Chapter 3: The Software Business Model
Chapter 3: The Software Business Model
Modifying the offering and business models to the ground realities of the target market is a concept that has been practiced for centuries. In one of the most definitive works of modern day economics, Adam Smith in his 1776 book “The wealth of Nations” discussed Mercantilism of medieval Europe and cons the term the “Invisible Hand” . The idea behind the "invisible hand" is the claim that people will unintentionally improve their community through pursuit of their own wants and needs. Adam Smith used this to argue his case for capitalism and influenced the early thinking on lais·sez faire, where governments have a smaller role to play in international trade and empowerment of the individual was considered good for the economy of both the trading nations.
Evidence of business model adaptations can be found even in the works of a brilliant 3rd century economist Kautilya’s. His book called Arthashastra, is one of the earliest works on commerce, taxation and international trade. This book was instrumental in setting up multi lateral trade agreements around this era that led to the formation of the famous “Silk Route” to enable connecting China and India with Persia and western Europe. Trading was customized depending on the requirements of the target market. For example, the Chinese exported Silk for precious stones. Europe in turn imported fur from the Russians using this route in return for exotic horses.
We can take this in the context of modern day economics and more specifically software and explore why business models and offerings in one part of the world is not necessarily transferable to the other parts without some modifications. These changes might range from tweaks to the functionality, pricing structure, marketing strategies to more wholesome changes like a different pricing structure and new delivery mechanisms. The markets are extremely different from one another and it requires a deep understanding of the dynamics and motivations of the individual segments to be able to design, develop and market a solution from each of them. In green field markets like the emerging ones, it takes even more research to get it right. Lured by the prospect of one billion breakfast eaters, Kellogg, the U.S. cereals giant, ventured into India in the mid-1990s. Three years after entering the market, sales stood at an unimpressive $10 million. Indian consumers were not sold on breakfast cereals. Most consumers either prepared breakfast from scratch every morning, or grabbed some biscuits with tea at a roadside tea stall. Advertising positions common in the west, such as the convenience of breakfast cereal, did not resonate with the mass market. Segments of the market that did find the convenience positioning appealing were unable to afford the international prices of Kellogg’s brands.
Sources of competitive advantage for Global Firms
How do successful firms ( in software or in other industries ) gain competitive advantage ? Among numerous factors, they chose a different innovative trajectory than that of its competitors, by focusing on a different segment, altering geographic breadth or combining the products of related industries.
Innovation and Emerging economies
Innovation, in this context can be characterized to include both improvements in technology and in better ways of doing things. It can be manifested in product changes, process changes, new approaches to marketing, new forms of distribution and in addressing new target markets and segments. Innovations shift competitive advantage when rivals either fail to perceive the new way of competing or are unwilling or unable to respond. This can be a result of many causes, among them complacency, inertia, inflexible assets etc. In his book “Innovators Dilemma” , Clayton Christensen portrays this predicament to be a direct result of successful firms paying too much attention to its existing customer base. Here are some of the reasons that can be attributed to this behavior.
Focusing on existing customer base is unavoidable for successful firms. Responding to their changing demands preoccupies the mindshare of software companies to such a large extent that they fail to see the emerging threats to their industry. Success metrics, product cycles, research, value chains are all tied to the existing business model. This impairs the ability of companies to innovate beyond those boundaries.
Take the computer industry as an example. IBM once dominated the mainframe market but lagged behind for years in the minicomputer market, although the latter is technologically simpler than mainframes. Digital Equipment Corporation (DEC) pioneered in the minicomputer market, closely followed by Data General, Hewlett-Packard, Nixdorf, Prime and Wang. However, each of those missed the emergence of the desktop personal computer market. In this case, it was another new comer Apple Computer that took the lead. When Apple brought its portable PC to the market, however, it was already six years behind Compaq. Similarly, the workstation market was created by some other rookie players at the time, namely, Apollo, Silicon Graphics and Sun.
So how can we apply these lessons to the emerging world where the customers in these countries have dramatically different requirements and a unique combination of infrastructural and social challenges?
In this chapter I will develop a new framework for designing products for the emerging markets. This framework takes into account the idiosyncrasies of the target market and explores how best to offer services that fit into their requirements. Before we can dive into the framework, lets look at some of the major factors that impact the business model as a whole. The factors that we will be discussing are broadly based on the consumer characteristics, enterprise behaviors, infrastructural and the competitive challenges in the emerging markets. In this chapter we will also be discussing the consumer as well as enterprise angels to each factor. Software is probably one of the very few products that cater to the consumers as well as to enterprise businesses.
