The Xbox 180: Why designing the business matters

Artefact’s Craig Hajduk on design tips for MBAs

The big story in June was Microsoft’s Xbox One announcement, and their abrupt about-face on used games and online connectivity. In an attempt to enable new scenarios based on online services linked to physical discs, they angered gaming enthusiasts by changing the rules of the business. It’s an all-too-common phenomenon, where high-profile companies make business model changes, and face significant backlashes from customers and the press.

It’s useful to take a step back and think about why companies keep having those painful experiences, and what design can do to help.

The Siren Song of Online Services

Online services seem ubiquitous. Both investors and finance departments love moving from volatile purchase or upgrade cycles to the more predictable, lower-risk world of monthly subscriptions. Tying use rights to a user account opens up lots of new licensing possibilities, which should result in increased value for both customers and companies.

But when an existing product has a different business model, it can be a harrowing transition. Without a strong, obvious value proposition, subscription models can seem selfish. Customers may feel that their loyalty and past investments are being taken for granted. Microsoft learned this the hard way in 2001, when they changed their software upgrade model for business customers. Although the new model was better for many customers than their previous approach, Microsoft faced a public backlash over perceptions of price hikes and confusion over use rights.

Similarly, on the consumer side, Netflix ran into trouble when they split their streaming and DVD rental businesses, introduced a new brand with Qwikster, and raised prices. The resulting frustration dominated their news cycles for several weeks, and hurt subscriber growth.

In each of these cases, executives had strong visions of where they wanted to take their businesses, and were convinced they were doing the right thing for customers. But, they were still unprepared for the critical, often emotional reaction they received. While both companies recovered — Microsoft has taken a more customer friendly approach with Office 365, which will soon be a $1 billion business, and Netflix continues to delight investors with innovative growth strategies — the initial missteps could have easily been avoided if they had taken a more design-centric approach to the new business models, rather than the typical analytical one.

Practical Advice for Designing Business Model Transitions

There are several practical steps teams can take to use a design-centric approach to develop new business models and plans.

  1. Simplify. And then, make it simpler. Sometimes, in an attempt to optimize for different audiences, companies introduce new pricing or licensing models that can make customer purchase decisions extremely complex. Companies like SAP take more than a hundred pages to explain their license types, which is a pain point for customers in a world where straightforward approaches like Dropbox enjoy explosive growth. The solution is to use a design process to drive to simpler solutions that still meet customer and business objectives, much in the same way that well designed devices are both powerful and intuitive. As designers, we are often engaged not only to design the products but, with the use of research and design techniques, to help clients visualize program design and identify opportunities for streamlining offerings across different channels and customer types.
  2. Prototype the plan. “Fail fast, fail often” is an often repeated mantra for product development that’s based in the idea that rapid, public iteration leads to faster product improvement. Unfortunately, rapid business model changes confuse and alienate customers. JC Penney discovered this when it changed its pricing strategy, and then switched it again when customers failed to respond. Things kept getting worse after all the changes, which forcing a major leadership change. A better approach is to prototype and test the evaluation, purchase, and licensing models that you want to roll out in the same way that you would test the actual product to make sure the business model and product value are tightly aligned. If your business structure allows it, narrowly scoped pilots can be an effective technique. Facebook Deals is one of the few public examples of prototyping a new service. They rolled out deals at the height of the daily deal craze, they did it in a few select markets, they tested, they learned, they left.
  3. Customers are people too (even in the enterprise). Quantitative disciplines like finance often dominate business model strategy, and it’s often tempting to think that customers will use the same spreadsheets and analytical tools to evaluate a pricing concept model that internal teams used to develop it. But it’s critical to keep the customer experience, including the emotional reaction, front and center. The understanding not only of the customers’ needs, but also of their perceptions and personal goals, yields surprising results that undermine the validity of purely quantitative assumptions. Ignoring that aspect of a business model switch is risky — just look at the backlash to Adobe’s new subscription-only business model. Research techniques that capture the entire customer experience—both quantitative and qualitative— are basic tools on the design thinking palette. It is time to add them to the business model planning palette as well.
  4. Use carrots, not sticks. Behavioral economics and cognitive psychology provide us with great insights and allow us to predict with a fair amount of accuracy how we will react to different stimuli. Designing a product that steers towards a certain behavior and outcome is something good designers are experts in. Leveraging these principles to predict reaction to business models is not a far stretch. For example, using incentives to pull adopters to new business models is often more successful than forcing customers to move. If they feel pushed, loss aversion amplifies negative feelings, and the positive benefits of the new model can be lost. Microsoft discovered exactly this effect with the launch of the Xbox One, where the use of online services coupled with traditional discs opened up new scenarios for saving, sharing, and cross device play. However, the impact on used games drove many customers to see it as a takeaway, forcing Microsoft to reverse its position shortly after launch.
  5. Avoid the risk of risk aversion. It is common knowledge that companies that are afraid to take risks often fail to create differentiated products and passionate customers. At the same time, recent research shows that risk-averse leadership actually shows a significantly increased appetite for risk when results are poor. The outcome for these companies is a manic swing between incremental, undifferentiated approaches, and radical changes that alienate customers just when their support is needed the most. Investing in innovation and building a culture of risk tolerance is the way to break out of the risk aversion trap and successful design firms are prime examples that the approach pays off.

