Only Dead Fish

What Real Disruption Looks Like: Lemonade Insurance

Disruption is an overused word but I find the breadth as well as the depth of disruption right now to be endlessly fascinating. Logical I guess, given how horizontal the impact of digital is, and how the different ways of re-wiring markets can come from such diverse forms of innovation. Digital may change the economics of individual parts of an industry's value chain but in doing so it can unbundle the entire value chain and put it back together again in such a way as to change the whole industry. A classic way for digital to disrupt is to change the way in which a product is sold. Dollar Shave Club, for example, went direct to consumer and disintermediated the retailers but in doing so turned a product into a service.

Digital can also disrupt of-course by bringing the benefit of much greater efficiences to the customer in ways that are hard for incumbent businesses with legacy systems, processes and thinking to do. One of my favourite early stage examples of this is insurance business Lemonade. Lemonade has a simple promise which is shaped around a commitment to 'instant everything'. Their mission is to dramatically simplify the process of insurance (or in digital parlance to significantly shorten customer journeys and remove customer pain points from typically laborious processes):

And they seem to be making a really good go of it. Like the new breed of fintech startups looking to reinvent banking, they are genuinely mobile first and focused on exceptional and intuitive customer experience supported with adept use of AI. Their promise is 90 seconds to get insured and three minutes to get paid. They have a nice CSR angle with all unclaimed money donated to good causes. Late last year they set a world record by settling a claim within three seconds. Now they've introduced the world's first live insurance policy which enables customers to make changes to their coverage in real-time from their phone.

For now the company is focused on homeowners and renters, and are live in a few states in the US but watch them grow. So many incumbent businesses talk about being customer-centric, yet so few genuinely shape their business operations and practices to reflect this promise. All of which leaves room for agile startups like Lemonade to reinvent industry after industry.

Platform Economics (2) - Network Dynamics

I thought I'd write some more about some of the basic economic fundamentals of platform business models (links to the other posts in this series are collected at the bottom of this post). 

It's worth delving a bit more into network dynamics and why (perhaps) the shift from more traditional market dynamics and approaches can be hard to grasp for incumbent businesses. For this I'll draw particularly from this Wharton piece by Barry Libert, Megan Beck and Jerry (Yoram) Wind (who in turn are drawing from their book: The Network Imperative). As always, it's worth reading the original, but I'm summarising my take outs here for my own benefit.

To begin with, the authors have defined four key business model types in the modern economy:

Asset Builders: a value proposition based on physical capital (manufacturing, distributing, marketing, selling or leasing physical goods). Example include Exxon, Ford, Walmart, Boeing

Service Providers: a value proposition based on human capital (providing expertise and services to customers). Examples include Accenture, JP Morgan Chase

Technology Creators: a value proposition based on intellectual capital (developing, selling IP such as software, analytics, pharmaceuticals, biotechnology). Examples include Pfizer, Microsoft, Oracle

Network Orchestrators: a value proposition based on network capital (facilitating interaction or transaction between different members of the network, value coming from building relationships, collaboration, sharing advice or reviews). Examples include TripAdvisor, Uber, Airbnb, eBay

In research conducted in 2014, it's been shown that when this framework was applied to the S & P 1500 (which captures a range of company size), there were notable differences in performance, with network orchestrators outperforming the other models across a range of measures including profit, return on assets and sales growth. 

Networks are of-course easier, faster and more cost effective to scale than physical products:

'Not only are many of the most valuable goods in our market — such as ideas, intellectual capital, and access — digitizable, but also our digital networks allow them to proliferate with great ease. The scaling cost is close to zero. When you add the network effect, where each additional participant (or node) in the network increases the value for every other participant, the network drives its own growth.'

The authors advocate for a recalibration of focus and investment to reflect this shift, but also recognise how hard it is for leaders to move on from decades of entrenched industrial age thinking that places greater value on physical assets. They have a nice summation of the key shift from firm-centric to network-centric thinking:

Whilst network orchestrators still represent a small proportion of publicly traded businesses, networks will proliferate across industries (albeit in different ways), and also blur the boundaries between how we think of different sectors. But the organisational orientation of a platform business is different to a traditional model:

'The companies that have truly built network-orchestrating organizations don’t just do one thing differently; they do everything differently — from leadership to recruiting to production to advertising.'

I've captured this shift before as one from resource control to resource orchestration, from internal optimisation to external interaction, from a focus on customer value to a focus on ecosystem value. I also believe that there is opportunity in creating multiple platform models across the different capabilities of a single organisation, in the same way that Amazon is systematically 'platformising' its different competencies.

This is a big shift. The idea of platform businesses may not be new, but digital technologies have brought a scale and potential comprehensiveness to this the like of which we have never seen. 

Other posts in this series: 

Defining Platform Business Models

The shift from pipeline to platform models

Platform Economics (1) - managing the demand curves on supply and demand side, cross-side and same-side network effects

And there is more in my book of-course.

Platform Economics

I've been writing a bit recently about the shift from linear pipeline to platform business models, in part to help me be more precise in how I define and describe it (to clients), and in part because I think the degree of shift in the dynamics of scalability, ownership, data, and interaction is under-appreciated (particularly in large, incumbent businesses).