Barriers to Entry
Let’s first explore some barriers to entry in the developed world for software markets. Lets take the case of Microsoft Office. It is well documented that the Office team at Microsoft considers previous versions of Office like Office 97 and Office 2000 as the primary barriers to the adoption of its latest versions. This is also referred to as “It is good enough” problem in the software circles. Other well established products such as Adobe Photoshop, Quicken etc also face the same problem. Why would an average user go out and but new versions of a tax software every year when 99% of the software doesn’t change year over year ? Thanks to Uncle Sam, the yearly changes to the taxation laws constitute the other 1% for which we shell out anywhere between $30- $100 to buy new versions of the tax software not to take chances with the IRS. Unless we are forced to, the software is “Good Enough” for average use. This is not only isolated to the consumer space. In the enterprise space this is even more acute as adopting new software means an installation cycle that comes with its own set of headaches for the IT departments and a learning curve for the users of the software.
In the emerging world, the first barrier to entry is often the acceptability of existing manual business process. The emerging countries don’t have many companies that can exploit economies of scale making it very difficult for medium enterprises to justify the cost of software acquisitions. Though there is consolidation happening to exploit scale and squeeze efficiencies, it is still a very fragmented landscape. Any business software can only be as good as the business process that leverages it. Here is where the problem begins in the target market.
Software Sales model
Identifying potential customers, developing sales strategies to raise awareness of the products, managing an active pipeline of customers and establishing a direct sales channel especially in the mid markets is a daunting task that keeps most business away from even trying. Targeting the top 5% or so of the market is easier as it means a handful of large enterprises which are more likely to have established business processes and have larger IT budgets and more latitude for experimentation. These large corporations are also likely to be divisions of multi nationals or have some major overseas presence in developed markets themselves. But this market is miniscule compared to what the overall market can offer.
Piracy
Affordability and payment practices
As we have discussed before in Chapter XXX, affordability of enterprises and consumers alike in emerging markets will have to be considered while developing the business model. Payment practices are typically a by product of affordability. “Micro credit” models usually work the best in these conditions for the consumer market. More on that later, but in the enterprise space also the business models will have to incorporate the fact that the traditional software licensing models of a significant one time upfront fee plus a periodic subscription might not be the best fit in these new markets based on the affordability factors.
Technical Infrastructure
Business practices
The critical success factors that influence the adoption of software in running the business processes of enterprises are very different in these markets. For example, improving productivity and reducing the manpower is a platform that resonates with the developed world where businesses are always looking to improve man power efficiencies. This constraint is not so severe in the emerging world where skilled labor is not as scarce or expensive as it is in other parts of the world. Another manifestation of the same issue is the fact that several business practices are not as evolved from a process stand point as their developed counterparts.
For example, the healthcare systems are far from being evolved in most emerging economies. The insurance and automatic billing are almost non existent.
Lateral Design
In his theory of dominant logic, Prof C.K. Prahalad talks about how one dimensional and preconceived certain assumptions can influence strategy and product decisions. This is prevalent in the software industry as much as it is in others. In this section, we will develop a framework with which we can challenge some of the premonitions and explore how the constraints of emerging economies. Lateral logic has to be applied to ensure that the fundamental assumptions of software usage are questioned and validated in the context of these target markets.
Lateral design involves challenging and re thinking some fundamental aspects of the software. For example, rethinking usage characteristics, underlying infrastructure, accessibility of the application, resource constraints etc. some of the other factors we have already discussed in this chapter like pricing, business practices , etc are also important to include in this thinking. The reason I call this lateral design is because when we take each of these issues, we have to analyze, capture and apply its repercussions to product design in ways that might be counter intuitive to normal design practices. For example, shelf life of applications is what is sometimes referred to as the “Half Life” of the product. In developed countries, it varies anywhere between 3 -10 years in most industries. This means that the product is significantly changed or upgraded every 3 -10 years. In some industries like manufacturing shop floor type of domains, it is closer or greater than 10 years where as in high tech consulting services space, software is constantly replaced or significantly upgraded every 3-4 years or so. This is in keeping with the pace and the fluid nature of the industry the software is supporting. Product designers take this half life into account while determining certain features like deployment and updates to ensure that the most appropriate service model to support the business. For example, the product might be designed to support constant updates in business logic functionality through web services in one domain while in another, it might not be that important while durability and availability might be the higer order bits.
In emerging markets, these conditions might be slightly different. In highly regulated economies, manufacturing software might be required to support
In this section, we will develop a model for product development for emerging markets. The top row of this figure indicate some major gates of the decision processing software companies should go through while developing new products or adapting their current offerings for the emerging markets. Lets look at each of these stages and dive deep into the factors affecting each.