Designing a business model is as complex as designing a product, yet we often tend to oversimplify it in executive summaries and on spreadsheets. Taking a step back to think like a designer and accounting for the qualitative outcomes in response to a business strategy change can result in better, smoother, more effective transitions. And when that happens, the ultimate goals of profitability, differentiation and reputation get within reach.

Note: Craig Hajduk’s article appeared originally on Geekwire on July 23, 2013.

Lurking in my weekly round up mail from 37signals was this gem from @joulee on medium.

Are there others to add to this list or ways to refine? I have to say, she has captured the essence of good management in collaborative, digital focused teams.

A Manager’s Manifesto

10) Always get the full story before making a decision.

9) It’s incredibly easy to ‘flip the switch’ and start writing people off after a few bad experiences. Resist at all costs. You were bumbling once too. You made poor decisions. You learn and grow, and so does everybody else.

8) Sweep up the crumbs. Wipe the tables. Turn off the lights. Plug the holes that need plugging—even if it’s menial, even if nobody will know you did it. Do it in service of the product, the company, and this wondrous, magical thing you are all building together.

7) Recognize you can’t do everything. Close your eyes, fall backwards, and learn to trust.

6) Clearly, there is a more efficient way to do the things you do. How? Ponder that on your daily drive home.

5) Figure out which people rely on you and how you can help them be self-sufficient. You may feel important having a monopoly on salmon provisions, but if the whole village learns how to fish, it’ll free you up to do something else. Like figuring out how to grow wheat. Or how to domesticate those cute wolf-pups.

4) Don’t say anything if it’s not actually contributing to the discussion. Your voice is not so melodious that it absolutely must be heard.

3) Making the best decision is not as important as putting in the right processes to ensure that the best decisions get made.

2) Dole out thanks and encouragement like you dole out opinions.

1) Above all, this: never, ever get in the way. It’s better to twiddle your thumbs and squint up at the clouds than to obstruct progress for the sake of that stupid, childish thing called ego.

Some great articles to read:

Marketing and product design are the same thing by Seth Godin

“knowing what product to build is something that both product designers and marketers need to understand intimately in order to do their jobs…the designers in order to design the product and the marketer in order to share the story.”

The newsonomics of a news company of the future by Ken Doctor

“Yet news sites need a continuous discovery flow of would-be customers, poured into the top of their data-analysis funnels by Google, Facebook, and others. The great majority are one-and-done “readers.” It’s those who know the publisher brand but aren’t yet ready to fork over several hundred dollars that bear the most attention. For the FT, that middle-of-the-funnel crowd now includes 4.8 million registered users; if you register, you get a little access beyond the FT’s paywall. Readers among that group are the likeliest to become paying customers, and in the meantime can be monetized with better targeted advertising as well. It’s an important point in an increasingly paywalled world: Build registration as well as subscribers.’

Inside Facebook’s Internal Innovation Culture by Reena Jana

“1. Encourage everyone — even those in the C-suite — to learn by making

2. A winning mobile strategy

3. Physically mix up your work environment on a regular basis. “

When the story goes digital

“Analogue systems are small packages of causality. This means that they contain a set of components that are related to each other either chronologically or by way of a hierarchy. Analogue systems give you the whole picture containing all these components and then you have to decide which parts you want to focus your attention on. Think book. Think audio cassette. The various different content units in these media are united by a common theme or source or idea.

Digital systems are cropped versions of these packages. Instead of giving you access to the whole picture, they narrow things down and make you focus on only one thing. This helps avoid clutter and simplify matters by reducing cognitive choice, but it also does away with a lot of context. Think single short story (as opposed to a thematic collection). Think single MP3 file instead of a CD.”

Editor, product manage thyself

“As an editor who gets to work on the product team, I’m empowered to help determine what I think other editors need to tell the story the right way. And when I’m wrong, I’m empowered to go back and try again. This is all quite new at my company, especially when it comes to the Internet, and there are a lot of other pieces to the puzzle I’m still learning about. But it feels like the right direction.”

When people get confused about “BS metrics’

“What is important about a key metric is that it is uniquely tied to the business value of the company and indicates there is some set of growing adoption and usage of that company’s products.”

Interesting to see that the latest research in relation to multiscreen experiences (from TIme Inc) tells us that people show a greater emotional attachment and engagement to the content on the TV when they are using a companion experience on a mobile or tablet device.

This makes sense, as the companion experience heightens the awareness of the content and also immerses the person more in the experience of the TV show. But, also interesting is that this experience is heightened when shared with another person, either in the room or remotely via social tools.

Also, audio is key to triggering a reaction from the viewer around advertising and this is becoming the same on mobile, tablet and PC as audio becomes a stronger interrupter in peoples daily lives.

Will be working through what this means for the ability of these devices to sense activity and the experience the customer is engaging with, and also what this may look like for mobile, tablet and TV experiences of the future … the screens will all connect, but the emotional attachment may differ based on the moment, task or mood of the viewer.

Here is the infographic from the research … some very interesting jumping off points here:

multi screen effects

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