October 12, 2009

Who wants to pay for the profits?

Some economics
In a perfect market economy, the price we pay equals the marginal cost of producing that last piece of product put out on the market. Profits are created where there is an inbalance between supply and demand in the market. In theory, supply will increase as long as there are profits to be made.

In reality however, this has not been a likely scenario as the perfect market needs complete information. In a world where there has been a lack of information, profits have been possible as demand or supply has not been transparent.

Now watch this video:

The long tail theory that Clay Shirky is talking about in his video above would incur that we should expect that the future will bring a next to perfect supply of information about both supply and demand. Thus, profits that are constructed from non-transparent institutions, or producing business models, will diminish over time.

The cost of transparency
Cause what has kept the market economy from fully functioning has been a monopoly in the access to information. With full transparency, we can begin to fully evaluate different options in contrast to others.

Regardless of whether or not a company is transparent or not, they will be anyhow. There is no room to hide in a world where information sharing and unboundary collaboration is possible. The surplus value of non-transparent business structures will be marginalized as you cannot say something and yet do another. You cannot charge a customer twice than what your competitor charges, if your product is known to be similar to the one of your competitor. You cannot even charge people a cent more. If you do, then demand will shift to your competitors product.

Long tail distribution of consumption and production
In a long tail world, where I connect to other people who like the same thing as me, a companys competitor becomes the customer herself. If a company doesn’t satisfy the needs of one person, and that person is one in a million, then that person have a statistical probability of finding 300 people with a similar demand on Facebook alone.

300 people is a large enough group to produce large enough of a demand for at least one of the people involved in the group to live of the surplus value it creates to satisfy the extra utility that is produced from producing the good that the people in the group wants to buy.

Misplacement of utility
The world before social media only allowed for dominant marketers to enlighten the utility of their products. A group of sowing Chinese production workers could not reach the 300 people in Sweden eager to buy their purple colored shirts. The Swedes had to go to the big retailer who sold the garment to its production price + distribution price + profit margin. They also had to obide to the supply given by the big retailer.

If the retailer said red was the color for spring, then red was what was in their stores. There was thus a misplacement of utility as the people really wanting purple could not get that shirt, but they had to buy a red shirt instead for the same price, but at a lesser perceived utility.

In a world of tribes this status quo changes as I can find someone who wants to produce the shit I want, and I can definitively find a group of people with the same demand as myself to bulk up enough buying power to make someone want to produce it. Perhaps production will not be any cheaper than it was before, and excessive profits will dissappear as a result, but I will get the shirt that I really want, that brings me the best utility, and someone will get to produce the shirt that they really want, and be able to have an ok life from that production.

So what does this mean
Well, we have allready seen this shift in digital products. Demand and supply has made business models next to non profitable for an institution, but still profitable enough for collaborative groups supported by the demand from passionate tribes. The most evident case being the music industry.

I believe we will see more industries walking down the same path as the music industry. Not only because social media allows for communication, but also because I think the speed of which social media is evolving is faster than the speed of change in large institutions that now have the production possibilities and supply power of the offline retail trade.

I’m simply asking… who wants to pay for the profits, when we know we don’t have to?

6 Comments
  • Stacey Derbinshire, October 12, 2009 Reply

    I found your blog on google and read a few of your other posts. I just added you to my Google News Reader. Keep up the good work. Look forward to reading more from you in the future.

  • Björn Alberts, October 12, 2009 Reply

    Interestering post, Jesper.
    However i miss the perspective of changing human behaviour. To compare clothes with music is not fair. I think it's much easier to change buying and consuming behaviour regarding music than it is for people in general how they buy clothes.

    As you already know, I agree with your thoughts in general but things turns more complicated when talking about behavioural changes in a wider perspective and in differet product categories.

    Also, even if existing industry structures are changing those changes can take a long time. For instance in 1996 I was involved in a project launching a price comparison site for consumer incurances. Back then insurance companies could turn that idea down by saying "we would not like to put our business into such transparent competition" and by that kill the whole project. 2 years later a company called Good Guy was launched. They survived for a while then disapeared when the venture capital was spended. I think it was just a few years back players like Pricerunner and others made that business model work properly.

    By all this I mean that you're right but it's important to put your predicitions into a time perspective that takes behavioural and industrial changes into consideration.

    Keep the good posts coming!

  • Jesper Åström, October 12, 2009 Reply

    Yepp. And that is why I put the Clay Shirky post in there as he talks about 50 years of Chaos! :) I think the change will happen a lot quicker than that. But Clay said what he did in 2004 and thus he couldn't have foreseen the enormous change that would occur in the last few months.

    In fashion we allready see these groups shaping as trend setters and buyers/sellers. Lookbook.nu is a perfect example of a trend setter through its crowdsourced fashion whilst zappos and treadless are both examples of collaborative sales in fashion. I also know of some new start up projects such as TrendVision that will completely put the knife to the throat of the whole fashion industry in a few years time.

    Thus I do not agree with your assessment that it is an unfair comparison. I believe that it is very fair as the signs are just the same, and the passion is just as great. Especially if you compare fashion and music. It is equal amount of life style as it is a question of taste. Thus it is more important to find your niche as it is to make an easy buy. But yes... it will take time... but the change will come :) (and I am fully aware that only 30% of the worlds population has Internet access, and that it will probably take some odd 20 years for this to have full effect...)

    What I didn't take up in this post, which I should have, is the transparent yet profitable industry of distribution. I believe non-digital distribution will be the last to go of the large institutions.

    Why I wrote this post is because I find the lack of theoretical or empirical evidence to support why social media is a question for the strategic decision makers and not the web or marketing department. It is about changing your business model to fit the new market structures that are shaping. Not change it over day, but be aware of it and change it over time.

  • Erik Starck, October 12, 2009 Reply

    Well, not everything will be free or have profit margin zero. I think there are golden scarcities: http://blog.opportunitycloud.com/2009/09/10/the-golden-scarcities/

    For example: status. You can probably build a business around that. See: Porsche. Omega. In some ways Apple.

    In these cases, the less mass produced it is the better.

  • Jesper Åström, October 12, 2009 Reply

    Well... what I am saying is that there in the future will be 100 Porches, a 1000 Omegas and 50 000 Apples. I too find this a bit too hard to swallow, but if I look at the evolution over the past ten years... well... Branson talks about commercial space flights in the year of 2012...

    SAAB too used to be a symbol of status, so did Rolex...

    And then we have the computer industry... we see what has happened with open source software... margins are allready diminishing on hardware and what brings profit are "add ons" such as unique designed mouses and head phones... All that is needed for the institutional cpu-business to go broke is for someone to invent a cpu version of couture :D... Why pay for something I do not want when I can have exactly what I want at the same price or less?


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