I ordered a coffee and a scone at Starbuck's the other day. As I was reading the latest dismal financial news, the barista said "That will be $5.27 please." I paid but then as I sat down, I started to think about how it is that Starbuck's can continue to charge so much for a cup of coffee, and a small pastry. It struck me as even more interesting that Starbuck's doesn't even advertise - no TV ads, no salesman. Then I realized that Starbuck's economic value isn't about the cup of coffee as a commodity, a good or even a service. Starbucks can charge a premium price because the economic value is an experience.
You can view coffee as several kinds of products.
- As a raw commodity, coffee beans are worth maybe 2 cents/cup.
- If you grind up the beans and package them as a good for sale in a store, they are worth, say 20 cents/cup.
- If you take the same coffee and brew it for a customer in a vending machine or serve it at a coffee shop, it can sell for $1/cup. Provide the service of frothing the milk and you can charge an extra 50 cents!
- Now surround that brewing process with the environment of a Starbucks, Peets or Caribou, where you can read the paper, check your Blackberry, or chat with friends, and that experience enables you to charge $3+/cup.
This progression from value based on commodity to value based on user experience is a fundamental process in today's economy. Commodities are typically thought as raw materials - things like corn or iron. Use these raw materials to make a product and you end up with goods such as cornflakes or automobiles. But as more competitors arise in the market, goods tend to become commodities. When that happens, it no longer matters who makes them. All that people really care about is price per feature. So companies try to differentiate and beat each other up by offering more features for lesser and lesser prices. This relatively destructive approach is especially common in economically turbulent times like now.
Services delivered through software are being commoditized just like goods. The classic example is long-distance or teleconferencing services where they are sold almost exclusively on the basis of price (although see InterCall). Software as a Service (SaaS) is another example, where many companies try to compete on price once competitors enter their market space.
But there is another way. The value chain is to move from a goods and services economy, to an experience economy, where user experience is the real economic value in any offering. The easiest-to-understand example of this today is the iPhone. There is no great technological feature breakthrough in the iPhone. It is completely a commodity cell phone when you look at it from a technical perspective. What sells the iPhone and keeps it at a price premium without viable competition is the user experience.
When it comes to SaaS, there can needs to be the same progression of economic value from a service with a set of features, to a service with an innovative and compelling user experience. The features of the software are not the only goal (those can become commodities). The application needs to be designed around the user experience to provide a sustainable value proposition. This requires an understanding of agile application design, high value scenarios, usability testing, user validation, addressing the full customer lifecycle and innovative use of Rich Internet Application technologies.
Categories: SaaS, User Experience