Boston Consulting Group: Innovation and Strategy Perspective
First Place Award May 2000
There is a growing concern that the Internet bubble is sure to burst. This, coupled with the fact that the majority of dot com companies do not see profits in sight for a long time, if ever, requires that we re-think the fundamental way in which companies make money or exchange value.
Traditionally, a company makes a product or a service and the client pays them accordingly. We see that this idea is becoming more flexible with the advent of companies like Accompany and Mercata, to name a few. These companies have succeeded at exploiting one part of Porter’s Five economic forces (competition between players in the industry, threat of new entrants, supplier power, customer power, and the possibility of substitute products). Both companies have aggregated customer demand and therefore power, giving them the ability to negotiate better prices with retailers.
Currently, there exists a tendency with many dot com companies to give everything away. This has become sine qua non in terms of the Internet and the new business models that are being developed around it. How are these companies going to make money from their business models, since some revenue models are more obvious and straightforward than others?
We need a new way of transferring money or value between the company and the customer. I propose that the stock market could provide the solution to these questions.
Stockpower.com proposes that when customers own stock in a company, they are much more inclined to purchase that company’s products. They have entitled this individual “The Investomer”.
This is the intermediate step in the evolution of our buying processes. For more “intangible” products, like software, it is more difficult for consumers to feel comfortable paying for the software, but there seems to be no difficulty in getting them to invest in the same company. Take Microsoft for example, few individual consumers actually purchase its Office package. Yet these same customers are pouring money into Microsoft, resulting in Microsoft’s large market capitalization.
Also, a large percentage of Internet companies are fuelling their growth with IPOs. These valuations are based on future expectations of the company; expectations of valuable products or services. How does this solve the problem of value transmission?
Because the companies are forced to offer the products for free, the only recompense for quality products is a value bolstered in the stock market. When a firm introduces a product that is well received, the stock price rises accordingly. On the other hand, when a company’s products are poorly received, the value of the company adjusts downward accordingly.
Herein lies the key to unlock the value transmission problem inherent in intangible products
Companies facing the grim reality of having to provide products and services for free need to keep in mind this principle and focus not on how to make money on the product itself, but rather on how much value it adds to the company’s valuation. By focusing on value creation in this context, companies can understand how customers (or investomers) will “pay” for the product or service (by investing in the company) and therefore provide those products that will favor an increase in company value.
Within this new system there exists the danger of free-riders: those individuals who benefit from the products of a given company without having invested in the company. This requires us to consider alternative product/payment exchange models and possibilities to avoid the free-rider effect.
Is the investomer what we are evolving into? Will we convert purchasing behaviors into investing behaviors in order to exchange value? These questions need to be answered firmly in any executive’s mind before taking strategic direction decisions regarding product introductions in our developing New Economy.