Proprietary Services are Dead! Long Live the Open Service Platform.

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I have been having an interesting discussion with Dutch financial services expert Wim Rampen on his blog. One of the questions he asked me is should we build services around specific customer segments, or should we build service platforms where customers can self-select the services they want themselves. This is a very insightful question to ask. It reaches to the heart of the move away from a product-focus towards more of a service-orientation that many companies have been going through over the past few years.

If I had answered this question ten years ago I would have said we should select customers we know we can serve well and still turn a profit, design tailor-made to deliver their needs and our needs to make a profit, and then communicate what we had developed to customers. This is the Type 1 Marketing developed by pioneers like Ted Levitt almost 50 years ago. It probably reached its zenith with Lanning & Phillips methodology ‘Building Market-Focussed Organisations’ which Michael Lanning turned into a best-selling book ‘Delivering Profitable Value’ a few years later. It is still one of the best books on creating mutual value for companies and customers.

Today, most companies have abandoned Levitt’s Type 1 marketing in favour of a more instrumental Type 2 Marketing. Rather than the surface opportunities, design profitable solutions and communicate them to customers model in Type 1 Marketing, Type 2 Marketing optimises market solutions and identifies target segments to market them to. The initial emphasis on surfacing opportunities and designing innovative solutions has been replaced by an emphasis on tweaking existing products. Big, dumb data has increasingly replaced smart customer insights. It isn’t the big data that is the core problem, but the instrumental, short-sightedness it often induces in management. Why go to the bother of innovating risky breakthrough products when we can tweak our current ones and find target audiences for them using predictive targeting models with practically no risk?

However, all is not lost. Tomorrow’s answer to Wim’s question will look very different. The growth in the proportion of businesses that are service-driven, the arrival of software platforms and the increasing digitisation of everything is already changing how we do business. As Phil Simon shows in his excellent book ‘The Age of the Platform’, it has allowed platform-based businesses like Amazon, Apple, Facebook and Google to go from nowhere to become multi-billion dollar businesses in just a few years. Not only are they in the news, today, they are buying newspapers too!

But there is more to this than just providing services over a software platform. The four companies mentioned all provide services over a multi-sided market platform. They provide a software platform where thousands of sellers can transact with potentially millions of buyers, who normally wouldn’t meet. Rather than providing highly segmented services optimised to just a handful of customer segments, as would have happened 10 years ago, they provide a platform that enables others to provide a full range of on-demand, software-enabled services to the customer base that uses it. Closed proprietary services have become open business processes-as-a-service. This radically changes how services are provided.

Take Apple as an example. Traditional telcos operate single-sided businesses. They organise bundles of handsets, minutes, SMS and Mb that they sell directly to customers. They also provide walled-gardens of mediocre services that lock customers in to using the garden of branded providers. The emphasis is solely on the telco and its profits, and not at all on customers and their jobs-to-be-done. Customers are not impressed and have not signed up to walled gardens in any numbers. There is no wonder that the arrival of the Apple iPhone with its multi-sided market App Store platform changed all that. Rather than focus on handset-based bundles and walled gardens, Apple offered the iPhone with its bundled App Store that allowed almost anyone to create an ‘app’ designed to do one customer job very well. Hundreds of thousands of designers did exactly that; there are currently over 900,000 apps available on the App Store. For example, the Facebook app helps you keep in contact with friends. Shazam help you identify what music is playing and buy it. Yelp helps you identify which restaurant you should go to for dinner. Etc, etc, etc. The arrival of the Apple iPhone and the App Store catalysed a complete change in the mobile telecoms service industry. A change that increasingly leaves mobile telcos with their telco-oriented business models as mere providers of loss-leading data pipes.

Companies have gone through a number of evolutionary stages, from Type 1 Marketing with its emphasis on innovating profitable new services, through Type 2 Marketing with its emphasis on tweaking existing services for incremental profit, to exciting new platform-based services with their emphasis on providing a long-tailed distribution including all types of service. The first two were mostly in-house affairs. But platforms are different. They are ecosystems of sellers and customers. The company’s job isn’t to organise the service but to organise the platform and leave service provision to the thousands of service providers. As the market capitalisations of Amazon, Apple, Facebook and Google show, there is an enormous amount of money in being a world-class service platform provider. And as the mass-migration of customers to platforms has shown, they are often significantly better at providing the services that help customers get their jobs done than yesterday’s proprietary service providers.

Proprietary services are dead. Long live the open service platform!

And finally a request… Other than the four multi-sided platforms mentioned above, do you know of any interesting examples of other platforms that are reinventing their service industries?

Graham Hill
@grahamhill

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