CHAPTER 9

Digital Supplements

Like physical products, digital products can have many variations. But the economics of versioning is very different. In the digital world, versioning is a revenue multiplier, while in the physical world it is a pricing instrument. Thus, digital versions are not created to just lower the prices by offering cheaper substitutes. Paperback editions are a cheaper substitute for hardcover books. This kind of versioning is a price instrument because by lowering the price the producer gains incremental sales. Lower-priced versions segment the market by the price sensitivity of the consumers.

This strategy is well known and widely adopted in the physical world. Small and large goods have versions; brands have regular and black labels, and even software used to have home and premium editions, but this model is being abandoned and replaced by more sophisticated pricing models for digital goods.

In the digital world, versioning creates new markets and new experiences. The different versions are not exactly substitutes. In most cases they are complementary in some way. Thus, we gladly buy two or three products instead of one. On the other hand, it is hard to imagine why someone would buy the hardcover and the paperback edition of the same book. Complimentary versioning requires creativity and innovation, while the making of lower-priced substitutes requires just good accounting and lower materials and manufacturing costs.

Digital products are known to have increasing returns. Once the product is created, an infinite number of users can download or sign up to use it without any extra cost to the supplier. As product adoption grows, profits surge while costs remain more or less the same. Scaling up has only a positive upside unlike in the physical world, where diminishing returns kick-in and force producers to invest to expand production. The revenue multiplier is very different from the increasing returns. It creates new revenue streams that can be scaled to produce increasing returns.

The Kindle book and the Audible audiobook are new and completely different products even though they are made from the same ingredient—the book manuscript. The two digital versions do not have to be produced by the same company as it often happens in the physical world. Audible was founded to turn audiobooks into a mainstream product. Audiobooks existed prior to Audible, but the company really made them popular and controls according to some estimates 41 percent of the market.1 They invented many audiobook-related technologies but most importantly Audible turned audiobooks into an artform by attracting top artists to impersonate the characters.

I started to appreciate this new artform after listening in the car to Jim Dale’s recording of one of the Harry Potter books that my daughter insisted I read. How could the same voice take so many different forms so that I could recognize each character just by the changes in the tone? Our appreciation of the richness of human voice and its artistic abilities has not only made singing popular but also a big industry. Why shouldn’t it be the same with reading? Because of its richness voice itself has become a source of versioning that drives more revenues. There are two recordings of the Harry Potter books by Stephen Fry and Jim Dale, and there is a heated debate about who does it better.2 To participate in the debate, one has to buy and listen to both audiobooks.

As can be seen, the Kindle and Audible books are neither 100 percent substitutes nor 100 percent complements. I can listen to the audiobook in the car and read the Kindle on the beach. They are supplements as they offer alternative experiences that enrich, complement, and complete the overall book experience, as the different versions can be appreciated in different ways and in different settings. Such supplemental products do not cannibalize each other’s sales as cheaper substitutes of physical products do, nor fully complement each other as they cannot be consumed simultaneously as fish and white wine can be.

Digital versions can inspire new ideas, reveal synergies, and breed new products and services. They can inspire new hardware or software that make them more usable. The Kindle device has become synonymous with digital books. We shop for the Kindle editions, not for an e-book. Any digital book can be read in the PDF reader or in any browser directly. In fact, the PDF digital format was invented to make document reading easier. And yet, consumers prefer the Kindle as it enhances their reading experience and hence Amazon commands 53 percent of the market for e-readers.3 The paper-like screen, the built-in dictionary that you can instantaneously access, the note-taking feature, the highlighting, and quotation sharing are features that make the Kindle very useful. We can take an entire library of books anywhere and store and print notes in organized ways, and also we can share passages that we like and glimpse at what other people have highlighted as interesting. Reading is a deeply social experience and we like to discuss books. The Kindle embeds the social directly in the reading experience. All of this taken together make us buy new Kindles when the hardware gets significant updates and in turn it hooks us to buying Kindle editions from Amazon.

