Summary: Whilst technology has significantly brought costs of production and distribution down, for consumers or businesses the cost of goods we procure has remained as high as ever. But that’s about to change. The systematic dismantling of unit cost economics of existing markets across many industries is now underway.
Jonathan Rothberg has raised $100 million to make medical imaging as cheep as a stethoscope, summarizing his invention as
“A scanner the size of an iPhone that you could hold up to a person’s chest and see a vivid, moving, 3-D image of what’s inside”
Zenefits, the new HR software provider gives your business a fully functional HR suite for zilch and no contracts.
The Dollar Shaving Club is selling razor blades at a third of the cost of a Gillette razor blade.
The spread in almost every industry that is being revolutionized by technology is now increasingly exposed. And as much as we’re seeing new digitally transformative business models emanate from an opportunity to provide better customer experience from the likes of Uber and Lyft at the same price or even surging prices or an opportunity to create delightfully smart digital products from Nest or Munchery or Fitbit, the opportunity to dismantle sheer cost structures is an equally transformative dimension that has also begun to destruct incumbents.
A similar opportunity to shatter incumbent unit costs economics exists in enterprise software as well. The race to zero is awesome, as Alex Wilhelm correctly said alluding to cloud storage. But it’s an opportunity for almost every consumer and enterprise sector.
Siebel Systems made a billion dollars in 7 years but accomplishing that kind of high volume, high margin growth is increasingly unlikely today – what GainSight CEO Nick Mehta characterized in this TechCrunch post as “it’s getting harder” to sell Enterprise Software. Today there are much more palatable options available that more closely reflect the cost of building and ease of distribution in SaaS. For instance, Sales Force Automation and Call Center starter packages come as low as $1 and up to $199/ month.
The beloved Tesla, for all its software driven efficiency hasn’t reached a point where it’s sharing the cost efficiencies, yet. It will be disrupted as well. It will be disrupted by the first car manufacturer to share the cost efficiencies from a software-first automotive design with the consumer. Though I’m betting that Tesla disrupts Tesla. Elon Musk has already shown his propensity to share savings from software-first product design with the new infinite mile warranty.
But I just don’t see all this as bad news. It’s actually fantastic news for anyone looking to create new business models. Cost drives sales friction. And so, when you get into the mind-set of designing a product strategy and distribution model to drive velocity you
- …mercilessly remove friction at every step of the sale
- …improve the ability of the customer to procure and to consume really really fast and replenish really really fast.
- …you create a cultural DNA of speed of execution and accuracy across every function in your enterprise. Volume sales demand this.
And as a result, when new unit cost economics allow the price to go down, it removes sales friction and adds predictability. You’re just not waiting until the end of the fiscal year to make 80% of your revenue from 20% of your customers.
Like in the case of Zenefits, zero dollars and zero contracts means almost zero sales friction and mad sales velocity. Result? 1300% revenue growth in 12 months.
Companies such as Zendesk have been able to go public on such lower price but high velocity models.
And by shaving incumbent margins and coming in at 1/3 the cost of up-market razor blades, the Dollar Shave Club now has a shot at going after Gillette’s $8B annual run rate and seemingly unshakable monopoly. $60M in revenue already here. Now, Gillette’s run rate suddenly looks like a verity realistic TAM for the Dollar Shave Club to go after. And if a physical product can cause such mayhem, so can every digital product.
To be clear, this isn’t about leaving money on the table. Get paid for your worth. See this post by Steve Sinofsky for a solid pricing framework. Rather, this is about understanding the right price point at which you still get paid for value delivered but also one that helps you achieve escape (sales) velocity. When you achieve this, you wake up sleepy markets and force a replacement cycle. For the Dollar Shave Club, this happened at 1/3 the price of Gillette.
Digital transformation is showing up in many shapes and sizes. But I’m convinced that dismantling unit cost economics will be one of the most lucrative and disruptive opportunities in the next decade.
The race to the bottom is a good thing. It’s where the goldmine lies.
(Cross-posted @ Pretzel Logic – @sameerpatel)