Enterprise IT ISVs must Plan on Constant Market Price Pressure as an Important Factor on Recurring Revenue Product Models

Professor Willy C. Shih, in an interview aired on November 29, 2012 on Bloomberg TV Surveillance faults Kodak (and other manufacturers of modern cameras) for, effectively, ceding control over manufacturing of the durable component of their camera system products over to foreign businesses. The durable component of the modern photography system is the camera. We entirely agree with Professor Shih’s judgement; however, we are particularly interested in the changes that manifested in marketplace interest in the non durable component of the system, meaning film, and, later, digital recording methods which entirely supplanted its predecessor as the preferred and widely popular method of recording and re-using photos.

We think the history of how this radical shift in market interest occurred is completely consistent with products that become commodities, over time. We also think that Kodak, itself, contributed to this transformation of the home photography market from something unique to merely a necessity for mass market customers in need of a commodity to record family events (like births, weddings, funerals, etc) for posterity in a visual form.

Kodak contributed to this destructive trend by producing film that would work in any camera, regardless of the manufacturer. When consumers could capture the same comparable quality image of an event through any available method, the market need swung all the way over to two telltale factors:

  • price
  • and availability

Of course, the absolute lowest cost photo system, as well as the fastest method of producing photos, are both to be found in digital cameras, and, further in the digital cameras included in mobile telephones (cameras were originally added to the feature set of cell phones as a spurious after thought to push consumer interest).

There are some disturbing parallels of Kodak’s unfortunate experience and the approaches of first IBM, and then Microsoft’s approach to the enterprise IT computing markets. With regards to the personal computer segment of the enterprise IT market, in our opinion, both IBM and, later, Microsoft opted to decouple hardware from operating system. By licensing their computing platform to multiple OEMs, both IBM and Microsoft inadvertently created the basis of a market entirely driven by a quest for computing solutions as commodities. To reiterate: when the computing experience is entirely uniform, despite the type of computer (durable component) used to convey the application (non durable component) to the user for processing, then the only important factors quickly become price and availability, which are two billboards pointing to a commodity market.

If enterprise IT ISVs choose to compete in these commodity driven markets, then they must be constantly on the lookout for lower cost methods of producing items, as well as the quickest delivery times. In the next post to this blog we will look a bit closer at whether or not there is an important opportunity in the Citizen Developer segment of the enterprise IT computing market for ISVs offering no code application development solutions.

© IMB Enterprises, Inc. & Ira Michael Blonder, 2012 All Rights Reserved


Parallels Between the Modern Mass Market Camera and Enterprise IT Software are Worth Considering for ISVs

For those readers who are unfamiliar with the modern camera business we need to point out that the camera, itself, represents the durable component of the product model. We should note that there are many segments to the market for cameras. Two of these segments are of particular interest to us for this discussion of razorblade product design and its importance for enterprise IT ISvs, regardless of whether the requirement is maintaining current products, or conceptualizing new ones: the segments made up of professional photographers and the segment made up of consumers. With regard to the professional market for modern cameras, we think that up to the very recent present, the non durable component of this hybrid product, specifically, the method of recording photos in a reusable format suitable for storage, reproduction, etc. amounted to rolls of film, In fact, one can argue that rolls of film are still very much in demand by professional photographers, despite a shift to digital recording.

For the consumer market it is a dramatically different story. There is little to no further significant interest, now in 2012m, from the consumer market in film. Almost all of the interest is now in digital methods of recording and re-using photos. One can only conclude that a radical shift in market interest in the non durable component of modern camera product has occurred. The extent of this shift was so wide that the entire business model for Kodak suffered a terminable blow as a complex result of it.

Before we take a bit of a deeper dive into the components of this shift in consumer interest, it is worth taking a moment to look at an important parallel between enterprise IT product design and modern photography marketing — specifically, with regards to target markets. For modern camera marketing the film buff (or hobbyist) made up an important market segment, much like -->


Enterprise IT ISVs Should Commit Equal Resources to Managing Durable and non Durable Components of Products

We have spent sometime over the last few posts to this blog discussing what we refer to as a “razorblade” product development strategy. The purpose of this strategy is to equip an enterprise ISV business with a method of building recurring revenue. The model we are describing owes much to the product strategy that Gillette Corporation and its competitors implemented to meet the personal needs of men with regards to shaving. Within this model the durable component is the razor designed by Gillette and its competitors, which replaced the blade of the razor with an apparatus which would accept cartridges. These cartridges added a non durable component to the shaving system. In fact, users need to replenish these cartridges. Over time, the amount of revenue received by manufacturers of these systems from sales of replacement cartridges far exceeded the revenue received from the sale of the durable component–meaning the razor, itself.

