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by
Tien Tzuo
Model Ts came only in black because with one automobile coming off the line every three minutes, that was the only color that would dry fast enough.
Ninety percent of all Americans live within twenty minutes of a Walmart store.
The Amazon versus Walmart battle has been framed as ecommerce versus traditional retail, but that’s always been a false dichotomy.
Apple as a Service.
80 percent of next year’s revenue was already in the bank, how fast do you think it would take for Apple to hit that trillion-dollar valuation?
The Bonobos “Guideshops” (which now belong to Walmart!), for example, don’t really sell anything. If you like something in the store, they’ll ship it to you later. The main idea is for people to try things on and get advice.
As it turns out, the Big Three have some distinct institutional advantages over Silicon Valley when it comes to building the future of the automobile industry. First, they have the distribution. The vast dealer networks these companies operate are commanding assets. Second, the scale of their operations is impossible to duplicate; more than 17 million cars were sold in the United States last year (Tesla sold around 100,000). Sourcing and assembling vehicles involves extensive regulations, and the margins aren’t great. Companies need to invest billions of dollars in factories and distribution
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“If I had asked people what they wanted, they would have said a faster horse.”
According to Reuters, many more Americans are paying for online news than ever before—roughly 16 percent of the population, a 7 percent jump from 2016 to 2017.
It’s following all the standard Silicon Valley best practices: subscription revenue, international expansion efforts, multitiered service offerings, freemium offers, customer behavior insights, and a significant TAM, or total addressable market. “We
Those that fail to at least explore consumption-based offerings may end up on the path to obsolescence.”
Hardware is shifting as well—the success of Amazon Web Services has convinced IT buyers to shift from big, expensive capex-based installations to opex-based rental agreements.
Operating expenses bear the advantage of a pay-as-you-go model for services used with comparatively little to no up-front investment. Not only is this a greater value prop, as a business is getting exactly what it pays for, but it’s also a strategy for freeing up cash to drive growth, and a way for large enterprises to be nimble rather than locked into expensive IT infrastructure that lacks flexibility and often serves as nothing more than a bottleneck for transformation.
They can figure out when a machine needs servicing by monitoring things like vibration patterns and comparing them with the past usage data of identical machines.
If the context of this book is the sweeping shift from products to services in retail, transportation, media, and technology, as well as the changes in business mindsets that this shift requires, then the industry that stands to benefit the most from that transformation is manufacturing.
IoT is the digitization of the physical world through sensors and connectivity. That may sound kind of jargony, but it’s accurate.
innovations. Schneider Electric (founded in 1836) tracks and monitors elevator usage patterns so that elevators can “default” to busier floors, saving people waiting time. They’re also tracking wear and tear, so they can schedule maintenance sessions during low traffic periods.
Gmail marked the end of seasonal boom-and-bust product cycles and the birth of the never-ending product.
The idea is to create an environment that supports sustainable development—the team should be able to maintain a constant pace of innovation indefinitely. That’s the only way to stay responsive, to stay agile.
Take Kanye West’s album The Life of Pablo, which I mentioned earlier. He dropped it on Tidal on February 14, 2016, and to nobody’s surprise, everyone freaked out and started streaming it like crazy. But then something weird happened … he kept working on it!
Product—you should make and package something that people want. Price—your product should have a competitive price that makes sense for both your company and your customer. Promotion—your product brand should be advertised through attractive channels (presumably by attractive people). Place—your product should be distributed and sold in convenient and compelling locations.
Taylor Swift relies on Spotify (except when she doesn’t).
Subscription pricing is trickier. Of course you have costs that you need to account for, but at the end of the day you’re not pricing an object, you’re pricing an outcome. But how do you express the value in a seat, minute, box, event, you name it? And what do you do about the fact that customers may assign different values to the same outcome? This ambiguity is intrinsic to the subscription model, and it can be either empowering or paralyzing. There’s a lot of pressure to not mess it up.
service. First, there is consumption-driven growth, which simply means your subscriber is using more of the same base set of capabilities. This is done through pricing. A client business adding more users or storing more data would be examples of consumption-driven growth.
Of course, this requires you to pick the right unit that ties consumption to value. There are a variety of factors to consider here. Some of them might include the need to keep it simple for the user, the ability to translate increased usage into revenue, or the importance of setting a usage “floor” and shaping that usage curve as consumption increases. Next you’ll need to consider the unit price, which can be as simple as price per unit, or it could be expressed in usage tiers. Finally, you’ll need to look for holes in your model, which usually happen at extremes—someone’s using your service
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Second, there is capability-driven growth, which lets your subscribers grow into your service by adding more features as their needs expand. This is done through packaging.
If you have more than 70 percent of your subscribers in your basic package, then you may have a perfectly respectable entry-level service that will ultimately kill you.
According to McKinsey, if a software company grows less than 20 percent annually, it has a 92 percent chance of failure. Because at the end of the day, it’s grow or die.
The guy who first formalized this system, also known as “the father of accounting” (they still have CPA conventions in his hometown!), was a Franciscan friar named Luca Pacioli.
ARR $100 Churn (10) Net ARR 90 Recurring Costs: Cost of Goods Sold (20) General & Administrative (10) Research & Development (20)
Recurring Profit (40) Sales & Marketing (30) Net Operating Income 10 New ARR (or ACV) 30 Ending ARR $120
The higher your recurring profit margin, the more you have to spend on growth.
it is perfectly rational for subscription businesses to spend all their profits on growth, as long as their bucket doesn’t leak. Remember, as long as you are growing your ARR faster than your recurring expenses, you can step on the gas.
We call it Tyler’s Slide:
When ARR grows, your budget grows.
Traditionally, 80 percent of a CFO’s job was to tell people what happened. To keep score. To track the budget. The other 20 percent was to interpret those numbers in order to direct resources, create forecasts, and manage strategy, to write the next part of the story. Today that ratio has flipped.
Why? Because subscriptions are the only business model that is entirely based on the happiness of your customers.
We call this the world of happy business: happy customers, with happy companies, reinforcing one another, iterating forever, with no beginning and no end.
