At many enterprises, when IT walks into a meeting, people assume it’s because the projector is broken. But if companies want to accelerate innovation and provide value to customers through technology, IT must evolve from a back office function to a core part of the business.
Of course, that’s easier said than done. To make IT core to the company’s business value, three major problems must first be solved:
- Innovation must be accelerated with the implementation of a strong technology foundation
- A culture of commercial intensity must be created to blur the traditional line separating business and IT
- Technology must be successfully commercialized, transforming innovations into revenue outcomes
If these three challenges are solved, organizations are able to focus on higher-value customer outcomes, and deliver sustainable differentiation to the business. Ultimately, the organizations that can solve these challenges are more likely to become the disrupters rather than the disrupted.
The foundation
A strong technology foundation is critical to accelerating innovation velocity.
That foundation consists of four initiatives: building software with Continuous Delivery; running systems with “Architecture as Code”; continuous insights with operational intelligence; and becoming a “programmable enterprise,” which means rapidly assembling technology assets into new business capabilities. Though each of these programs seems independent, they are interconnected, and must be architected and delivered in a cohesive manner. Organizations will have a technology foundation that is secure, compliant, and resilient by design.
A culture of commercial intensity
Culturally, when you drive change, there are three groups of people you must deal with: those eager to collaborate; the cynics or the Eeyores who don’t believe change is possible; and those eager to be offended and are seeking to protect their tiny empires.
The trick to building the right culture is to first find those eager to collaborate. It doesn’t matter where they sit, or how important their function, product, or service is. What’s important is getting a quick win — collaborating, delivering commercial impact, and letting the results do the talking. As you begin to string together wins, the cynics take notice, and start to convert into believers. As the results, the believers get discovered by leadership and the guarded walls that exist within an organization break down. This is as much about social engineering as it is business and technology.
Commercializing technology
The hardest of these three problems is commercializing technology. If you work at a bank, and you come up with a brilliant piece of software, how will you convert that to revenue? Understanding how the business makes money today is critical. From that, you can better understand the capabilities of the sales and marketing teams. Commercializing technology comes down to delivering three business outcomes:
Protect the premium. Clearly differentiate against cheaper alternatives, and protect the gross margins of the product. Average Sales Price trends, regrettable customer attrition, and the inquiry-to-order time are all metrics that help quantify the health of this outcome.
Increase the spend of existing customers. Capture greater wallet share from customers through up-selling and cross-selling.
Capture net-net customers. Sell to new customer segments, and increase market share of existing customer segments.
What’s interesting about technology is that there are many new and clever monetization models that have been created over the past decade. To effectively commercialize technology, these monetization models must be adapted to leverage the core capabilities of the sales and marketing teams, and align to the three business outcomes.
Here are six popular monetization models to get you started:
Free-trial to fee. Initially allow users to test services for free, and after some period of time, the users lose access and must pay. Online virus scanners are an example. Some characteristics to consider:
- The revenue curve can vary based on how the user-base is acquired. Offering a free trial to an existing user-base has a different profile than enticing a potential user via online ads.
- Sales efforts vary significantly. While customers are likely to try a service for free, a sales rep may need to make a call to persuade the customer to buy.
- This works best when you have an existing customer base, and you can easily entice them to try out a new feature.
Freemium. There are a set of features that are free to users, but higher-value features are only available if you meet specific criteria (e.g.: you pay for them, you have a minimum account balance, etc.). Some characteristics to consider:
- Typically the focus is on market penetration or user adoption first in order to obtain a critical mass of free users. Monetization comes later with for-fee services. This requires that we take a multi-year view on benefits.
- The revenue curve tends to be exponential, where there’s very little revenue initially, but it grows quickly over time.
- The sales effort is minimal. Initially it’s about market awareness, and building the customer base of free users. Subsequently, the focus is on exposing the existing user-base to up-sell opportunities
Indirect revenue. The user base gets free access to all capabilities, and revenue is generated on the back-end, including reselling data and referral fees from partners. Google and Facebook are good examples of this business model. Some characteristics to consider:
- Typically the focus is on market penetration or user adoption first in order to obtain a critical mass of users. Monetization comes later, and the user-base is used as leverage over partners when negotiating fees.
- The revenue curve tends to be exponential, where there’s little revenue initially, but it grows quickly over time as new partners sign on.
- The sales effort is minimal, because initially the focus is on market awareness and building the customer base. Subsequently, focus may shift to using sales reps to acquire partners.
Direct revenue/licensing. This is the traditional software model, where the software is licensed (by CPU, by user, etc.). Examples are Microsoft Office and Salesforce.com. Some characteristics to consider:
- This model requires significant internal processes and mechanics – software/service delivery mechanism, onboarding support, license tracking, well-versed sales team, etc.
- The revenue curve tends to be linear, where sales reps are making calls, closing software deals, etc.
- The sales effort is high; because a well versed sales team, and potentially a highly skilled onboarding team is required.
Time-delaying. Capabilities are initially released to paying or high-value customers first, and those capabilities are delayed to the broader user-base. Real-time stock quotes are a good example. Users with a minimum account balance or a subscription get access to stock price data faster, and the rest of the users get quotes that delayed 20 minutes. Some characteristics to consider:
- This model works best when you have access to an existing customer base with clear segmentation (high-value and the rest), and the ability to incentivize customers to move up the tiers.
- The revenue curve tends to be linear, with an initial delay. It takes time for non-entitled users to become aware of the value of having access to the capability sooner. This model is often combined with the free-trial-to-fee model, to accelerate the upsell to the broader customer base.
- The sales effort is low initially, where relationships with the existing customer base make it easy to raise awareness.
Consultative. A consulting-like business model is built around software capabilities and services. For example, consulting firms develop analytics software that is used as part of a paid consulting engagement to advise customers on how to optimize their business. Some characteristics to consider:
- The model works best when an existing consulting business or customer relationships can be leveraged.
- The revenue curve tends to be linear, with slow growth, because it’s a function on the number of paid consulting engagements completed.
- The sales effort is high, because every consulting engagement must be won.
Aligning the business outcomes, the capabilities of the sales and marketing organization, and some combination of the various software monetization models is the secret formula to commercial success. Organizations must successfully solve the core three challenges: building a strong technology foundation, blurring the line between business and IT, and established a formula for commercializing technology to create sustainable differentiation. The organizations that overcome these challenge become the disruptors that operate with the resources of an enterprise and the agility of a startup.
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