They are product delivery models that dramatically reduce the cost, time, and resource requirements to test products and their purported value.
The risk to trial is mitigated and individual users can experiment and validate value in isolation of the broader enterprise.
More than ever, companies that focus on reducing the risk and resources required to trial their product or service are outperforming "heavy" footprint product companies.
The capital markets are highly efficient and dollars quickly flow to the highest yielding assets. IT markets, however, are characterized by high degrees of friction that artificially limit capital reallocation and flow.
Typical IT frictions include: required asset requisitions, proprietary interfaces, multi-department decision making, multi-level budget approvals, lack of connectivity, lack of resource and expertise, and behavioral inertia.
It truly pays to ask what are the exogenous barriers that artificially limit value testing and access.
Today's fastest growing companies seek to optimize two core things:
1) friction free adoption and
2) hard "value per unit" analysis; such as price per click, price per CPU, price per seat.
Capital flows to the highest yielding assets.
Once economic actors are able to validate the "value per unit," the dollars will flow:
- at a rate proportional to the relative increase in yield (value/cost) from product A to product B and
- at a rate inversely proportionate to the number of barriers that limit the free flow of capital to product B (the higher the # of frictions, the slower the reallocation to the economically advantaged unit of value).
- market are efficient and capital flows to the highest yield assets
- products that provide a higher yield (value/cost) will attract capital
- ex. cost per action, cost per seat, cost per CPU
- product delivery models that reduce frictions will see faster capital allocation
- efficient product test, validation, and delivery mechanisms stimulate capital flows
- equity value creation is a function of the amount of total capital at risk and the rate of reallocation from one class of assets to the next
- ex. total capital at risk = total ad spend market
- ex. "value unit" = cost per sale
- ex. "yield" comparison = $100 sale/$2 cost per click= 50x vs $100 sale/$15 per telesales call = 6.66x, or 7.5x differential in yield
- the targeted pool of capital
- the economic unit of value in question
- the differential in yield from model A to model B per given unit of value
- barriers to capital reallocation from model A to model B
- barriers that protect model B from replication