One particular design consideration for crowd orchestrators is how much control to give to both customers and suppliers. Can customers choose individual providers? Can suppliers set their own prices? Overall, the more control a crowd orchestrator exerts, the more the customer experiences the work performed by the crowd as one coherent virtual firm. It is not the individual provider of the product or service that matters when using Lyft, Uber, Instacart, or others. In fact, the customer has no way of choosing who will fulfill the request, and it is the crowd orchestrator who sets the prices, not the individual suppliers.
In contrast, with less control, there is more variety in the market. You might not value that variety when it comes to traveling from A to B—for a short ride, a car is a car as long as it is clean and basically safe. The same is not true for a vacation home. In such settings, variety of choice is valued by the customer, and so imposing control (“Your doors have to be white and you need to charge one hundred dollars per night”) would be useful neither to the customer nor to the provider of the home.
As with other connection architectures, we see that over time some firms operate with more than one architecture:
Airbnb started out as a platform where travelers could find a place to stay while traveling by engaging in a short-term rental agreement with the owner. The owner acquired the real estate with the primary motivation to use it for herself and only hosted Airbnb guests to defray costs. That makes Airbnb a crowd orchestrator. But increasingly, rentals listed on Airbnb are owned by commercial real estate companies that rent their properties 365 days a year, using Airbnb as a sales channel. For those customers, Airbnb is also becoming a connected market maker.
The “mother of all platform models” is the auction site eBay. Again, when an individual sells his old lawnmower on eBay, the company is acting as a crowd orchestrator. But when the local hardware store uses eBay as a distribution channel, eBay is a connected market maker. A similar development can be seen at Etsy, which started out as a marketplace where individuals could sell handmade items and now also offers factory-made items.
NOT-FOR-PROFIT CROWD ORCHESTRATORS
Connected strategies can be employed successfully not only by profit-seeking firms but also by organizations that have other objectives. The connection architecture of crowd orchestrator can be a powerful tool to connect individuals in need with individuals who want to help. Consider DonorsChoose.org. Public school funding in the United States has been very tight for many years, creating deficits in almost everything from art supplies to books and lab equipment. Teachers with needs in their classroom can submit a request to DonorsChoose.org. Its staff will vet and post the projects, including a detailed financial overview of how funds are being spent. Individual donors, and some corporate partners, then pick projects and contribute funds. Once a project is fully funded, the staff at DonorsChoose.org purchases the requested items and ships them directly to the school. In turn, each donor gets a thank-you letter from the teacher, photos from the classroom, and a report of how the funds were spent. Since 2000, DonorsChoose.org has connected more than 3.5 million donors to fund more than 1.25 million classroom projects, totaling more than $766 million in funds raised. Without this crowd orchestrator, it is hard to see how these donors and teachers would have connected with each other.
Crisis Text Line is another crowd orchestrator in the not-for-profit sphere. Crisis Text Line connects people in personal crises to trained volunteer crisis counselors who can work remotely anywhere with a computer and an internet connection. All conversations on the crisis-intervention hotline, lasting on average one hour, are conducted via text messages, the preferred medium for many teenagers. Crisis Text Line provides training to volunteers and has invested heavily in technology that allows texts to be automatically reviewed for severity, so that imminent-risk texters are responded to first. Volunteer crisis counselors are supported by full-time paid staffers who have advanced degrees in mental health or related fields. Since its launch in August 2013, Crisis Text Line has exchanged more than eighty-six million texts with people in need. While it started in the United States, it has replicated its system now in Canada and the United Kingdom. Given its extensive data, which links crisis topics, time, and geography (e.g., depression peaks at eight o’clock at night, anxiety at eleven o’clock at night, self-harm at four o’clock in the morning, and substance abuse at five o’clock in the morning), it provides access to its anonymized and aggregated data for free to police departments, school boards, policy makers, hospitals, families, journalists, and academics. Again, without this crowd orchestrator, the connections between people in need and people with good listening skills would not have been made.
Peer-to-Peer Network Creators
The other problem Jane had to solve in our little vignette was choosing to pay the bartender for the drinks or to reimburse her friends for the money. Even without a wallet, she could have settled accounts through her smartphone using a service like Venmo. Once a customer has signed up with Venmo, payments can be made by individuals with only a cellphone number or an email address, enabling transfers regardless of an affiliation with a bank and the existing payments infrastructure.
Venmo is a peer-to-peer (P2P) network creator. In contrast to crowd orchestrators, where it is clear that one individual is the supplier and the other is the customer, with P2P network creators, individuals might change roles frequently, as in the Venmo example. Today, we send money via Venmo to you. Next month, the transaction might go in reverse. We are simply part of the same payment network. Venmo, owned by PayPal, now handles billions of dollars.