The Kindle book is not a substitute for the print edition. Despite all fears, it has not nor will cannibalize print.4 They are supplements. Portability is the defining supplementary feature. When you need to travel light, you take the Kindle. When you need to continue reading a book that you didn’t bring with you, you can continue reading it on the Kindle app on your phone. The seamless transition from one form and device to another is what makes reading anytime and anywhere very similar to how we use and benefit from the location information apps. This experience determines the ultimate scale and scope of the reading business. A reader can go from paper to device, to phone, to headphones without losing track of his book and for that convenience they are willing to pay for the multiple versions and the associated devices.

The informational symbiosis does not stop here. A core tenant of this book is that data has the magical property to create new value out of itself through subsetting, enrichment, and metamorphosis. A subset of a vast amount of environmental data is packaged in a product called the Weather app. The same weather data enriched with routes information can drive packaging optimization—the amount of ice and insulation put in the box when shipping fresh food products by companies like Plated and Blue Apron. And metamorphosis occurs when something completely new is borne from the same data. What if you wanted to create the best conversational bot? If the bot is to pass the Turing test and be able to pass as a human, it has to have a real voice and converse on many topics intelligently. It has to be able to change the intonation to express different emotions and to be able to tell stories and make arguments. We humans learn how to be good conversationalists by reading and by listening to other people. Storytelling and reading are the bedrock of our communication and reasoning abilities.

Today bots are being trained using machine learning techniques, which we will discuss in more detail in Part III of this book. The approach is similar to how humans learn. The machine is fed lots of examples to learn from. One of the hardest problems in machine learning is the collection of teaching examples. And you need a lot of examples as machine learning algorithms require a lot of training.

If you consider the digital supplements that we discussed, Amazon already has all that is needed to train a conversational bot. They have the largest collection of digital text and voice. Thus, the data scientists have the materials to train Amazon’s Alexa to be intellectually and artistically sophisticated. Why this has not happened yet is a different story. There is plenty of more work to be done to make algorithmic learning as efficient as human learning is. Humans learn from just a few examples, while machines have a learning limit even with millions of examples.

Amazon’s impact on the reading business is the most analyzed and widely discussed case about the enormous benefits of digital transformation. As Eric Weiner,5 a bestselling author on innovation states, the most obvious examples are sometimes the best to make a point. The point is that data has the potential to morph continuously into new products and services. As companies collect more and more data and package it into data products, the opportunities to invent new data products increase.

The Opportunity Matrix for Digital Supplements

The dimensions in the opportunity matrix for digital supplements are modified to reflect the particulars for this type of growth model. Figure 9.1 and 9.2 shows the Monetization Opportunity Matrix for the obvious case of the reading business.

Figure 9.1 Monetization opportunity matrix: Digital supplements (Example 1)

Figure 9.2 Monetization opportunity matrix: Digital supplements (Example 2)

The technology dimension reflects the ability to package the new version in a new device (the Kindle) or a new app (the Audible app). Some technologies are more complex than others and the complexity determines whether the technology itself will be a source of revenue, as is the case of the Kindle, or whether it will be just a distribution vehicle, as is the Audible app given for free to users. The synergy dimensions determine to what extent two versions can be used somewhat as substitutes as opposed to being complete alternatives that complement the overall experience. These have implications for the marketing of the digital versions. As we saw earlier, the Kindle sparked a lot of discussions about the future of paper books. Audiobooks on the other hand have never been considered a rival that can cannibalize print or digital books.

The ultimate synergy is a new product with an entirely new use case, as is Alexa. Alexa can deliver audiobooks or order digital and print books. But it can do a lot more. Yet, its intelligence can be enhanced by learning from the other two digital products.

Let us go to a less obvious example of digital versioning—the digitization of money.

Paper money is going through the same transformation process as books. Unlike the saturated market for digital books, the digitization of money is a highly competitive market with many players coming with different products to facilitate the exchange of money for goods or for money. The monetization matrix below shows the different versions of money and how synergies give birth to new types of products and services.

