New York magazine had a feature on pizza this week and it mentioned that one pizzeria, Kesté, is offering a ten-day pizziaolo training course for $4,000 and there is already a waiting list. Now, I’d normally post something about New York pizza to my tumblog but every time I see an example like this I think of the freemium model for Web services.
Kesté is not a unique example. Museums frequently offer high-end travel packages to overseas art galleries and places of historic interest. Although airlines are struggling right now, their model has long revolved around charging some customers many multiples of the lowest priced fare for a significantly higher level of service.
None of the above examples are strictly freemium models but the common thread is deeper services that extend the spending (in the best cases at a heavy premium) of the most passionate customers. The reason I think of Web services is that freemium features usually feel like small and arbitrary product extensions.
I think there is a mental block online caused by the principle that marginal costs approach zero, which reinforces the assumption that all users are equal and promotes scale over everything else. But these ideas have never been mutually exclusive in the past and I don’t think they are now.
Examples like Kesté or first class air travel give me the feeling that premium Web services might need to be much more dramatic extensions of free features (with prices to match) for a very specific constituency of fanatical or professional users that probably haven’t been identified yet.
Posted on July 21, 2009
I wanted to post about Customer Relationship Management (CRM) early in the life of this blog because it underlies a lot of my thinking and I knew I’d refer to it often in blog posts on a wide range of topics.
Strictly speaking, what I’m interested in is ‘customer-centric’ business and I’ve found that this is the best way to think about it. Talking about CRM invariably draws associations with with expensive, large-scale and often failed IT projects and that have little to do with customers. Those systems are meant to provide tools to scale customer-centric objectives but like most things getting there is really down to people.
In the last few days some of the themes of customer-centric business have started to emerge online. Albert Wenger has posted twice on a disruptive, Web-based banking model built on learned relationships and customer experience. There have also been several other posts on Twitter’s potential as the basis for a ’social CRM’ system.
I looked around quite a bit online for some useful diagrams to illustrate customer-centric business but I couldn’t find any. Specifically, I was looking for diagrams by Peppers & Rogers who pioneered these concepts in the mid- to late-90s. The two charts below can be found in their book Enterprise One to One and I cannot recommend it highly enough. I’ve not read all of their books but I’m confident anything they have published is probably excellent.
Most businesses pursue aggregate-market competition which as indicated below focuses on producing products that solve a narrow set of problems and attempt to maximize the number of customers that buy them. All customers and potential customers are treated equally, it’s the numbers that count and the main objective is to attract new customers (which has traditionally been expensive).
In contrast, customer-driven competition focuses on serving a defined group of existing customers and creating a wider range of products and services designed around them. The goal is to increase the share of customer spending rather than aggregate-market share. These are not new ideas, just rarely attempted or executed very well.
There are a couple more parts to a customer-centric strategy. First, all customers are NOT equal. They are distinguished individually by their value to the company. At a simple level this is how much business they have with you but valuations could include other factors as well.
Once customers are ordered by value businesses should spend most of their time and resources on the most valuable customers and extend their spending through individually tailored products and services that grow their overall share of each customer.
The Web was meant to provide the interactions necessary to enable firms to distinguish between customers, remember them, and subsequently move past mass-customization to individually tailors products and services. What actually emerged was a reputation for cumbersome CRM implementations where the overarching goal of customer-centric business was lost.
At the same time, new Web services have been built using a product-centric mindset on the dual principles that online marginal costs tend towards zero and that network effects make services more useful the more users they have, both of which are true.
Given that most Web services are launching entirely new and disruptive products, a product-centric approach is usually necessary. New innovations often need to be product-led because customers don’t know they need them until they are presented.
However, as the growth of Web services continues and they become pervasive in our lives I think customer-centric business will become increasingly important as a way to build real businesses online and I expect to revisit this topic frequently on this blog.
Posted on March 24, 2009
My name is Phillip Baker and this is my personal blog about finding value in a world of free information.