Yet another P2P network creator in the financial services space is TransferWise, which focuses on international money transfers. Sending money across country borders remains an expensive undertaking. TransferWise realized that if Mario, who lives in country A, wants to send one hundred dollars to Madhav, who lives in country B, and Jamini, in country B, wants to send the equivalent of one hundred dollars to Juanita, in country A, that result can be achieved by transferring one hundred dollars from Mario to Juanita, who both live in country A, while transferring the equivalent of one hundred dollars in local currency from Jamini to Madhav, who both live in country B. That results in two domestic transfers, which are much cheaper to execute than two international transfers. By creating new connections between the various parties, TransferWise substantially reduces costs.
P2P network creators are remarkable organizations, often connecting millions of individuals. Moreover, they can present a threat to existing businesses. Banks used to love domestic and international money transfers because they carried hefty fees. Now, these important revenue streams are being significantly affected because these competitors are utilizing completely different connection architectures.
Foreshadowing the next chapter, on revenue models, we find it helpful to think about three different types of P2P network creators based on how they monetize their connection architecture:
Transaction or membership revenues: While not as expensive as traditional banks, TransferWise does charge a transaction fee. Venmo, though it does not charge a fee for transactions inside the network, does make interest income on the capital it circulates and charges customers when they use credit cards to make payments. Membership revenue is the source of income for dating portals such as Match.com. Lonely hearts pay Match.com a fee to be connected to each other, which sometimes results in happy couples but is always cash in the bank for the company.
Fees for access to the information that is created in the network: Wherever there is content and traffic, there is income-generating potential, often from advertising. YouTube started out as a P2P platform for sharing videos. It now makes a fortune with commercials, selling access to finely calibrated audiences on the network (e.g., targeting specific ads to viewers of certain programs). LinkedIn allows people to join the network for free but sells access to the information to potential employers.
Revenues from complementary prod
ucts: In addition to acting as a connected producer of running shoes, allowing customers to upload and analyze their running data, Nike acts as a P2P network creator by supporting virtual running clubs. These free clubs create a community of runners who encourage each other to run more. That’s good news for a company selling running shoes.
We illustrate the P2P network creator architecture in figure 7-5. Individuals are connected to each other via the network, with most participants serving as both senders and receivers of whatever the network is designed to facilitate (money, information, etc.) For some network creators, revenues are generated “within the box” of the network. For other network creators, revenues are generated by selling access to information that is created within the network. Finally, some network creators are able to use the network they create to drive up the willingness-to-pay that customers have for other products and services they offer—that is, they use the network as a complementor.
FIGURE 7-5
Connection architecture for a P2P network creator
The Connected Strategy Matrix
In the second part of this book, you learned about creating different connected customer experiences. We introduced four of them: respond-to-desire, curated offering, coach behavior, and automatic execution.
In this chapter, we introduced five different connection architectures: connected producer, connected retailer, connected market maker, crowd orchestrator, and peer-to-peer network creator.
Each connection architecture can be used to create different customer experiences. With four connected customer experiences and five connection architectures, we can create a matrix that has the customer experiences on one axis (the rows) and the connection architectures on the other axis (the columns) (figure 7-6). We call the resulting matrix the connected strategy matrix.
The purpose of the connected strategy matrix is twofold. First, it can serve as a framework to help you understand both your own activities and those of your competitors. Where are your competitors operating in this matrix? Where are new startups popping up? Because firms can create more than one customer experience and can operate with more than one connection architecture, they can play in multiple cells of the connected strategy matrix. The second use of the connected strategy matrix is as an innovation tool. By going through each cell and asking yourself, “If our firm had a strategy in this cell, what would it look like?” you have a very structured way to guide your innovation process. We will guide you through this process in more detail in the workshop in chapter 10.
FIGURE 7-6
Connected strategy matrix
Beyond Platforms: The Five Connection Architectures
Over the last few years, many executives we have talked to have expressed concern about being disrupted, not by their competitors but instead by companies that operate very differently from them. The verb to uberize is making it into dictionaries, and uberization is praised for its utilization of digital technology to dramatically increase the efficiency of an economic system by leveraging platforms and P2P interactions. Beyond Uber and its competitors, this idea is most commonly illustrated with the cases of eBay, Airbnb, Zipcar, Facebook, and many other companies we discuss in this book.
