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Consumption, the Customer and the Cloud

What does winning look like?

The popular adage that “the customer is always right,” when taken as a literal statement, can exasperate just about anybody with a customer facing role, but you have to admit that the idiom holds up in the abstract, macroeconomic sense. The aggregate “voice” of the customer is what shapes industry trends, informs demand for goods and services (and by extension, labor), and guides the economy as we know it. Most of the time, the marketplace serves the customer need efficiently, but what about when it doesn’t? Here we examine the causes and solutions to a classic paradigm where consumers are grossly over-served.

Written by

Nick Foster

Research Associate
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What is Consumption Economics?

High tech is a landscape riven by rapid change and disruption. “Moore’s Law” once posited that the rate of innovation in computing hardware was such that processing power doubled roughly every two years (IBM now estimates the doubling window at 30 months, but that’s still a brisk pace!)1. For decades, the tech industry rode alongside this trend, focusing on developing and release the next big thing, seeking to be the most compelling story in the marketplace. But from the customer’s point of view, does pushing the bleeding edge of what is possible actually make sense?

The “consumption gap” is a common problem for technology companies, referring to the complex where consumers can’t or don’t embrace new features, services or new degrees of complexity at the same pace at which providers can develop and release them. The result is a gap between the potential value that these products can deliver to customers and the actual value they provide to those users. For example, American consumers returned $14 billion worth of electronics to stores, but only 5% of those returns were because the product was broken.2 But business consumers may not have the same kind of flexibility, especially given how IT and software used to be seen as major capital investments. Considerable value can be “left on the table,” so to speak, when users don’t use a product to its full extent, as the time and effort spent developing and selling those neglected aspects of the product is ultimately wasted. Customers aren’t necessarily dissatisfied; they might get everything they need from a product without nearly using all of it, but the inescapable fact remains that, “They have unused features and licenses, excess capacity, and stable systems that serve their basic needs, so why buy more unless it’s cheaper?”3

Think about it from your own experience as a user of all varieties of software. In your experience as a Microsoft Word user, for instance, what percentage of its total features and capabilities would you say that you regularly use? (To take the example further – what percentage of its total features do you even know about?) Maybe you use the pre-built document templates and some of the more obscure font choices, but how many tools within the References and Mailings tabs make it into your repertoire? What about the built-in Wikipedia search plugin? How many readers have built a customized table of contents in their documents? It’s unlikely that any one user would be inclined to use Word to its fullest, broadest extent; people simply may not care about features they don’t want, they may not even know about them, or they may actively avoid them because they prefer a different tool for that job. In seeking provide features for everyone and every possibility, there is going to be some waste. This is just one particularly illustrative example, but same effect can be seen across the software world.

The cloud computing model lends itself to a production, selling and service model that meets consumer needs and builds consumer value more efficiently, with clear value optimization for buyer and seller alike. Cloud enables a sense of balance that closes the consumption gap while changing how providers pursue a compelling value proposition. Consumption economics, as defined by Todd Hewlin and Thomas Lah, refers to a model for capturing more consumer value by increasing consumption and enticing customers to “move up the ladder” to buy additional services or features on top of the base product.4 Profits are optimized and customers are sticker and better engaged, since they made the choice to increase their investment in the product to a level that suits them.

Companies will have to master consumption economics to win in the cloud, but how can they set the stage for that success? To what extent does the promise of cloud computing relate to the principles of consumption economics? And how can a tech company pursue consumption economics to win in the marketplace? The software industry’s past, present and future show a clear progression and maturation towards enabling consumption economics, so to understand the current state of affairs and to begin to answer these questions we should first take a look at a time when software was in the consumption gap instead.

Discrete Indescretions

“In the beginning,” computer software used to be sold and installed on actual discs. Eventually, users could simply download software and install as their own, cutting out the physical disc but retaining the same basic experience. Even then, however, users paid for static licenses to use the exact piece of software they purchased – which was often bound to only work on the particular machine to which it was first installed – and using software was very much an offline experience. The installed program lived on your computer; you needed the hardware support it and the know-how to use it. For the sake of clarity, let’s refer to this as “discrete” software.

In these olden days, software developers could typically take as long as two years to create and market a new version of an existing piece of software. In the tech landscape, this can feel like a lifetime; again, think of how fast computing standards change during that time. This kind of “big bang” release strategy5 required a lot of time and money to execute, and the resulting inflexibility to changing consumer needs during that time essentially created a development vacuum.

This was the case for Adobe and its flagship creative products. Before its transition to selling and serving its software via the cloud, the company was reliant on capturing new revenues each year, as its recurring revenues were quite low (less than 20% in 2011)6. Paradoxically, though, they were so low because consumers’ satisfaction with the product was so high, as each version of the software was so feature-rich that it gave them everything they could possibly need and no reason to buy a newer version. .