Product Research
This maybe the most important element of the Emerging markets framework. Researching the target market and mapping the offerings ( product, service or a combination of the two ) to the characteristics of the market is the main objective of this step. This augments the traditional product research that any software company might normally do to extend its product line. The following product research elements are important for emerging markets as well:
Market Size analysis
This analysis is typically performed to understand the potential market size and characteristics associated with the target market. For software companies, this typically means understanding the enterprise landscape to make sure that the target segment is growing at a sustainable pace to allow sufficient room for a few major players in the domain.
In addition to the above usual steps, it is also important to perform the following ones to make sure that the offering being developed is in line with the characteristics and requirements of the target market.
Country Analysis
Country analysis is about understanding the macro socioeconomic factors that are influencing the country’s direction at any given point of time. Lets take Brazil as an example to see how to break down the data to model a sample product offering taking the various macro economic factors into account.
Brazil is generally a slow growing country with only about 3% growth in GDP over the last 10 years. This combined with a very high level of fluctuation in currency meant that the saving patterns of consumers are dramatically different from those in other emerging markets.
The propensity of Brazilians to kick back a little and enjoy life is evident by a number of factors like low saving rates, generally expressed happiness with quality of life ( among the highest in emerging countries ) etc.
Brazilian population predominantly resides in Urban areas which is also a major variance from other comparable countries like Russia and India.
An inflation rate of 10% + in the recent years also indicates an inherent macro economic instability.
The above analysis tells us that the business model of the offerings should take into account the following:
The business model should lend itself to exploiting more near term opportunities given the geo political instability and consistently high inflation rate
Personal consumption of software is the highest in Brazil when compared to other countries making it a promising market for consumer software like personal communication and productivity software.
There is a lot of emphasis on entertainment making it attractive for video gaming and mobility based software
Rapid expansion of telecommunications and the impressive growth in the use of internet has surprisingly increased the usage of B2C type of eCommerce over the internet. This is a clear departure from the trends we see in other markets like India and China.
Primary and Secondary market research
Performing any kind of user research in emerging market is a very tricky proposition. The challenges can be summed up by just one macro point- The target customers ( both enterprise as well as consumers ) really don’t know what they need. This is true to some extent even in the developed world. In his book “Crossing the Chasm”, Geoffrey Moore illustrates brilliantly the natural dispersion of customers when it comes to adopting new technologies. This theory is built on the idea that the rate of diffusion in the Technology Adoption lifecycle curve is not continuous. There is a chasm between the early adopters and mainstream users and this is further amplified in the emerging markets for a variety of reasons we have discussed in this book so far.
Primary market research in emerging markets is not as accurate as in the developed world because the customers are typically not as advanced and the business imperatives driving them are also different. For example, a focus group study on anticipated online gaming usage might not resonate well with the emerging market as the broadband high speed adoption lags that of the developed world significantly. Without the experience of being always online, the results of such a primary market research might not be indicative of potential usage and adoption simply because the user base is not ready for the technology.
Secondary market research can also have its own share of inaccuracies. Secondary market research is typically used to validate perceptions and to predict adoption, market share, project growth rates etc. In emerging economies, the challenges include unpredictable macro economic data, wildly fluctuating economic and political climates, lack of clear understanding of the patterns of technology adoption etc. Emerging markets are notorious for their propensity to jump technical waves. For example, the cell phone penetration rates are much higher than land line density every reached. India also almost skipped the entire mainframe/mid range computing wave and caught on to the desktop PC wave. Emerging countries have the advantage of not having to worry about legacy issues. Individual consumers also exhibit similar behavior so it is imperative for secondary research to take this into account while predicting technology adoption and market growth.
Pricing Strategies
As we have discussed extensively in the last section, affordability plays a big part in assessing one’s business model. While I don’t intend to discuss the basics of pricing strategies in this section, I do want to touch upon a few important points that are relevant in this discussion. Pricing is a very important barrier to technology adoption both in the consumer as well as in the enterprise markets. In consumer markets, the concept of disposable income is often discussed as one of the determining factors of pricing. For example, if it costs.15 cents to manufacture, market and distribute a can of coke in Brazil, how much should it priced at ? 30 cents or 55 cents ? Other factors like size of target market, competition, perceived value of the product etc all have significant input into this process but the key element here is the portion of disposable income that an average consumer is willing to spend on a “luxury” spend item like a can of coke. It is also fascinating to understand the behavior of rural and poor markets when it comes to discretionary spending. Unilever sells more single serve shampoo sachets than it sells larger bottles. This is typically because of the proclivity of the rural consumer to live for the day or the week rather than planning for the entire month or the year. These concepts can be extrapolated into the world of software to analyze the spending practices of consumers and enterprises.
