Marco Bertini is rewriting the rules of commerce. Instead of selling the “means” (products and services), he believes companies should adopt innovative revenue models to pursue the “ends” (actual outcomes). The key: reflect the value that customers actually derive from their purchases. Bertini is a professor of marketing at Esade and a visiting professor at the Harvard Business School. He is also a senior advisor to the marketing, sales, and pricing practice at the Boston Consulting Group. Marco is the co-author of the book The Ends Game: How Smart Companies Stop Selling Products and Start Delivering Value. He received his doctorate from Harvard Business School and has previously served on the faculty at London Business School.
Your book, The End Game, covers the idea that customers don’t buy products, per se, that the products are a means to an end. They buy the solution or the end in itself. Take us through the thesis of the book and behind the idea of what this means for companies.
Theodore Levitt, a very famous professor remarked, “Customers don’t want to buy the nail or the drill, they want to buy the hole in the wall.” And that observation was made to make the following point, that companies, if they really want to grow, what they should be doing is stop thinking about what they’re making and shoving it down the throats of customers, but really think about customers and their needs and wants and work their way backwards, right?
Most companies understand they should be thinking about value creation from the perspective of customers, but when it comes to value creation for themselves, how do we turn this into revenue for a business, which is essential for the business to be a business, right? They don’t think about the customer. They think about themselves. What is the cost of the drill? What is the risk tolerance factor that I have when I sell this drill? What do my internal politics say about the price it should be?
And so there was a mismatch between these two sides. But still when customers put money behind something, it’s because they’re looking for solutions, right? They’re not looking to buy stuff just for the sake of buying stuff. They’re buying it for the promise that the stuff will solve some of their problems, right?
In the Subscription Economy, people want to buy value. On the way to value, you have access, you have consumption, you have performance. These things must be there. They’re necessary in order for value to be derived. And so we can hold all these revenue models on this line.
Even if a company says they have a customer obsession, at best it’s a half step. How can companies go all in on customer-centricity?
So think of a car, right? If I told you my car gets you from A to B comfortably, and to what. And then I literally sell a car. Then you get access. You have to buy that car in the old fashioned way, right? And so that’s on you. If you cannot afford it, bad luck, right? Then if your car sits in the garage 95% of the time, which is by the way what most cars sit in a garage, 95% of the time, that’s on you, my friend. You bought the car. It’s your asset. It’s that you’re just not using it very much. And it’s depreciating as we are speaking right now.
And if it doesn’t really get you A to B reliably, comfortably on the things you’re looking for, again, that’s still also on you. And all this risk is on the shoulders of the customers, which does two things, if I may. One is, bring down what these customers are willing to pay. So either they’ll stay away from the marketplace, they will just, “I will not buy a car, I’ll just walk instead or take public transport.” Or they’ll say, “Just in case, let me buy a cheaper car,” right? And so it brings sort of the valuation… It shrinks the pie in the marketplace.
You described three layers of value in the book:
1.) The customer needs to get the thing
2.) They need to use the thing
3.) They need to have the thing work or do what it’s supposed to do, deliver on its promise
And all three of those things have to happen to achieve value. So how are subscription businesses able to deliver on the other two pieces of that value? What advice would you have for them for getting better at that?
Usage should be like a warning sign in the company. There is value that is not being tracked there, right? To some people, you’re an amazing deal because they’re using you a lot. And to some others, you’re a terrible deal because they’re not using you very much, like a gym, right?
And so, if you find that pain point, that is that the consumption pattern is actually so varied in your user base, then what you should be thinking about is how do I add? And you said, kind of, I think it was simply as a usage metric. I think it’s kind of hard to conceive and actually put it into practice.
Companies need to think about how they flex these patterns with some sort of usage metric, because that will allow my own pricing to mirror the valuations I find in the marketplace and it makes it infinitely more scalable.
Look for the pain points and address them before somebody else does. If the biggest pain point is access, the standard sort of subscription setup is already infinitely better than doing an ownership model. But after having done that, if you find lots of pain points in consumption and or in performance, then don’t stop there. You try and evolve, right?
What’s the thought process around monetization design to understand what is the, either most efficient way or the profit maximizing way or the best way for your customers to go about it?
The process that we focus on the most in the book is really a rational process. It kind of assumes certain rationality where the customer is sitting there thinking to themselves, “Where is my inefficiency? Why am I asked to pay for this? And why isn’t there a better solution?”
And so in the enterprise world… AWS for example, decision-making is somewhat more rational, this is easier to see, right? Why would I be paying for server time if I’m not using it? So why don’t we find… And by the way, we can also measure it much easier than in consumer markets. So everything’s sort of pointed in the direction of, I’m trying to get rid of these inefficiency, these pain points.
Which companies are just nailing customer value, on all three of these layers?
An Australian mining company called Orica, was facing very, very strong price pressure from new competitors. We’re talking about industrial explosives for mines, at half the price.
For a mine, the largest cost of running a mine is excavation. When things go boom in the mine, there’s lots of stones you don’t need and very few stones that you do need, right? And so excavation is very costly. And then they discovered that excavation, the cost of excavation is typically a function of the size of the rocks that are blown up.
So if in an explosion, the fragmentation is very, very high, so very small rocks, that is relatively cheap to manage because you just shovel it up, put it on the conveyor belt, it gets crushed and it’s taken away. But if the explosion produces large rocks, then you’ve got delays, additional blasts, cranes, breaking of the conveyor belt, you name it, right?
And so facing this price pressure, Orica used to sell in an ownership way, price per kilogram of explosives. But having discussions with their mines and understanding they were looking for small rocks, not dynamite sticks, back to the “drills and the hole” metaphor, they did some tests and realized that their explosives, compared to the competitors’ actually created smaller rocks after all, because they were higher quality.
And so they said to themselves, “Hold on a second, why are we charging by kilogram, which actually favors their competition because on a per kilogram basis, we’re actually much more expensive than the competition. When our customers care about sizes of rocks and we have smaller rocks.” And so they changed to what I call rock and rock contracts, where basically they’ve made their payments from mines as a function of the diameter of rocks that are blown up, okay?
So this is a shift, a very quick shift from ownership all the way to performance-based model. Now I like this example because people don’t usually think about mines, and explosives and all these things. You’ve got the situation where, on the one hand, my traditional ownership model was actually doing me harm. It was making me comparatively less favorable in the eyes of the customer. And the performance is something that is easy to understand, easy to measure, easy to verify. It’s actually there right in front of me. It took some internal movements as well, but it was quite an insightful thing to do and they’ve gone back roaring. They now have the same sort of market power that they had before all these happened.