However, there’s also the vital possibility that each new “big bang” release might simply be too complex and feature rich for most consumers to use to the fullest extent. Especially to lower-value, more casual users of the product – a point where even would-be professional users necessarily have to begin – a single iteration of the product is far more than they could possibly use efficiently, so they are even less likely to buy again.

And now consider the prices involved. Two years is a long time to develop something, so companies would understandably want to recoup their investment. But there has to be a point where higher prices and huge products just don’t align with consumers’ actual needs and experiences. In 2010, the latest discrete version of Adobe’s full Creative Suite could have cost customers well over a thousand dollars depending on the license they bought; a brand new license for Photoshop alone would have cost about $700. Those prices set the barrier to entry for a first time customer pretty high!

The sum of these components presented a real conundrum for Adobe: It was reliant on bringing in new, first time customers each year with expensive, expansive and development-intensive products that are so complex and fully featured that few customers come back to buy again. Looking at the case with the benefit of hindsight, it’s clear to us now that Adobe was in the consumption gap.

Change was sorely needed, and Adobe sought that change in the cloud. But how does the cloud actually solve these problems?

Closing the Gap

The cloud model yields powerful benefits for software providers and consumers alike, sometimes independently but oftentimes acting in some sort of symbiosis. To generalize, the main benefit for both parties is that that the flexibility of the cloud model enables providers to stay more in tune with consumers’ needs and habits, stay abreast of the industry trends that inform those needs, build more relevant customer relationships and provide products and services that more efficiently capture consumer value. These factors contribute to an environment where the consumption gap is very narrow – assuming it even exists at all – and where the consumer value in the relationship between the buyer and seller is optimized. Let’s look at how the cloud closes the consumption gap in terms of pricing for end-users, product development and cost of “ownership” for business customers.

The most overt benefit that the cloud computing revolution offers to providers and consumers alike is the “pay-as-you-go” model, which allows customers to pay for only as much service or software as they want to buy by way of a monthly or yearly subscription – as opposed to paying a higher single price point for an expansive product that they might only use pieces of. The flipside for providers is that they only need to provide that correct amount of service and/or software for that appropriate price point. There is no mismatch between consumer needs and provision of service. This is equally true for SaaS, PaaS and IaaS . For instance, if your company needs computing power, don’t invest in a new data center; simply pick and choose what features and horsepower you need for your virtual machine from CenturyLink or Amazon Web Services. It’s the same for software. Start with a basic license and add more features when you need them; don’t go out and buy software, subscribe to it!

Selling more finely-tuned software, with different price points offering more or less service or features, allows cloud companies to sell more product at more flexible, consumer-friendly prices. Discrete software would ship in maybe only a few different versions (if there were multiple levels at all), and the price point and features were simply not up for debate. Consumers paid for the software that fit their needs and budget the closest – that’s why it was common for consumers to wind up paying for features that they didn’t actually need or use, or felt like they had enough features (and spent enough) that they wouldn’t need to upgrade.

Let’s loop back to the Adobe case to illustrate the idea. The Adobe Creative Cloud is a SaaS product suite – launched in 2011 – with a very broad range of service and price points. Users can customize their account by picking and choosing which apps they want (Photoshop is a popular choice) and any add-on features that may be of interest (such as Adobe Stock, which as we can see in the screenshot below is being offered as an easy upsell).

Look at the price points available to an individual user, comparing monthly subscription fees to the prices for a new discrete license. For example, if you only want basic access to Photoshop, you’ll only need to spend $240 over two years – compare that to the $700 price for a discrete copy of Photoshop in 2010; it’s a bargain. That’s a very fair price that accommodates the lower end of the consumer base (and lets Adobe bring in even more customers on that end). In short, people are paying for what they need. On the other end, you could spend $50 per month for access to the complete Creative Cloud, which comes close to the cost of a brand new license for the full Creative Suite in 2010. Again, people pay more to get more, but because they have to decide that they want that much service, they are much more likely to be better-informed, better-skilled users who could and would take fuller advantage of those offered services. On all fronts, the value provided and value consumed are much more closely aligned than was possible before the Creative Cloud.

Adobe is just one of countless companies that have transitioned to a cloud-based model in recent years, but its story follows a familiar script. Pricing and service flexibility are indeed the most overt benefits for consumers and providers alike (almost half of all respondents to a recent KPMG survey identified cost efficiencies as the biggest drivers of their cloud success)7, but price is really just one of many aspects that define the cloud. Even just operating in the digital environment that cloud necessitates leads to more refined, co-related opportunities for enabling consumption economics. The same survey identified several other key areas for business transformation that shine a light on the importance of consumer insights and their application. These include the ability to mine and execute on deeper insights from data, the ability to innovate new services more effectiveness and the ability to develop new business models (that respond to and amplify those insights and innovations).