Perceived value of software
Software makers, especially the ones that make mission critical business applications like SAP that runs Fortune 500 businesses or ABB that creates software to manage shop floors sell the concept of using software as a competitive advantage over its immediate competitors . the more the customers realize this, the higher the premium they are willing to pay for the software.
This is also true in the mid market segment of developed countries where small companies are realizing that software can be effectively used to gain the extra edge while servicing customers. For example, by using a CRM system, a legal firm can track and service its largest clients with up to date and most accurate information thereby increasing the customer satisfaction and reducing turnaround time. This gives the companies the competitive edge that can be quite difficult to duplicate immediately.
In emerging markets, other than in the very high segment which usually comprises of multinational companies, the perception of software is that of a necessary evil. It is not considered to be a source of competitive advantage. There are several reasons for this latency. Competitive pressures, globalization and market fluctuations are changing this but we have to learn to adapt to these realities while we look at pricing strategies. As long as software is not accepted as a key strategic advantage, it will continue to be a minor part of the overall enterprise budget.
Multi layered pricing
The pricing model should take the above into account and have appropriate strategies for offering staggered SKUs at various price points. Business software in the developed countries often have SKUs that are categorized into 2 or 3 levels of usage typically starting from a “Standard” version to a high end “Enterprise” version that typically has a few more bells and whistles in functionality. In the emerging market, we have to be a little more innovative in pricing and subsequent definitions of the product SKUs. I propose thinking about having “single serve” versions of the software that expire on pre determined usage. For example, a customer could buy a retail software that will expire based on a number of days or number of transactions that are posted through the system. This is very similar to a pre paid phone card that needs “recharging”. This strategy could run the risk of getting complicated if the vendors try to get too fancy with this. Keeping it simple and having the end objective of providing a low entry point for the consumers while keeping the option of upgrading based on usage will be an attractive option for companies that simply cant afford the high upfront costs associated with licensing complex software.
Business Practices
Most of the enterprise software makers pride themselves on the fact that their software captures the best practices of the target market they service. For example, SAP prides itself on the fact that their software bring to bear the established practices in the area of supply chain management. A healthcare application in the physician management space is intended to optimize the workings of a physicians clinic and the software is intended to bring local practices, regulations and cultural aspects into the process. It is generally accepted that by following these best practices, business can not only weed out process in efficiencies but also effectively use it to model their business.
In emerging markets, the business practices might not be in sync with those in the developed world. For example, many elements of the supply chain process are still manual as small time suppliers still are not savvy enough to fulfill order information electronically. In most emerging countries healthcare is not as heavily regulated as it is in the developed world. Consequentially, hospitals are not inclined to pay for software that emphasizes heavily on regulatory compliance.
Taking these differences into account, software should be redesigned to incorporate these subtle but sometimes very important differences in business practices. A great example of where this is applied is in the area of professional services software. This genre of application is typically used by legal and consulting companies to optimize on the resource allocation as manpower is usually very expensive in the developed world. This software helps build a process to streamline allocation of resources as it is the source of competitive advantage for the services firms. On the other hand, in emerging economies, manpower resources are not that scarce. Emphasis is paid more on customer management and real time collaboration with overseas customers and in knowledge sharing. It is the same application but with slightly different accent to accommodate the strategic intent of the target user base.
Generalizing the above observations, we can concur that it is really important to understand the underlying business challenges and tweak the design of the product to address the target market imperatives. This could be anywhere between having a different marketing emphasis to creating a new feature set to cater to the requirements.
Product Design
With any new product development process, once we have the fundamental market and product research done, we proceed on to designing the product or in the case of an existing product, customizing it for the intended market. Product design is often an ignored discipline in software and is often mangled by technical design or high level user requirements. In this section, we wil explore how to instill this discipline back into the product development process. I propose looking at the following as the critical elements that influence the way of designing software for emerging markets. These will be of course above and beyond the normal steps of traditional product design processes.
Deployment
Usability
Subscription services
This kind of licensing model is not new to the technology industry. Actually this was perhaps one of the earliest business models in the computing industry with original mainframes. During the dotcom era, subscription and hosted services made a mighty comeback. Internet was the backbone for this thinking and everything had to be based on the internet.
There were several reasons why this concept never really took off in the enterprise environment.
