Showing posts from August, 2008

The economic efficiency of sport

Should we spend so much money on sport?

Hilariously, now that the Olympics have started and nobody can have the conversation about how badly Britain will do, a new topic arises: are we too good at cycling?

This question is sometimes framed like this: are we spending too much money on something as trivial as sport? And sometimes it is more like: should we be doing better in 'real' sports such as athletics instead of in sports that "young African men can't afford to play"? Either way, those who choose to spend money on training elite sportspeople are rightly asked to justify it.

Perhaps the standard answers are valid:Olympic success encourages other people to take up sports - improving quality of life and reducing healthcare expenditure long-term.The Olympics in London will encourage tourism and that will generate more money for the economy than they will cost.

But whether consciously acknowledged by the funders or not, there's another reason why this success will …

Software maintenance: client value models

Dennis Howlett has a great post on his ZDNet blog: A fresh model for software maintenance.

He targets a number of things that vendors should do to reduce the cost and burden of software maintenance - treating customers individually, training their resellers and partners better, and helping the customers to build their own centres of excellence so they can support themselves better. The ideas are based in part on
C.K. Prahalad and M.S. Krishnan's book, The New Age of Innovation: Driving Cocreated Value Through Global Networks. Looks like something I should be reading soon.

This is an issue close to my heart, since it is a very sore point for many clients. Software buyers are much more likely to query the maintenance charges than the initial build costs - and yet maintenance seems to be an area where most small software companies don't make any money. Oracle seems to be an exception (Dennis quotes their 30% margins and says that much of it is from maintenance revenues), while SAP …

A new generation of software

All the recent news in software has been about putting established categories of application software online. Online CRM software - Online project management software - Basecamp. Online accounting software - Xero, Freshbooks, FreeAgent. Online ERP software - SAP Business One and Netsuite. Office productivity software - Google Apps. Email software - GMail. Even Photoshop has online competitors - Picnik (among others).

This will continue, and I think most observers agree that desktop and client-server software in these categories will gradually be overtaken by the online/SaaS alternatives - though Microsoft Office will probably hold out longer than most.

But when was the last time a genuinely new category of software became prominent? Think of the main categories of software:
- Office suites (which used to be several separate categories: word processors, spreadsheets, presentation software)
- Project management
- Drawing and graphics
- Email clients
- Web brows…

Structured Pricing

Another area of theory I have been working on in the last few weeks is pricing. It's well-known that suppliers can use price discrimination to distinguish between those customers who can or will pay more, and those who can't. Here are some (edited) notes from a forthcoming report we are publishing about the concept of structured pricing.

Economic theory relies on agents trading products and services in a way that makes all of them better off. Any two people entering into a transaction should both gain from it; whatever is traded must be worth more to the buyer than the money they pay; and the money must be worth more to the seller than the object they’re selling. Any trade therefore provides higher value to both parties than they currently have – or else it will not happen. In classical economics, the price of something is regarded as a signal to tell the buyer and seller how much other people (at the margin where the supply and demand curve intersect) value it, and therefore …

Is CVM the new CRM?

A fair bit of the economic research I do is speculative and it's gratifying when it ends up in a useful commercial output. This is one good example.

The work I've done on how people evaluate prospective utility and make decisions has led to the concept of structured value modelling. This in turn allows us to consider how people influence each other's models of value. And the outcome of that is that we have created a new category of software: Client Value Management or CVM software.

Traditional CRM systems are good for high-volume marketing - especially to consumers. They are not very popular amongst business-to-business services providers - for instance professional services firms. The reason being that CRM is a reductionist tool - its concept is to allow the simultaneous management of large numbers of people by making simplifying assumptions. If we assume that people fall into one of four demographic groups then we can send them messages at a cost of 4p each and hit a milli…