Consequently, the survey respondents called out increased business performance, greater automation of services, and, most importantly, the increased ability to introduce new features and updates and to deploy those changes rapidly as the most powerful business results they’ve seen in their own business’s journey through the clouds.8 Let’s expand on some more of these consumer “care-abouts,” starting with the cloud’s impact on innovation and product development.

The richer and more present provider-customer relationship that the cloud enables by way of sophisticated data and usage tracking (in the always-online environment) enables cloud-based software providers to push regular product updates and even release “minimum viable products” (MVPs) for the sake of testing and of pushing its bottom price point lower – opening the possibility for reaching new strata of customers and potentially redefining the product itself. In other words, it basically lets them see how small a product they can provide that people will pay for. Look again at the lowest-cost licenses for Photoshop – they only provide basic access; purchasing a full Photoshop solution is twice the price; the former option is essential an “MVP.”

This is the basic premise behind experimental innovation, and it happens all the time in the cloud. They constantly test new features and push their products forward step by step, instead of lurching many steps forward every two years. Picture a hypothetical case where a developer rolls out a new feature to 2% of customers, then 5%, then 10%. Customers can provide feedback along the way – even passively; if they don’t use the feature, that tells you all you need to know – and the developers can use those insights to improve the quality and customer-centricity of their product. Each change in itself has relatively low stakes for the health of the product or customer relationship. If it works, developers can keep exploring it; if it doesn’t work, they can scrap it. They don’t need two years to spin out of alignment with customers.

Turning to your customers as partners in development is a surefire way to gather insights that inform the direction of your product in powerful ways, not to mention insights that inform how best to plan and execute new updates and new product launches. Customers are more engaged in a product that reacts to their role as an active customer. Moreover, rolling out regular, frequent update based on these insights pushes the product forward and drives value much more efficiently – in terms of money, time, and even sanity – than the classic two-year development cycle.

The legacy approach to developing and selling software also bears financial risks that providers would surely rather avoid. One of the motivating factors for Adobe’s transition in cloud services was the sharp decline in its revenue and valuation during the 2008 financial crisis. At that time, most corporate consumers treated their IT choices and business software as critical capital expenses10 – so when capital is tight, vendors for those services suffer. It cuts both ways, too: spending two years to develop a new big bang release is a big capital investment on the part of the software provider as well – especially if sales figures on the other side of that window are disappointing.

Compare that to the cloud context where software is usually sold on a subscription basis. In today’s environment, business consumers tend to treat software as a more flexible operating expense. Why buy a mansion when all you need is to rent a few bedrooms? The capabilities of more flexible pricing and service levels makes it more possible for the relationship between provider and consumer to survive or even deepen during leaner times; the service can be scaled up or down to meet the consumer’s need.

Cloud software also doesn’t require that end users own and operate hardware powerful enough to handle it, since the software exists out there in the ether and customers only pay for access – usually through their web browser. Successful cloud companies aim to make their products as accessible to all users and in all use cases. Some of our clients in Silicon Valley express their hopes that cloud platforms could one day be an “internet desktop:” “We want to get to the point where people do not need any technology. Just a browser and a laptop.”11 These developments further reduce the barriers to entry to being a customer (and staying on as a customer) by making it as easy as possible to get started on the platform. No need for capital investment in nicer computers and no need to train people on how to use them. There is only the cloud-based service, be it software, a platform or more.


So clearly the cloud is a platform and a paradigm that lends itself handily to the cause of consumption economics. Everywhere the consumer turns, the purchased and consumed value align more closely than ever. Software providers can develop better and more cost-effective applications (more cost-effectively for them, as well), all while expanding the pot of customers and retaining more of them each year. Times have truly changed… The only question that remains concerns how tech companies can actually get to this point. What conditions need to be met in order for cloud economics to really take hold? What does it mean to win in the cloud? And what does winning even mean?

The answer may have been right beneath the surface this whole time.

1 Moore’s Law

2J.B. Wood, Todd Hewlin, Thomas Lah. Consumption Economics: The New Rules of Tech, 2011.


4 Ibid.

5Santiago Comello-Dorna, Chandra Gnanasambandam and Bhavik Shah. “From Box to Cloud,” McKinsey & Company, 2015.

6Kara Sprague. “Reborn in the Cloud,” McKinsey & Company, July 2015.

7“Elevating Business in the Cloud: 2014 KPMG Cloud Survey Report,” KMPG, 2015.


9 Comello-Dorna et al. “From Box to Cloud.”

10Drue Reeves and Daryl Plummer. “The Truth About Cloud Economics,” Harvard Business Review, April 2013.

11Client interview notes/p>

12 Ibid.

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