of 17 songs, each selling for $1.29. These “micro-transactions” are possible because bits are cheaper to create, store and manage than atoms. This may be the basis for the efficiencies of e- commerce operations, but it is not necessarily the basis for new digitalized business models.

The emerging digital environment, the one coming from digitalizing business rather than digitalizing transactions is creating more opportunities for firms to disrupt each others economics beyond simple disaggregation and reassembly.

A firm disrupts its and competitor enterprise economics by changing how customers and companies assign, attribute and earn value.

The term, enterprise economics is intentionally broad as digital disruption covers a range of strategies from transforming pricing to redefining customer/market units and profit pools.   This ranges from current approaches related to selling access (a.k.a. advertising) to attracting premium customer via so-called ‘freemium.’  Both are viable digitally enabled economic models, but they are applicable in a limited number of circumstance.

  • Advertising revenues only work when you are able to attract economies of attention to drive scale economies in micro-revenues.  Few firms have the millions of people, attention, eyeballs, etc., to make this model a cornerstone of their strategy.  Even specialty firms, those with ‘high value’ eyeballs use digital advertising as secondary source of revenue.
  • Freemium models are likewise limited in their application to firms that are able to support a large group of free users against relatively low conversion rates for premium services.  While digital operations are cost-efficient enough for the business to carry nonpaying customers, the viability of the freemium model depends on a sustainable conversion ratio and a business having technology that is “too cheap to charge for.” LinkedIn, for example, has the wherewithal to market, sell and serve a base in which only 15% of customers pay for 100% of the cost of operations (the estimated conversion rate for customers of LinkedIn’s premier services).  Not everyone is so fortunate.

I believe that future digitally based economic disruptions will come from more than selling access or giving stuff away.  Here are few thoughts:

Digital price disruptions are a given as technology changes the cost of products, services and the unit of value in ways that disrupt competing models.  The first wave of price disruption was price transparency and comparisons enabled by the Internet.  Here providing price transparency actually created intermediaries and brokers for example in the travel and leisure industry like Travelocity, Oribitz, Hotels.com and the like.   These are intermediaries who were supposed to disappear as disintermediation dried up their profit pool.

Digital technologies change more than just price.  They change the fundamental economic model and perception of value, cost and commerce.   Consider what is going on now in software and transportation.  Micro-leasing companies like Zip-Cars are changing the unit of consumption for automobile travel. The introduction of software as a service (SaaS) changes the unit of value compared to traditional license-based products.  With SaaS you buy access over time to a range of services rather than an individual license to a fixed set of functionality.  The economic unit is different disrupting license revenue models and operations.  Watch the interplay between Google and Microsoft in this space one tries to change the economics of the other.

Applying digital technologies to disrupt economics encompasses fundamental differences of price, unit sold, revenue model and the like.  This post highlights just a few of these disruptions and there are more to come.

 

1 Comment »

Category: Digitalization Economy Strategic planning     Tags: , , , ,

1 response so far ↓

  • 1 Carolina Ruiz   May 4, 2012 at 5:56 pm

    I am a journalist. I am writing an article on freemium model. I would like to interview Mark McDonald on the subject. Please contact me to my email.