Remember the hype about the New Economy? Companies with no revenue at all, without a real business model and without any grounding in reality launched Initial Public Offerings and raised millions, from 1995-2000 – solely because they had three letters, .com, after their name. After the crash, the words “New Economy” crashed even deeper than the NASDAQ. 

Guess what? The new economy is real, powerful and is changing our lives. What the new economy really is, is the Digital Economy – converting knowledge, information, services and products into bytes, to sell, transform, transmit and store. The dot.com crash was just a minor and temporary setback, as almost always happens during enormous life-changing revolutions.

What is the key to business success in the New Economy?

Let me try to simplify it, in about 112 words.

Economists tell us there are two kinds of costs: VARIABLE (directly related to costs of production, such as raw materials, components, labor), and FIXED (not related to production, such as management, marketing, rent).

In the Old Economy, VARIABLE costs were dominant – the cost of making products.

In the New Economy, FIXED costs are dominant, because once you build the mobile network, or website, the marginal ‘production’ costs of adding another subscriber or customer are zero. In fact, they are negative!   The digital economy has zero or negative marginal costs. Because for a network, the more people there are, the more valuable it is and the more people want to join it.

What does this mean? Take, for instance, Sprint, who spent $1 b. to build America’s first fiberoptic network.  Once that network was in place, the name of the game was innovation – how to innovate new services, based on the network, that people would want and would pay money for? And innovation, not only in services, but in pricing. Pricing innovation is crucial.

Why?

Because economists teach that to maximize profit, companies need to equate price with marginal cost. This works in the Old Economy. But in the New? When marginal costs are negative? Negative prices? Pay customers for using our service???

Pricing policy is the most underutilized area for innovation. The New Economy requires innovative pricing for success – zero prices with subscription fees, zero prices with service contracts, zero prices just to gain eyeballs for advertising – all are pricing formulas that have created billion-dollar businesses, including Google.  

If you want to launch a New Economy business in the new Digital Economy, don’t think pricing is Old Hat.  Find ways to make money with clever pricing systems. Find ways to build demand and utilization for platforms that have nearly infinite capacity. 

The New Economy is actually pretty old. We have always had platform businesses based on utilizing expensive platforms (copper-wire phone systems, for instance). The difference is, today, far more new service innovations are digital in nature. The digital revolution is spreading to huge industries, such as music and publishing, which for the most part simply do not see the revolution coming and have been trampled by it. 

So, innovators: If your innovation is digital in nature: How does your innovative business model answer this question – how can I build a clever pricing model, when the cost of an additional customer is zero or negative? How will I find customers, sell to them, and retain their business, to boost utilization of my expensive platform?      

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