The threat of digital disruption is real, as anybody owning a cab or running a hotel will testify. But before getting too excited about the sharing economy and platforms (see the sidebar in chapter 1), we find it helpful to look at these phenomena a bit more carefully. In our view, details matter, so while Uber, Airbnb, and others all make for great business school case studies, we should not overlook the fact that they operate very differently from each other.
In this chapter, we discussed five connection architectures:
Connected producers: You don’t have to be a radical new startup or create a two-sided marketplace to have a connected strategy. Traditional producers such as Disney, Nike, and Daimler have created connected strategies within parts of their businesses by changing how they connect to their customers and by moving from episodic interactions to continuous connected customer relationships.
Connected retailers: Traditional retailers ask customers to come to their store and to buy what they have. Connected retailers make the choice process and the ordering of, payment for, and receipt of the product much more convenient for a customer. From Amazon for books, and Netflix for movies, to meal-kit providers for groceries, connected retailers create a much closer relationship with customers, which allows customization and the reduction of pain points along the entire customer journey.
Connected market makers: These firms create a market by connecting supplier firms with customers. Examples include Expedia, Priceline, and Amazon Marketplace. Connected market makers are the bazaar operators of the twenty-first century. They neither buy nor sell; they just make sure the right buyer is connected to the right supplier. This approach sounds like the dream of every operations manager: it seems as if this approach requires almost no capital (capacity, inventory) while also being free of any operational risk. However, to succeed with this connection architecture, a firm needs to be able to attract both buyers and sellers (create a two-sided market) and provide them with liquidity and trust.
Crowd orchestrators: In contrast to connected market makers, the firms can’t rely on existing suppliers. A key task of a crowd orchestrator is to mobilize individuals to serve as suppliers—for example, of driving services (Uber), shopping help (Instacart), accommodations (Airbnb), or financial resources (Kickstarter). The key challenge is to attract customers while the set of suppliers is still small. Once a critical mass is reached, though, two-sided network effects kick in: the more suppliers that are available, the more customers will come; the more customers that come, the higher the incentives for more suppliers to join.
Peer-to-peer network creators: These firms form and organize communities of users, blurring the lines of consumers and providers. Again, network effects play an important role in the sustainability of firms with this connection architecture. If the value a customer derives from a network increases with the number of participants (e.g., as the number of posted reviews increases), then larger networks will tend to attract more new users, increasing network size even more.
The connected strategy matrix that we introduced in this chapter helps you think through these differences. Moreover, it allows you to integrate your analysis of the connection architectures with the four connected customer relationships we introduced in the second part of the book. In the upcoming workshop in chapter 10, you will put this tool to work.
A final thought (for now) on the growth of platforms and networks. The connection architectures to the right side of the connected strategy matrix are enabled through advances in technology—ride sharing just does not work without mobile computing and geolocation. With technology further advancing, there is no reason to believe that this growth will stop any time soon. But that by no means implies that connected producers and connected retailers are the dinosaurs of connected strategy. For example, our opening vignette about Disney is one of a connected producer that focuses more on the rows of the connected strategy matrix (new connected customer experiences) than the columns. There is no “one size fits all” for connected strategies.
8
Revenue Models for Connected Strategies
The average American spends $384 per year on dental care between out-of-pocket expenses and insurance copays. That’s about $10,000 on dental care over three decades, on top of the hassle of scheduling appointments, getting to them, waiting, and the pain of the care—a pain point if there ever was one.
Now, imagine that you are the CEO of an oral care or medical device company. You invent an amazing toothbrush that detects plaque and cavities before dentists or patients do. Using the insights from this book, your company makes it smart and connected. It guides the patient in the brushing process and schedules a dental appointment if needed. Your toothbrush, let’s call it the Smart Connect XL3000, keeps customers’ teeth
so much cleaner that it cuts dental care costs in half and reduces time spent in appointments. Let’s assume it costs $300 to produce and lasts five years, as long as the toothbrush head is replaced every six weeks. At what price would you sell the Smart Connect XL3000?
Before pondering your pricing proposal, be it $500 or $5,000, be it with a 50 percent gross margin or 20 percent more than the competition, note that the issue is about more than price. As far as our connected toothbrush, or any connected strategy, is concerned, the big-picture task is coming up with a revenue model.
We define a revenue model as one or several mechanisms that will compensate a firm by capturing some of the value that its products or services generate. In the case of our Smart Connect XL3000, customers benefit from healthier teeth, increased convenience from fewer appointments, and long-term savings on out-of-pocket costs and copays. If you sell the toothbrush for $400, almost all this value stays with the customer. Customers might love you for that, but you will only make a small profit that may not recover all the R&D investment you made to create the XL3000. If you price it at $5,000, however, very few will buy, destroying a lot of potential value.
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