Subscription based software licensing means that the licensee doesn’t have to shell out huge upfront licensing costs typically associated with enterprise software
Modifying the offering and business models to the ground realities of the target market is a concept that has been practiced for centuries. In one of the most definitive works of modern day economics, Adam Smith in his 1776 book “The wealth of Nations” discussed Mercantilism of medieval Europe and cons the term the “Invisible Hand” . The idea behind the "invisible hand" is the claim that people will unintentionally improve their community through pursuit of their own wants and needs. Adam Smith used this to argue his case for capitalism and influenced the early thinking on lais·sez faire, where governments have a smaller role to play in international trade and empowerment of the individual was considered good for the economy of both the trading nations.
Evidence of business model adaptations can be found even in the works of a brilliant 3rd century economist Kautilya’s. His book called Arthashastra, is one of the earliest works on commerce, taxation and international trade. This book was instrumental in setting up multi lateral trade agreements around this era that led to the formation of the famous “Silk Route” to enable connecting China and India with Persia and western Europe. Trading was customized depending on the requirements of the target market. For example, the Chinese exported Silk for precious stones. Europe in turn imported fur from the Russians using this route in return for exotic horses.
We can take this in the context of modern day economics and more specifically software and explore why business models and offerings in one part of the world is not necessarily transferable to the other parts without some modifications. These changes might range from tweaks to the functionality, pricing structure, marketing strategies to more wholesome changes like a different pricing structure and new delivery mechanisms. The markets are extremely different from one another and it requires a deep understanding of the dynamics and motivations of the individual segments to be able to design, develop and market a solution from each of them. In green field markets like the emerging ones, it takes even more research to get it right. Lured by the prospect of one billion breakfast eaters, Kellogg, the U.S. cereals giant, ventured into India in the mid-1990s. Three years after entering the market, sales stood at an unimpressive $10 million. Indian consumers were not sold on breakfast cereals. Most consumers either prepared breakfast from scratch every morning, or grabbed some biscuits with tea at a roadside tea stall. Advertising positions common in the west, such as the convenience of breakfast cereal, did not resonate with the mass market. Segments of the market that did find the convenience positioning appealing were unable to afford the international prices of Kellogg’s brands.
Sources of competitive advantage for Global Firms
How do successful firms ( in software or in other industries ) gain competitive advantage ? Among numerous factors, they chose a different innovative trajectory than that of its competitors, by focusing on a different segment, altering geographic breadth or combining the products of related industries.
Innovation and Emerging economies
Innovation, in this context can be characterized to include both improvements in technology and in better ways of doing things. It can be manifested in product changes, process changes, new approaches to marketing, new forms of distribution and in addressing new target markets and segments. Innovations shift competitive advantage when rivals either fail to perceive the new way of competing or are unwilling or unable to respond. This can be a result of many causes, among them complacency, inertia, inflexible assets etc. In his book “Innovators Dilemma” , Clayton Christensen portrays this predicament to be a direct result of successful firms paying too much attention to its existing customer base. Here are some of the reasons that can be attributed to this behavior.
Focusing on existing customer base is unavoidable for successful firms. Responding to their changing demands preoccupies the mindshare of software companies to such a large extent that they fail to see the emerging threats to their industry. Success metrics, product cycles, research, value chains are all tied to the existing business model. This impairs the ability of companies to innovate beyond those boundaries.
Take the computer industry as an example. IBM once dominated the mainframe market but lagged behind for years in the minicomputer market, although the latter is technologically simpler than mainframes. Digital Equipment Corporation (DEC) pioneered in the minicomputer market, closely followed by Data General, Hewlett-Packard, Nixdorf, Prime and Wang. However, each of those missed the emergence of the desktop personal computer market. In this case, it was another new comer Apple Computer that took the lead. When Apple brought its portable PC to the market, however, it was already six years behind Compaq. Similarly, the workstation market was created by some other rookie players at the time, namely, Apollo, Silicon Graphics and Sun.
So how can we apply these lessons to the emerging world where the customers in these countries have dramatically different requirements and a unique combination of infrastructural and social challenges?
In this chapter I will develop a new framework for designing products for the emerging markets. This framework takes into account the idiosyncrasies of the target market and explores how best to offer services that fit into their requirements. Before we can dive into the framework, lets look at some of the major factors that impact the business model as a whole. The factors that we will be discussing are broadly based on the consumer characteristics, enterprise behaviors, infrastructural and the competitive challenges in the emerging markets. In this chapter we will also be discussing the consumer as well as enterprise angels to each factor. Software is probably one of the very few products that cater to the consumers as well as to enterprise businesses.