I'm reading Andrew McAfee and Erik Brynjolfsson's Machine, Platform, Crowd at the moment, which does a good job summarising some of the big shifts. The a16z podcast above featuring Andrew and Erik is a really good listen, and discusses some of the key ideas in the book. These are positioned in the context of the rebalancing that is needed between the dynamics of mind and machine, product vs platform, core vs crowd. They also discuss a few of the key principles inherent in platform business economics, notably network effects, supply and demand side economies of scale, the changing nature of corporate ownership, the idea of complements, and the red queen phenomena.

To complement this I re-read Chris Smith's excellent two-part post on platform business economics, which set out in simple terms some of the distinctive dynamics involved. As blogging is my way of assimilating and thinking aloud I'm going to summarise some of Chris's points here (largely for my own benefit but as always you're welcome to tag along of-course).

To remind us, platform businesses are essentially orchestrators. They typically have some key characteristics including serving multiple types of customer, facilitating efficient value exchange (between all the constituent players in the ecosystem), and exhibit shared common standards (the terms that ensure the participants can transact easily and fairly). Chris quotes Alex Moazed of Applico who defines two key types of platforms: exchange and maker:

…both platforms that create value and generate revenue by facilitating interactions between consumers and producers. But each platform type has a slightly different core value proposition. An exchange platform creates value primarily by enabling direct exchanges between its consumers and producers. In contrast, a maker platform creates value by enabling its producers to make content and broadcast it out to an audience.

The key thing here is being the facilitator - value being derived from access and interaction (because data). Being a thin layer that enables exchange of value means high leverage but more limited ownership (and as Tom Goodwin has said, that the battle is for the customer interface). The interaction between distinct user types in the platform ecosystem can act as its own market (facilitated by the platform of-course) but this activity strongly affects the other players and markets in the ecosystem, leading to exponential growth through network effects.

The example I used before is Google and Android. Google is the owner of the operating system, and it partners with providers (mobile device manufacturers who serve as the carrier) but it's a win-win relationship (great hardware carrying great software, everybody wins). App developers are the producers (creating apps for Google Play) but again it's a win-win (the more great apps, the more Google Play becomes a differentiator for the OS). Consumers are part of the ecosystem too, but there is a value exchange here too with access to great phones carrying great operating systems and access to a great app store, and money and data flowing the other way. A change in one of these market dynamics positively impacts the other dynamics in the ecosystem e.g. more people buying apps through Google Play doesn't only mean more developers wanting to put their own apps on the platform, but it benefits the OS through more people choosing Android and the devices that carry it.

Chris uses the standard demand curve, which shows the relationship between price and volume, to show how platforms yield network effects. 

With a platform business you have to manage multiple demand curves simultaneously - the supply-side and the demand side - and a change in one is tightly linked to changes in the other. A platform like Airbnb for example, needs to have critical mass on both sides if it is to work. But the more accommodation providers are on the platform the more attractive Airbnb becomes to consumers. The more consumers join because of this, the more attractive Airbnb becomes to other accommodation providers, and the better Airbnb gets:

 

There are two key types of network effects in this context - cross-side and same side. Cross-side is like the scenario above where user dynamics on one side impact user dynamics on the other - for example where realising demand-side economies of scale helps to achieve supply-side economies of scale and vice versa.

Same-side network effects are when user growth on one side of the platform affects other users on that same-side. Chris uses the example of where positive advocacy from great customer experience can enhance user growth, but Chris has a neat table showing how cross-side and same-side network effects can have positive and negative demand curve impact:

Key to the effective orchestration of a platform ecosystem then, is understanding how the demand curves shift in response to each other. 

I've liberally lifted from Chris's post here for my own benefit but worth reading the original. He's also written a follow up that deals with growth dynamics which I'll aim to write up in due course.

The Best Career Advice

From (Dilbert creator) Scott Adams, quoted in Tools of Titans:

'If you want an average, successful life, it doesn't take much planning. Just stay out of trouble, go to school, and apply for jobs you might like. But if you want something extraordinary, you have two paths: 1) Become the best at one specific thing 2) Become very good (top 25%) at two or more things.

The first strategy is difficult to the point of near impossibility. Few people will ever play in the NBA or make a platinum album. I don't recommend anyone even try.

The second strategy is fairly easy. Everyone has at lea fews areas in which they could be in the top 25% with some effort. In my case, I can draw better then most people, but I'm hardly an artist. And I'm not any funnier than the average standup comedian who never makes it big, but I'm funnier than most people. The magic is that few people can draw well and write jokes. It's the combination of the two that makes what I do so rare. And when you add in my business background, suddenly I had a topic that few cartoonists could hope to understand without living it.

I always advise people to become good public speakers (top 25%). Anyone can do it with practice. If you add that talent to any other, suddenly you're the boss of the people who only have one skill. Or get a degree in business on top of your engineering degree, law degree, medical degree, science degree, or whatever. Suddenly you're in charge, or maybe you're starting your own company using your combined knowledge.

Capitalism rewards things that are both rare and valuable. You make yourself rare by combining two or more 'pretty goods' until no-one else has your mix. AT least one of the skills in your mixture should involve communication, either written or verbal. Adn it could be as simple as learning how to sell more effectively than 75% of the world. That's one. Now add that to whatever your passion is, and you have two.'

I hope that I can teach my girls the value of combinatorial skills.

Post of the Month - July 2017 - The Winner

A good, close vote this month but in the end it was Nadya Powell who won through with her erudite post on breaking up with advertising. Well done Nadya - you of-course join the hall of fame. My thanks to all those who took part in this month's vote.