In the last article, Ecosystem Value Modeling is the Key to Digital Services Revenue Optimization; we defined the ecosystem of digital services, the relevant components, and the value alignment model using the “Value Threading” methodology.
Does your ecosystem have market dynamics, what are they, and how do you measure them? In nearly all cases, no single company controls the ecosystem. There are exceptions, Apple being one of them. Apple maintains pricing power throughout the digital services it offers and those of its partners. With Apple as the exception and perhaps a model, what should most companies across all industries do to build a model?
I trade stocks regularly. I am always amazed at the impact one company has on another. Nvidia is one specific example of the capability they offer and the impact on major digital platforms. Does your company’s digital ecosystem mirror this?
In my view, the market dynamics of any company’s ecosystem can be measured and used to understand customer behavior, monetization potential, and the overall ecosystem strategy. Digital services will be the most important component in the future.
At the highest level, the supply and demand metrics certainly move based on price. In Apple’s case (and many other industries), taking a flat 30% of digital services is the least effective approach because it assumes constant demand. Apple is not alone in this mistake. Many telcos globally offer apps and products using their customer engagement and DCB (Direct Carrier Billing). In most cases, the fees are similar to those of Apple. The flat rate demand assumption is a key reason programs in the Telco space generally fail to deliver as expected.
Setting Apple aside, let’s discuss a typical family or industrial farm. To be successful, the total cost ecosystem includes equipment, service, seed, labor, land, etc. There is no logical way that John Deere or AGCO might own all of this. However, if you consider their piece of the ecosystem and relative value, what is the monetization strategy for their offering within the entire ecosystem?
We can assign value in terms of cost, value, and sentiment to each service in the ecosystem.
For most businesses, customer sentiment is the initial driving force behind purchases. When Alan Greenspan talked about the “wealth effect,” he specifically talked about a market sentiment factor more powerful than revenue or costs. Secondly, how customers feel about the market and the cost is typically more important than the actual cost. Cost is the tangible view that drives sentiment and day-to-day operations. Value is the most important and the hardest to identify, and typically, it is viewed in the long term rather than the short term.
Add to this the complexities of elasticity of demand within your ecosystem. I am always amazed at how much the cost of fuel impacts purchase decisions. In a total cost of ownership model for most consumers, it is not the most relevant metric by any stretch. Lease costs, service, and insurance would be much more relevant. In the industrial world, power or fuel is much more important. It could be as much as 50% of the cost per hour of a commercial jet or 30% of a commercial-grade truck.
In my view, digital services are the glue that connects value with cost. If done well, they bring market sentiment into balance. Digital services can offer customers outcome-based metrics and accurate costs of their ecosystem. This can impact sentiment, similar to the “wealth effect” Alan Greenspan discussed.
As we build the total ecosystem monetization model, the foundational metrics are as follows:
| Projected | Downside | Upside | |
| Projected Dollar-Based Outcomes | Plan | Risk | Opportunity |
| (-) Recurring Costs | Plan | Risk | Opportunity |
| (-) Variable Costs | Plan | Risk | Opportunity |
| (=) Net Value Creation | Retained Earnings & Growth | ||
Within the ecosystem, we alter the model for each digital service or part of the ecosystem. Adding “sentiment” measures valuable services that can be monetized but perhaps don’t impact the system directly. For example, self-driving cars may be required as a differentiator, but if there is still a driver in the car or truck, the output or cost may be harder to measure.
| Ecosystem Sentiment | Projected | Downside | Upside |
| Sentiment Impact Score: – Customer Unfilled Demand – Strategic Capabilities – Competitive Differentiation – Innovation | Plan | Mitigation | Unique Differentiation |
For each digital service within the ecosystem, adjust the model, adding “sentiment” to measure valuable yet harder-to-quantify services. This model serves as the basis for your future monetization strategy.
What is missing? The entire idea of owning the ecosystem is to build long-term customer relationships and value over time. The self-driving example given earlier may have a high sentiment score early on, but in the long term, the sentiment metric will be replaced with cost reduction. Adding one more variable to the equation completes the model.
The Ecosystem Market Monetization Model
Dollar-Based Outcomes
(-) (Sentiment Impact Score + Recurring Costs + Variable Costs)
(X) Lifetime Value
= Long Term Ecosystem Customer Value
Constructing this model makes the importance of digital services evident, highlighting potential undercharging or overcharging scenarios. You might also identify partner services offering greater value, prompting considerations of acquisition or integration.
The ultimate goal? Advanced consumption-based pricing models reliant on digital services. This approach aligns projected outcomes, costs, and sentiment in a unified equation and point in time. Digital services are the glue that controls the entire ecosystem.
Stay tuned for more on variable consumption-based price modeling.