For centuries money has been a physical good—metal coins or paper notes. At different times commodities such as salt, tobacco, cattle, and so on, were used for payments, but coins and paper money became the standard because of their convenience. They are easy to carry and do not require special care as cattle do. Plastic cards turned out to be even more convenient especially when people travel. The notes in a stolen wallet cannot be recovered, but a plastic card can be canceled, thus minimizing the risk of actual money theft.

Plastic cards sparked the development of many related devices such as card readers for payment processing and software for transaction processing between the participating intermediaries. A complex ecosystem of hardware manufacturers, software companies, and payment processors evolved to support these digital payments. Today, the lucrative payment processing revenues have attracted many disruptive companies who are pushing the limits of digitization through payment apps that eliminate the need for a physical card. These payment apps fuel the development of new contactless hardware to easily tap the phone to make a payment. Simplicity and convenience are driving the evolution of a new ecosystem.

While plastic cards can be viewed as a substitute for paper money, crypto currencies create new money that has supplemental use cases. The crypto currencies have both advocates and critiques, but more countries and more businesses are beginning to accept them on par with paper money and plastic cards. Like the plastic cards, the crypto currencies create many opportunities for making money which attracts users and grows the ecosystem. The crypto ecosystem includes miners who unlock new coins, hardware manufacturers making specialized technologies to lower the cost of mining, and software developers who provide trading, exchanges, analytics, and fraud detection tools for the crypto operations. When money is made in the ecosystem, the digital product will grow and fuel more related innovations. The new crypto exchanges are emerging as intermediaries between paper, plastic, and crypto, but their evolution may turn them into something much bigger as they are adding fast commercial payments processing and other functions. The more digitized the ecosystem, the more services the exchanges can add and grow into new digital giants.

How to Tell If Digital Version Will Work?

Given the hype of the digital transformation, companies want to turn everything into digital. But what determines that a product—physical or digital—can be versioned successfully? First, it is necessary that the digital version meets the spec, that is, the digital product is equivalent in its core function to the original one. The digital book has the same manuscript. The digital currency can store value and can be used as a medium of exchange. But while this is enough to make a digital version usable, it is not a guarantee for success.

More often the functional equivalency is a trap for product and marketing managers. Why have two products that do the same thing? Scaling one product is hard enough, so why scale two? Even more so if the different versions require separate marketing and other resources that can impact profit margins. There is also the fear of cannibalization. When two products are just functionally equivalent, it is hard to predict whether sales will just split or increase.

Digital supplements succeed when they offer alternate experience coupled with convenience. We go to different restaurants that serve more or less the same food because the ambiance is different or because we happened to be nearby. The functional equivalency trap is false because people see value both in consistency and in variation. Consistency can bore us, and variation can tire us. Versioning retains the consistency through the functional equivalence but infuses it with variations that enrich the experience while simultaneously making it more convenient.

In blind pursuit of digitization, people fail to see the value added that makes the digital supplement viable. The Twitter Peek device launched in November 2009 was the brainchild of two very successful managers from Virgin Mobile USA. It was the Twitter equivalent of the Kindle—a dedicated handheld device just for tweeting. It met the spec 100 percent, but it failed. It did not add any value through new experiences or conveniences. The Twitter Peek belongs to the same quadrant in the Monetization Opportunity Matrix as the Kindle. If we place the smart in the quadrant below it as a base technology for this matrix, we can see that the hardware is not that new or different from what the consumers already had. Unlike the iPhone or the tablet, the Kindle has a paperwhite screen that is especially convenient for reading. The Twitter Peek also did not offer an alternative experience. What more can you do, that you cannot do on the Twitter app on the phone? There is only the inconvenience of carrying one extra device and switching between devices. The product fails the Monetization Opportunity Matrix as it cannot draw customers even as a substitute. Without extra experience and extra convenience there is no value.