Barriers to Entry
Let’s first explore some barriers to entry in the developed world for software markets. Lets take the case of Microsoft Office. It is well documented that the Office team at Microsoft considers previous versions of Office like Office 97 and Office 2000 as the primary barriers to the adoption of its latest versions. This is also referred to as “It is good enough” problem in the software circles. Other well established products such as Adobe Photoshop, Quicken etc also face the same problem. Why would an average user go out and but new versions of a tax software every year when 99% of the software doesn’t change year over year ? Thanks to Uncle Sam, the yearly changes to the taxation laws constitute the other 1% for which we shell out anywhere between $30- $100 to buy new versions of the tax software not to take chances with the IRS. Unless we are forced to, the software is “Good Enough” for average use. This is not only isolated to the consumer space. In the enterprise space this is even more acute as adopting new software means an installation cycle that comes with its own set of headaches for the IT departments and a learning curve for the users of the software.
In the emerging world, the first barrier to entry is often the acceptability of existing manual business process. The emerging countries don’t have many companies that can exploit economies of scale making it very difficult for medium enterprises to justify the cost of software acquisitions. Though there is consolidation happening to exploit scale and squeeze efficiencies, it is still a very fragmented landscape. Any business software can only be as good as the business process that leverages it. Here is where the problem begins in the target market.
Software Sales model
Identifying potential customers, developing sales strategies to raise awareness of the products, managing an active pipeline of customers and establishing a direct sales channel especially in the mid markets is a daunting task that keeps most business away from even trying. Targeting the top 5% or so of the market is easier as it means a handful of large enterprises which are more likely to have established business processes and have larger IT budgets and more latitude for experimentation. These large corporations are also likely to be divisions of multi nationals or have some major overseas presence in developed markets themselves. But this market is miniscule compared to what the overall market can offer.
Piracy
Affordability and payment practices
As we have discussed before in Chapter XXX, affordability of enterprises and consumers alike in emerging markets will have to be considered while developing the business model. Payment practices are typically a by product of affordability. “Micro credit” models usually work the best in these conditions for the consumer market. More on that later, but in the enterprise space also the business models will have to incorporate the fact that the traditional software licensing models of a significant one time upfront fee plus a periodic subscription might not be the best fit in these new markets based on the affordability factors.
Technical Infrastructure
Business practices
The critical success factors that influence the adoption of software in running the business processes of enterprises are very different in these markets. For example, improving productivity and reducing the manpower is a platform that resonates with the developed world where businesses are always looking to improve man power efficiencies. This constraint is not so severe in the emerging world where skilled labor is not as scarce or expensive as it is in other parts of the world. Another manifestation of the same issue is the fact that several business practices are not as evolved from a process stand point as their developed counterparts.
For example, the healthcare systems are far from being evolved in most emerging economies. The insurance and automatic billing are almost non existent.
Lateral Design
In his theory of dominant logic, Prof C.K. Prahalad talks about how one dimensional and preconceived certain assumptions can influence strategy and product decisions. This is prevalent in the software industry as much as it is in others. In this section, we will develop a framework with which we can challenge some of the premonitions and explore how the constraints of emerging economies. Lateral logic has to be applied to ensure that the fundamental assumptions of software usage are questioned and validated in the context of these target markets.
Lateral design involves challenging and re thinking some fundamental aspects of the software. For example, rethinking usage characteristics, underlying infrastructure, accessibility of the application, resource constraints etc. some of the other factors we have already discussed in this chapter like pricing, business practices , etc are also important to include in this thinking. The reason I call this lateral design is because when we take each of these issues, we have to analyze, capture and apply its repercussions to product design in ways that might be counter intuitive to normal design practices. For example, shelf life of applications is what is sometimes referred to as the “Half Life” of the product. In developed countries, it varies anywhere between 3 -10 years in most industries. This means that the product is significantly changed or upgraded every 3 -10 years. In some industries like manufacturing shop floor type of domains, it is closer or greater than 10 years where as in high tech consulting services space, software is constantly replaced or significantly upgraded every 3-4 years or so. This is in keeping with the pace and the fluid nature of the industry the software is supporting. Product designers take this half life into account while determining certain features like deployment and updates to ensure that the most appropriate service model to support the business. For example, the product might be designed to support constant updates in business logic functionality through web services in one domain while in another, it might not be that important while durability and availability might be the higer order bits.
In emerging markets, these conditions might be slightly different. In highly regulated economies, manufacturing software might be required to support
In this section, we will develop a model for product development for emerging markets. The top row of this figure indicate some major gates of the decision processing software companies should go through while developing new products or adapting their current offerings for the emerging markets. Lets look at each of these stages and dive deep into the factors affecting each.
