The New Service Economy

There is lot of talk that the next innovation will be around services and not products. Excerpts from an article on Ewashing combined with Andy Grove’s prediction or the saying ” The Internet changes everything ? just wait five years” can be dismissed but not ignored.

Most people see washing machines as solutions to their dirty clothes problems and judge them according to how well they solve them. It is the experience of using it that is the true measure of a washing machine’s worth. Spin speed, program options, price and so on all influence buying decisions but they are just proxies (made necessary by imperfect information) for the subsequent day-to-day owning “experience”.

Now the Internet is stripping away many of the information constraints that required solutions to be sold as “products”, we can dispense with the proxies and focus on the experience.

The standard washing machine manufacturer’s response to the Internet is to open a website giving product details and offering discounted direct sales prices. Most businesses see the Internet as no more than a lower-cost sales channel.

But suppose a washing machine manufacturer sees it not as a sales channel but as an opportunity to craft a completely new service relationship with customers. “Customers don’t want washing machines,” the manufacturer reasons, “they want clean clothes. The machine is just a thing they have to buy to achieve that.”

What kind of business model and what kind of machine might emerge from such thinking? Let’s call the business model “cleanclothes.com” and the product “the internet washing machine”. The machine has a display panel and is linked to the Internet. Faced with a wine-stained sweater and shirt on the morning after the office party, you do not need a handbook to work out the right setting. Key in the type of stain and the material and let the machine consult the manufacturer via the Internet, get a reply and set itself accordingly.

With the manufacturer in direct, interactive contact with the user in this way, other things become possible. Why not “pay as you wash” and avoid all the problems associated with owning and servicing a machine? This would be tantamount to outsourcing the washing process; to paying a fee to ensure the desired experience of ever-clean clothes.

This short, amiable paper includes some very serious thinking.
The author argues that it has been communications constraints that have shaped business models and supply chains. Because suppliers did not know precisely what consumers wanted, they packaged their wares into solution bundles designed to address problem bundles. But there was no real understanding of how well the solution bundles solved the problem bundles.

But of course the Internet changes all that. The author’s washing machine model is a good analogy for the way companies should now be thinking. The “service and transactions” model he proposes is profoundly different to the traditional “product and purchase” model.

Firms that get this change should be able to bring together a host of things that make up the customer experience that were previously separate. Firms that do not, will, as the author says, find the Internet at best a zero-sum game, allowing them to cut their marketing and distribution costs but also, because it makes customers better informed, obliging them to drop their prices.

As the author also says, one of the biggest developments over the past decade has been the shift of focus from product to service. Now firms must shift their focus again from service to experience. Selling experiences, he says, gives more “bang for the marketing buck” and customers are less price-sensitive about experiences than about products.

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