Tuesday, September 8, 2020

The Disruptive Power of the Ends Game (Part 1 of 2)

Why businesses should not just ask what customers want, but measure whether they are getting what they need.
This is a slightly expanded version of Part 1, published in Inc. magazine on 9/8/20. This Part 1 concentrates on what is in the book, The Ends Game. Part 2 takes off from there, to explain how FairPay strategies can enable businesses and customers to play the Ends Game in a way that is even more efficiently win-win -- and thus create and share in even more value.  (See the Inc. version of Part 2, or slightly expanded here.)
The Ends Game is the title of an important new book that explains why now is the time to focus on helping customers achieve the ends they seek, and sharing in the value that they co-create with them. It argues that the ways enlightened and sophisticated companies currently attend to their customers are excellent, but only half the battle. This book presents a concise and clear manifesto of what is missing, why it is essential to focus on it now, and how to embark on the path to do that. It is written by Marco Bertini and Oded Koenigsberg, professors of marketing known for their insights into pricing strategy.

I had the pleasure of reading a pre-release copy because Marco co-authored with me two articles about the FairPay framework. This new book by Marco and Oded concentrates on how to think about "What are we asking customers to pay for?" As they say, that is essentially a question of revenue models. (It is also foundational to how FairPay addresses a related question: how do you harness new levels of cooperation with customers to be even more efficient and adaptive in doing that?)

Why read -- and play -- the Ends Game now?

This is a deeply researched and insightful work, offering a coherent vision of why playing the Ends Game is the future of business. It lays out a concise manifesto for business model disruption, centered on revenue models, and explains why pricing models are the essence of business. It offers conceptual grounding supported by a wide range of examples, in a style that is neither abstract nor buried in anecdote.

Marco and Oded show how businesses have been focused on the means for serving customers, but rarely focus on the real ends that customers want. It explains how all the work of customer care, market research, design of customer journeys, and operational skill and responsiveness are typically directed at the means not the ends. Businesses pride themselves on their focus on the customer, the authors note, "but then the same company pays hardly any attention to customers when it decides how to earn revenue from them."

This focus on ends is not a new idea, but it has been neglected because we lacked the technology and data to address the customers' ends at scale. The authors point (as Marco and I have in our co-authored papers) to the invention of the price tag around 1850 as a key turning point from which traditional business decoupled itself from consideration of individual customer value proposition in order to scale: "organizations gradually shifted their pricing decisions away from customers and what they value, which was the focus of haggling, to the one piece of information they could trust and readily collect: information on the cost of making an offering and bringing it to market." (Of course competitor pricing has also been an important factor.) Pricing for value on an individualized basis has long been understood to be the ideal in theory, but in very hard to do at scale in practice.  The compromise has been to sell the means to the ends, and hope that was close enough.

What has changed to make the Ends Game feasible is the growing availability of new kinds of "impact data." Impact data provide "information on when and how customers consume products and services, and how well these offerings actually perform." That new data lets businesses "move from promises to proof." Technology makes the achievement of ends transparent and accountable. Companies can now record consumption events and, increasingly, even observe the value obtained from them. This "post-purchase behavior" can now be "observed directly, completely, and in real time."

Marco and Oded make a strong case for the value of these new strategies to benefit not just businesses, but their customers: "The powerful combination of real-time consumption patterns, personalization, and rich contextual data--all at scale--provides companies a basis to establish and reinforce trust with their customers, one by one." I was struck by how this positive vision provides an important counterbalance to the fatalistic view of Shoshana Zuboff's influential The Age of Surveillance Capitalism, and how The Ends Game rightly highlights the benefits that could come from responsible, opt-in uses of data by businesses.

Applying impact data to enable revenue models that are accountable for the ends

The essential point of The Ends Game is that businesses profit best from relationships with customers that enable them to achieve the customers' ends in ways that are accountable, sustainable, and mutually beneficial.

To make revenue models efficient, businesses must address three levels of barriers to value co-creation:

  1. Access waste: “Customers can’t get it.”
  2. Consumption waste: “Customers don’t or can’t use it.”
  3. Performance waste: “The customer has access to it and consumes it, but the end result simply isn’t satisfactory.

The authors explore the already widely recognized and duplicated successes of addressing access waste through subscription and membership models. This is already the topic of many excellent books, but as they point out, subscriptions and other shifts from ownership to access are "only the first of many potential moves.”

Their treatment integrates this access waste with the bigger picture of consumption waste and performance waste. They expand on how consumption waste can be addressed with models that apply metering of usage, or sharing, of resources, products, or services.

From there they move on to the ultimate question: outcomes and performance waste -- and how new kinds of impact data can make the often very subjective and elusive questions of outcomes far more tractable. “[t]he ultimate outcome, of course, is value...Actual satisfactions.” That is what your customers really want.

Marco and Oded address a related question that is also central to FairPay: risk. Customers are reluctant to take risks on access, consumption, and performance.  Companies can "attract more customers by lowering barriers to purchase and boost willingness to pay by progressively taking on the risk inherent in the exchange.”