Life Cycle Supplemental Add-Ons

Every physical and digital product inevitably goes through life cycle variations. Planned life cycle variations are revenue drivers and thus should be considered as part of the business model of every product. My grandfather had only two suits his entire life. They were well made and he took care of them as diligently as we take care of our cars today. Like a scheduled oil change, he took his suits to a tailor for “maintenance” every year. This was a very different behavior from our habits of buying one or two new suits every year. Being curious about this, I checked the history of men’s fashion and discovered that for a very long period people purchased one or two suits for a lifetime.

And then “trends” were invented. Trends are purposefully introduced variations that induce consumers to buy more. Fashion designers vary the cut, the fit, the colors, the materials, and other features to make the old look dated. Those changes nudge people to see things differently and want new things. Some economists call this planned obsolescence and many anticonsumerism advocates are really against it. But such attacks ignore the innate human craving for novelty and the fact that novelty makes people learn new things. When novelty is driven by alternate experiences and hew conveniences the overall knowledge in society increases.

The business of life cycle variations is well developed in the world of physical goods, but it is fast invading digital product management. The life cycle variations in the digital space are different as it is less about complete change and more about continuous supplemental add-ons. The creation of the supplemental add-ons is driven by market saturation and user learning. As more competitors enter the same space, companies start to differentiate by exploiting the user learning curve. Products get enhanced with more features that allow users to do more things. If you give users too many features too early, they will be turned off from the product because the learning curve will be too steep. If you introduce advanced features too late, users will abandon the product for being too shallow compared with other products.

The life cycle monetization matrix in figure 9.3 reflects the market and product dynamics for branding and design products, and more especially for the marketplaces that distribute such products as Shutterstock (shutterstock.com), Envato (envato.com), 123RF (123rf.com), and many more. The rapid saturation in this market drives quick product variations.

Figure 9.3 Monetization opportunity matrix: Lifecycle adaptation

Branding and design products used to be delivered as one-off high-end services. This is why many design agencies failed to see how a brand manager could choose off-the-shelf products without consulting a creative director. The more value we place on our own services, the harder it is to foresee how technology can drive their commoditization, even though markets are designed to do that through competition and cost pressures. Today even creative directors draw inspiration and source materials from these sites.

So how did a site like Shutterstock break into this market? The answer is variety—a huge variety of stock photos that no creative agency could match. That was the genius insight of Shutterstock’s founder, who himself shot over 100,000 images to seed the site. Variety always finds a customer. Give people enough to look at and they will find something to buy. Both tourist gift shops and Walmart know and exploit this retail secret very well. Hence our base product for the matrix is the stock photo.

In the digital world, variety is easy to replicate. It does not take too many technologies and resources to create variety. Hence, the market for stock images became saturated very fast. The solution to this problem is to introduce supplemental add-ons. Allow users to download different sizes of the same image. This is technologically simple solution, but it allows the company to attract consumers with different needs and different price preferences. Thus, the same image can be monetized differently.

Simple templates do not require technology, but they allow consumers to customize the content. They turn the design process into a self-service where everyone, even people who do not possess artistic skills, can deliver good looking marketing content. But templates, especially those intended for web content, such as the WordPress website templates, have magical revenue potential. They turn the one-off purchase into a subscription-based recurring revenue. As browsers, web standards, and aesthetic preferences change, templates become maintainable. The company that ensures that the templates are up to date can charge subscription fees for the updates. The business value of digital is the ability to turn revenues into predictable streams via subscriptions for carefree maintenance.

The self-service model lures the customers to do more themselves. As they learn more, they want to be able to do more. This is the point at which sites add tools as means to differentiate, attract, and keep users loyal. The sites for digital marketing and branding content are introducing tools to customize layouts, build templates, and much more. Tools are another source of subscription revenue. More importantly, tools make consumers more loyal because of switching costs. Once a user has invested time and effort to learn a tool, it is difficult to persuade them to switch and learn an alternative tool. The more sophisticated the user, the harder to switch.

The life cycle supplemental add-ons allow companies to differentiate the sources of their revenues. Images are a direct sale, but templates and tools are subscription sales. Digital products can be varied and enhanced to convert one-off sales to recurring revenues.

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