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.
- 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.
- 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.
- 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.
- 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.
- 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.