The middle part of the book digs deeper into examples of how companies are already playing the Ends Game, spanning a broad range of industries with B2B and B2C products and services of all kinds. Some of the revenue and pricing models will be familiar, some not.

Especially striking to me was the example of a Spanish comedy theater with a "Pay per Laugh" model (which had a price cap "so that no one would need to cry because they laughed more than they could afford") -- a creative use of sensing technology to measure laughs, clever framing of the model, and use of a price cap for added risk avoidance.

Pay per Laugh may seem fanciful, but as the authors observe, "Value is the ultimate outcome. If a firm could charge its customers based directly and precisely on the tangible and intangible satisfactions they derive in an exchange, then there would be no need for an intermediate measure to calibrate the exchange and access, consumption, and performance waste are minimized. Value establishes the natural equilibrium between You get what you pay for and You pay for what you get."

They come back to this as the “Existential question…What are we asking customers to pay for?” I have emphasized much the same fundamental point through a thought experiment where a value "demon" is capable of reading the minds of the customer and the provider to reveal their direct value perceptions and how that value should be shared.

Most industries are at the early stages of a process that will unfold over the next few years, with improving technology making performance models not only feasible, but also practical and profitable. The primary concern for organizations in the meantime is understanding the true source of the value they create for customers. If value itself cannot be measured, the choice of outcome is critical. There may be factors that contribute to an outcome that the organization cannot observe, measure, or control. To the extent that there are significant differences in the value customers derive from a product or service, then the chosen outcome measure must be “personal” enough to reflect this.

The quest for ends

The final portions of The Ends Game dig deeper into these challenges -- how to take action and how to define outcomes. Attention is given to collecting and analyzing impact data without abusing the privilege and to "ensuring that customers are active and positive participants in the creation of quality outcomes."

Marco and Oded outline four conditions for a suitable measure of outcomes: to be meaningful (thus valuable to customers, even if highly subjective like "enjoyment"), measurablerobust, and reliable. Metrics must address the breadth of heterogeneous customer needs and wants, and the depth of the task of meeting them, including the complexity of who contributed what when multiple parties are involved in a solution. I add a further issue to be considered in my second part: how customers can become more direct participants in defining what the relevant outcomes and metrics are, as they perceive them.

[Not included in the Inc. version: Barriers to moving toward outcomes include the "quality paradox ...when a company obsessively directs its efforts toward continuously innovating its products and services, it risks becoming accountable to its offering rather than to its customers." One important form of this is surrogation, when the metric that is the surrogate for an objective distracts from the objective itself, creating a form of tunnel vision that is reinforced by its partial and temporary success.]

The authors grant that overcoming these barriers is hard, but complacency is dangerous. They are realistic in suggesting that managers focus on the quest, not just the destination. In some contexts the quest may be long, and only partial steps will be practical now -- to be extended gradually.

Impact data present particular challenges because they are so personally intrusive and invasive compared to the more traditional market research data and data on customer journeys: "the trillion dollar question...the extent to which customers are willing to share their information with firms and fuel the Ends Game ...companies must be able to communicate that sharing one's data has never been a more valuable investment." Building trust and transparency are essential to getting customers to opt-in to truly collaborative efforts to play the Ends Game. It all comes down to accountability -- that means not only creating, but demonstrating value. This is another theme central to FairPay:  what matters is not only what a business does, but also how it does it.

Last, but not least, there are organizational obstacles to change. The authors point to the opportunity for disruptive startups that can start fresh without legacy concerns -- and also to how established businesses can begin to move before a startup or some bold competitor can steal their markets. "Often it is a newcomer that succeeds in reducing waste by introducing a revenue model conceived to improve access to the market, mirror consumption, or perhaps even guarantee performance."

[Not included in the Inc. version: That brings us back to the centrality of truly partnering with customers, with the ultimate principle being "to profit only when customers do." The authors point out that impact metrics can create a moral hazard, where customers can try to game the metrics. There are tactical measures to limit that, but at a strategic level we return to two central tasks for the business: “…questioning the gap between what it promises customers and what they actually pay for" and ensuring that the customers "benefit proportionally—if not disproportionally—as outcomes improve.”]

This quest has many challenges that will unfold in stages over time. But the authors make a strong case that this quest that must be undertaken if a business seeks lasting success -- and they provide clear directions on how to embark on it.
---

Part 2 of this commentary (in Inc, and slightly expanded here) explores how FairPay restructures the Ends Game -- as a new form of repeated game over the course of the relationship with each customer -- to directly motivate collaboration, transparency and trust to use impact data in this quest to define and meet each customer's desired ends -- in a win-win way that is emergent and adaptive.

(An article by Marco and Oded summarizing the book, The Ends GameCompeting on Customer Outcomes, appeared in MIT Sloan Management Review.)


------------------------

More about FairPay

A very brief and simple introduction is in Techonomy"Information Wants to be Free; Consumers May Want to Pay"
(FairPay is an open architecture, in the public domain. My work on FairPay is pro-bono. I offer free consultation to those interested in applying FairPay, and welcome questions.)

------------------------

To stay updated and interact with others interested in FairPay, please join the LinkedIn group, “FairPay: Adaptively Win-Win Customer Relationships.” 

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