Product Research
This maybe the most important element of the Emerging markets framework. Researching the target market and mapping the offerings ( product, service or a combination of the two ) to the characteristics of the market is the main objective of this step. This augments the traditional product research that any software company might normally do to extend its product line. The following product research elements are important for emerging markets as well:
Market Size analysis
This analysis is typically performed to understand the potential market size and characteristics associated with the target market. For software companies, this typically means understanding the enterprise landscape to make sure that the target segment is growing at a sustainable pace to allow sufficient room for a few major players in the domain.
In addition to the above usual steps, it is also important to perform the following ones to make sure that the offering being developed is in line with the characteristics and requirements of the target market.
Country Analysis
Country analysis is about understanding the macro socioeconomic factors that are influencing the country’s direction at any given point of time. Lets take Brazil as an example to see how to break down the data to model a sample product offering taking the various macro economic factors into account.
Brazil is generally a slow growing country with only about 3% growth in GDP over the last 10 years. This combined with a very high level of fluctuation in currency meant that the saving patterns of consumers are dramatically different from those in other emerging markets.
The propensity of Brazilians to kick back a little and enjoy life is evident by a number of factors like low saving rates, generally expressed happiness with quality of life ( among the highest in emerging countries ) etc.
Brazilian population predominantly resides in Urban areas which is also a major variance from other comparable countries like Russia and India.
An inflation rate of 10% + in the recent years also indicates an inherent macro economic instability.
The above analysis tells us that the business model of the offerings should take into account the following:
The business model should lend itself to exploiting more near term opportunities given the geo political instability and consistently high inflation rate
Personal consumption of software is the highest in Brazil when compared to other countries making it a promising market for consumer software like personal communication and productivity software.
There is a lot of emphasis on entertainment making it attractive for video gaming and mobility based software
Rapid expansion of telecommunications and the impressive growth in the use of internet has surprisingly increased the usage of B2C type of eCommerce over the internet. This is a clear departure from the trends we see in other markets like India and China.
Primary and Secondary market research
Performing any kind of user research in emerging market is a very tricky proposition. The challenges can be summed up by just one macro point- The target customers ( both enterprise as well as consumers ) really don’t know what they need. This is true to some extent even in the developed world. In his book “Crossing the Chasm”, Geoffrey Moore illustrates brilliantly the natural dispersion of customers when it comes to adopting new technologies. This theory is built on the idea that the rate of diffusion in the Technology Adoption lifecycle curve is not continuous. There is a chasm between the early adopters and mainstream users and this is further amplified in the emerging markets for a variety of reasons we have discussed in this book so far.
Primary market research in emerging markets is not as accurate as in the developed world because the customers are typically not as advanced and the business imperatives driving them are also different. For example, a focus group study on anticipated online gaming usage might not resonate well with the emerging market as the broadband high speed adoption lags that of the developed world significantly. Without the experience of being always online, the results of such a primary market research might not be indicative of potential usage and adoption simply because the user base is not ready for the technology.
Secondary market research can also have its own share of inaccuracies. Secondary market research is typically used to validate perceptions and to predict adoption, market share, project growth rates etc. In emerging economies, the challenges include unpredictable macro economic data, wildly fluctuating economic and political climates, lack of clear understanding of the patterns of technology adoption etc. Emerging markets are notorious for their propensity to jump technical waves. For example, the cell phone penetration rates are much higher than land line density every reached. India also almost skipped the entire mainframe/mid range computing wave and caught on to the desktop PC wave. Emerging countries have the advantage of not having to worry about legacy issues. Individual consumers also exhibit similar behavior so it is imperative for secondary research to take this into account while predicting technology adoption and market growth.
Pricing Strategies
As we have discussed extensively in the last section, affordability plays a big part in assessing one’s business model. While I don’t intend to discuss the basics of pricing strategies in this section, I do want to touch upon a few important points that are relevant in this discussion. Pricing is a very important barrier to technology adoption both in the consumer as well as in the enterprise markets. In consumer markets, the concept of disposable income is often discussed as one of the determining factors of pricing. For example, if it costs.15 cents to manufacture, market and distribute a can of coke in Brazil, how much should it priced at ? 30 cents or 55 cents ? Other factors like size of target market, competition, perceived value of the product etc all have significant input into this process but the key element here is the portion of disposable income that an average consumer is willing to spend on a “luxury” spend item like a can of coke. It is also fascinating to understand the behavior of rural and poor markets when it comes to discretionary spending. Unilever sells more single serve shampoo sachets than it sells larger bottles. This is typically because of the proclivity of the rural consumer to live for the day or the week rather than planning for the entire month or the year. These concepts can be extrapolated into the world of software to analyze the spending practices of consumers and enterprises.