There are many examples of products that have been built along these lines. Most of these examples derive a considerable proportion of revenue from sales of the non durable component of the product. We spent sometime discussing one example of these present day examples, the Kerig® one cup coffee system. This system produces a considerable amount of revenue from the sale of so-called “coffee pods” which must be purchased, specifically, for the coffee maker, which is the durable component for the system. An added benefit for the manufacturer is that the amount of content (meaning the ingredients that make up a lot of the benefit for users of the complete coffee system) required for each pod is very small; therefore, the non durable component of the system is highly efficient, which contributes even more to the profitability of the operation.

On November 29, 2012, Willy Shih appeared on Bloomberg Surveillance. We found the airing of this interview with Professor Shih to be quite timely. In fact, as we will present in a later post to this blog, in our opinion, Prof Shih presented a compelling case for manufacturers of razorblade products — including enterprise IT ISVs — to allocate substantial ongoing resources to the task of defending market place position for the durable component of these products. We should note that prior to his present position at the Harvard Business School, Willy Shih spent a considerable amount of time at Kodak. In fact, he served as head of its consumer digital business in 1997. Therefore, he speaks with considerable authority on this topic.

In the next post to this blog we look at the modern mass market camera product as a preamble to our comment on Mr. Shih’s interview on Bloomberg Surveillance on the 29th of this month.

© IMB Enterprises, Inc. & Ira Michael Blonder, 2012 All Rights Reserved


Device Apps Provide ISVs and Their Hardware Partners with a Compelling Method of Maximizing Recurring Revenue Models

Apps provide ISVs and their hardware partners with a powerful method of closely coupling durable and non durable components of what we have referred to as a “razorblade” product development strategy. With computing systems effectively locked down, as they are for smart phones and tablets, which are, effectively, closed systems that run on a reduced instruction set computing (RISC) set of features, vendors have located a compelling method of producing revenue from durable and non durable components of these systems. In fact, Apps that are specific to operating systems (OSs) are entirely comparable to the coffee pods that are required for a single brew coffee system marketed by Green Mountain Coffee Roasters, Inc — Keurig®. We think that the companies producing these products are after the same level of enormous profitability that this product from Green Mountain Coffee Roasters, Inc. has produced.

Of course, not all market participants are proceeding with the same level of methodical dedication to a profit objective. Consider, for example, Google’s Android system. In fact, as Darcy Travlos pointed out in an article published on August 22, 2012 on the Forbes web site, Five Reasons Why Google Android versus Apple iOS Market Share Numbers Don’t Matter, “Google gives away its Android operating system in order to have real estate on mobile devices and, therefore, ubiquity is critical for Google to deliver ads. On the other hand, Apple makes money on every iPhone and iPad it sells, even before an ad is delivered to the device” (quoted from Ms. Travlos’ article, for which we have provided a link). In fact, as Ms. Travlos so aptly concludes, Google’s purpose for engaging in this smart phone market with, effectively, a closely coupled App component, has much more to do with expanding the application of its click ad electronic promotion product to a new market place, than it does with extract profit from both ends of a razorblade product marketing strategy. Again, as Ms. Travlos points out, Apple’s intentions are quite another matter. In fact, Apple is realizing enormous revenue from the sale of the durable component, while tightly managing participation in the App marketplace.

In fact, Apple has innovated this razorblade product model. We think that Apple is using the non durable component — Apps — to drive more sales of iPads and iPhones, which amount to the durable component of these products. As the Apps attract more users, more iPads and iPhones will have to be purchased by new customers. As well, compelling Apps will require that customers continue using these smart phone and tablet devices. We think, further, that Microsoft® has studied all of this very closely. Stay tuned as they try to apply the same principles to legacy office computing as they roll out Windows® 8 and Office® 8, which will both have their own App stores.

