Understanding Demand in a Recurring Revenue Business: Part 2 of 3

Posted by: Matt Shanahan

Part 1 highlighted that value has switched from product shipment to service usage. Part 2 highlights why the switch occured.

The Internet has indeed changed everything. With the switch from analog to digital, came dramatic movement in both supply and demand that has been well documented in books such as The Long-tail, Free, and Customer Revolution. On the supply side, traditional barriers to entry have been systematically knocked down one-by-one—leveling the playing field from a cost, infrastructure and delivery standpoint. From a demand perspective, 24 x 7 accessibility coupled with an explosion in online search sparked a transition from a “push” to “pull” model, dramatically shifting customer expectations and behavior. Today, the new supply curve for digital products looks more like a flat line than a slope, challenging incumbents’ business models. The new demand curve flattens as well with a move away from more expensive alternatives toward new, free offerings on the Internet. This “flattening” of the traditional supply and demand curves has put a squeeze on margins for organizations. Their response? A massive transition toward service-oriented businesses.

The switch to digital creates more opportunities for innovation and new sources of value. Value has shifted from product delivery to service usage. In particular, customer demand is increasingly fueled by speed of deployment and time-to-impact of service. Salesforce.com exemplified this value proposition by enabling CRM for customers within hours compared to solutions like Siebel Systems that took months if not quarters to activate.

Leading organizations are quickly figuring out how to transition their products into service offerings, where an on-going, two-way relationship between the supplier and the customer preempts the product as a discrete “thing.” The software industry led the way showing huge success with a nimble transition from traditional product offerings to one of Software as a Service offerings (SaaS,) but other industries are right behind—including gaming, communication, platform, infrastructure and now even the media (see http://paidcontent.org/article/419-time-to-change-the-lens-media-as-a-service/.)