Perceived value of software
Software makers, especially the ones that make mission critical business applications like SAP that runs Fortune 500 businesses or ABB that creates software to manage shop floors sell the concept of using software as a competitive advantage over its immediate competitors . the more the customers realize this, the higher the premium they are willing to pay for the software.
This is also true in the mid market segment of developed countries where small companies are realizing that software can be effectively used to gain the extra edge while servicing customers. For example, by using a CRM system, a legal firm can track and service its largest clients with up to date and most accurate information thereby increasing the customer satisfaction and reducing turnaround time. This gives the companies the competitive edge that can be quite difficult to duplicate immediately.
In emerging markets, other than in the very high segment which usually comprises of multinational companies, the perception of software is that of a necessary evil. It is not considered to be a source of competitive advantage. There are several reasons for this latency. Competitive pressures, globalization and market fluctuations are changing this but we have to learn to adapt to these realities while we look at pricing strategies. As long as software is not accepted as a key strategic advantage, it will continue to be a minor part of the overall enterprise budget.
Multi layered pricing
The pricing model should take the above into account and have appropriate strategies for offering staggered SKUs at various price points. Business software in the developed countries often have SKUs that are categorized into 2 or 3 levels of usage typically starting from a “Standard” version to a high end “Enterprise” version that typically has a few more bells and whistles in functionality. In the emerging market, we have to be a little more innovative in pricing and subsequent definitions of the product SKUs. I propose thinking about having “single serve” versions of the software that expire on pre determined usage. For example, a customer could buy a retail software that will expire based on a number of days or number of transactions that are posted through the system. This is very similar to a pre paid phone card that needs “recharging”. This strategy could run the risk of getting complicated if the vendors try to get too fancy with this. Keeping it simple and having the end objective of providing a low entry point for the consumers while keeping the option of upgrading based on usage will be an attractive option for companies that simply cant afford the high upfront costs associated with licensing complex software.
Business Practices
Most of the enterprise software makers pride themselves on the fact that their software captures the best practices of the target market they service. For example, SAP prides itself on the fact that their software bring to bear the established practices in the area of supply chain management. A healthcare application in the physician management space is intended to optimize the workings of a physicians clinic and the software is intended to bring local practices, regulations and cultural aspects into the process. It is generally accepted that by following these best practices, business can not only weed out process in efficiencies but also effectively use it to model their business.
In emerging markets, the business practices might not be in sync with those in the developed world. For example, many elements of the supply chain process are still manual as small time suppliers still are not savvy enough to fulfill order information electronically. In most emerging countries healthcare is not as heavily regulated as it is in the developed world. Consequentially, hospitals are not inclined to pay for software that emphasizes heavily on regulatory compliance.
Taking these differences into account, software should be redesigned to incorporate these subtle but sometimes very important differences in business practices. A great example of where this is applied is in the area of professional services software. This genre of application is typically used by legal and consulting companies to optimize on the resource allocation as manpower is usually very expensive in the developed world. This software helps build a process to streamline allocation of resources as it is the source of competitive advantage for the services firms. On the other hand, in emerging economies, manpower resources are not that scarce. Emphasis is paid more on customer management and real time collaboration with overseas customers and in knowledge sharing. It is the same application but with slightly different accent to accommodate the strategic intent of the target user base.
Generalizing the above observations, we can concur that it is really important to understand the underlying business challenges and tweak the design of the product to address the target market imperatives. This could be anywhere between having a different marketing emphasis to creating a new feature set to cater to the requirements.
Product Design
With any new product development process, once we have the fundamental market and product research done, we proceed on to designing the product or in the case of an existing product, customizing it for the intended market. Product design is often an ignored discipline in software and is often mangled by technical design or high level user requirements. In this section, we wil explore how to instill this discipline back into the product development process. I propose looking at the following as the critical elements that influence the way of designing software for emerging markets. These will be of course above and beyond the normal steps of traditional product design processes.
Deployment
Usability
Subscription services
This kind of licensing model is not new to the technology industry. Actually this was perhaps one of the earliest business models in the computing industry with original mainframes. During the dotcom era, subscription and hosted services made a mighty comeback. Internet was the backbone for this thinking and everything had to be based on the internet.
There were several reasons why this concept never really took off in the enterprise environment.
Subscription based software licensing means that the licensee doesn’t have to shell out huge upfront licensing costs typically associated with enterprise software
posted by Paddy Srinivasan at 7:23 AM
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