© IMB Enterprises, Inc. & Ira Michael Blonder, 2012 All Rights Reserved


Cloud Computing and Software as a Service are Examples of Computing Products that Conform to Razorblade Product Design

Cloud computing and software as a service (SaaS) offers amount to examples of our notion of “razorblade” product design applied to office automation and information technology (IT) markets. For both of these types of products, the durable component of the system amounts to the computer hardware, networks and web browser software required for participation in the offer. The non durable component usually amounts to nothing more than time, which dictates the rate at which the customer must pay to maintain the benefits delivered by these products.

It is important to recognize that, broadly speaking, the durable and non durable components of these offers can be decoupled. In other words, a cloud services provider, or an enterprise IT ISV with an SaaS offer, may end up with no revenue, whatsoever, from sales of the durable component of the system. Nevertheless, durable components in the form of computers, networks and web browsers are still required for use of these products. Some participants in these markets, for example, Dell and/or HP, have attempted to capture the durable revenue component, but, generally speaking, this added benefit has alluded them.

Something of an exception to this rule, in our opinion, is the Office 365 offer from Microsoft®. In fact, Microsoft owns the largest segment of the operating system market for its cloud service as the result of the near universal usage of Windows®. But the way Microsoft captures the durable component revenue portion of the Office 365 product does not conform to our “razorblade” product model. The durable component revenue is indirectly paid to Microsoft by its OEM partners, and not from the actual end customers of Office 365.

As we mentioned above, the non durable component of most cloud and/or SaaS offers amounts to no more than time. We think this component, which usually amounts to a monthly subscription model, is actually a weakness of these products. In our experience, customers will require cloud and SaaS vendors to provide new content in order to ensure reliable, long term subscription to services. Therefore, if IT ISVs are to successfully use cloud and SaaS products to drive recurring revenue, then business planning for these products should include the cost of regular development of new features for offers. Therefore the operating expense (OPEX) portion of cost of goods sold will be comparatively higher than products that align more precisely with our “razorblade” model. In fact, examples of IT products that constitute a better articulation of a durable and non durable component mix are already available as we will illustrate in the next post to this blog.

© IMB Enterprises, Inc. & Ira Michael Blonder, 2012 All Rights Reserved


Green Mountain Coffee Roaster has a Real Money Maker in the Keurig Single Cup System

In our opinion, the Keurig® Single Cup Coffee System, which is owned by Green Mountain Coffee Roasters, Inc. is an example of “razorblade” product development. This consumer item conforms to the dictate that any product in our “razorblade” product category incorporate both durable and non durable components. The Keurig® brewing systems is the durable component of the product, while the Keurig® “Pods” amount to the non durable component of the system, which must be periodically replenished by the user.

This hybrid combination of durable and non durable components has, evidently, generated an enormous amount of revenue. As Oliver Strand wrote in an article With Coffee, the Price of Individualism Can Be High on February 7, 2012 in the Dining & Wine Section of the New York Times web site, the actual price, per pound of coffee, paid by users of this brewing systems who opt for certain brands of coffee pods for Keurig, amounts to $51.00, or over 4 times what one of our staff members pays for fresh roasted Sumatra coffee from a local grocer. A 400 percent markup beyond top grocer pricing for comparable non durable items is nothing to sneer at, especially when one considers the reach of this product in terms of customers and the frequency at which replenishment is required.

It is no wonder, then, that “razorblade” product design is something of a holy grail for product marketers. An especially precious feature of any example of this type of product design is the need that customers almost universally experience to replenish the non durable component of the product. In fact, the need to replenish amounts to a core driver of a recurring revenue component to these products. Of course, any product that includes a solid recurring revenue component is highly prized. In fact, operational expenses (OPEX) will be dramatically lower for these products. Existing customers who are effectively “hooked” on replenishing non durable components do not require further sales efforts. Neither do these customers require much in the way of additional marketing (though the history of the Keurig® system does include a substantial amount of follow-on marketing cost, which accompanied Green Mountain Coffee Roaster, Inc’s ambitious expansion of the pod coffee options for the system, as well as its attempts to introduce additional durable components in the form of new brewing systems).

Given the lucrative revenue qualities of “razorblade” product design, enterprise IT ISVs (and their computing hardware partners) have searched for a method to incorporate the same type of product in their offers. We think that cloud computing and the App store feature of mobile computing devices are two examples of these efforts. We will talk a bit about cloud and Apps in the next couple of posts to this blog.

© IMB Enterprises, Inc. & Ira Michael Blonder, 2012 All Rights Reserved