How many times have you been to a business conference that guided the world to sell things for free? Well, if you never heard about one, then you need to know about Nokia World 2007 Conference where Chris Anderson, Editor in Chief talks to the world referring to this. The campaign broke all the traditional rules of selling a service product. As per Chris, the new way to sell today has changed focus from the actual product to the complementary product or supporting product that could enhance the selling of original product.
Chris talks about the new selling concept of 0 + 2 = 2 in contrary to the old concept of 1+1 = 2. Now, what the hell does he mean by this Maths..?
Consider Company A that sells both - the products and the services on the same products. As per the traditional earning model Company A earned Rs 1 revenue from selling the product and Rs 1 revenue from the services on the product. The modern way of selling sacrifices the revenue on product to earn revenue on service which is more profitable and perpetual revenue raiser i.e. - selling the product for free with revenue as Rs 0 and earning 2 from servicing that eventually costs very less.
In industries like IT the revenue earned through service and maintenance of a software or an Infrastructure could be 100 times the price of software (which is considered product). For Telecom operators the investment is fixed as they pay for the licensing lease - the huge the number of subscribers, the larger the profits.
Giving a valuable product at a very less (or at no margin) or even free of cost can breakdown the entry barrier and at the same time, developing a model to recover the revenue from value added services and perpetually introducing innovation may lead to deep money mines.
One such industry that has practiced this principle well enough is Telecom. In May 2009, Apple announced that one billion iphone apps have been downloaded in the first nine months. A source identified that Apple is earning more than $70-160$ from iphone applications developed by open source community of around 600,000 developers that paid a membership fee of $99 (excluded revenue). Now it’s worth noting that it took 6 months to hit 500m app downloads, and only three months for the next 500m app downloads, so Apple’s revenue run rate is higher than this. Thought the revenues from software applications today have not gone pass the product revenues but the change is expected soon. It wasn't a miss calculation when Reliance sold Samsung phone sets for Rs. 500 in the year 2002.
I run a Guitar School. Imagine a situation where every home has a Guitar, the music school industry is destined to grow leaps and bounds. The reason why it's not growing today is because a decent guitar costs good amount money. If I shake-hands with a Guitar retailer and partner to provide learning services on such a model, both Product and Services will amplify.
If you go by the Cheese theory, you will analyze that the old cheese might not last longer and the market dynamics might move the cheese soon. The quicker you let go the old cheese the sooner you will find the new cheese. Move with the cheese and enjoy it.
2 comments:
Interesting , but unlikley in case of capital & labour intensive industries where cost of goods sold is prime drive for P&L.
However, we still have to wait for this scenario where usgae drives consumption as inturn drives cash flows for company..nice concept...0+2.
True. I forgot to mention that this concept would work well in service industry which require a little bit of infra/product.
Service is one thing which once deployed almost cost's nothing.
Thanks for your comments.
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