Monetization at the Point of Value

It's hard to believe that it's been six years since Jonathan Schwartz published a blog post about how Sun monetizes Java. With Sun's not-quite-untimely demise, I've been thinking back to this, especially since Schwartz was one of the first technology/business blogs I read (the venerable Cringely being numero uno).

First, the cheap shot: nowhere in his post does Schwartz say, Customer X will pay me $Y for Z, which is only possible because of Java.

(A second cheap shot: maybe you backed the wrong horse? Flame on.)

I'm not smart enough to write a complete treatise with good conclusions, but I do have some enumerated observations:

• There's a distinction to be made between selling commodities and monetization at the point of value, but it can be made arbitrarily fine. Gasoline is a commodity but is not monetized at the point of value; if it were, you'd be charged for it incrementally as your gas tank emptied. On the other hand, you can think of gasoline as being monetized at the point of value, because you're willing to pay for it when your gas tank is empty. You can argue semantics all the live-long day.
• Marketing, to a large extent, is about communicating clearly to customers.
• Clear communication is predicated on the assumption that customers are likely not paying a lot of attention to you; they're paying attention to their own jobs, instead.
• Product pricing is an extraordinarily important aspect of marketing.
• Sun's main products, computer servers, were traditionally sold upfront. In fact, the entire industry operated this way.
• After all, it's a collection of physical parts, with a very real cost, and what it's used for is running code, which is far more abstract and varies in value to a great degree.
• Those collections of physical parts were increasingly commoditized.
• Sun's downfall came about because it could not figure out how to ride the wave of server commoditization; this is ironic, as Schwartz points out his admiration for the railroads and the oil companies. It is also ironic, because Sun had way more talented engineers than anyone (although that's a double-edged sword...) and therefore had an advantage for finding ways to profit from commoditization.
• The market of folks who want to buy servers (i.e. computation) is probably different than those who want to buy servers upfront. Amazon serves a different market than the one Sun served.
• From disastrous experience, I've seen that customers hate having to choose between different pricing schemes for the same product. They don't want to think about it.
• Customers also hate having risk shifted onto them. An upfront price for a server is nicer than trying to figure out the value of running a particular application for a period of time, assuming you can afford the price of the server.
• Having a choice between upfront pricing and monetization at the point of value is not only bad marketing, it's bad management, when you factor in sales incentives. How do you fairly compensate your sales staff for both scenarios? You don't, and your sales staff wastes its time figuring out how to game the system, hurting your marketing in the process.
• Some faction in a company likely benefits from the status quo pricing scheme, and they'll resist changes to the pricing scheme. This makes it hard to roll out a new pricing scheme for the same product.
• If a company wants to move to monetizing at the point of value, it is probably better to roll out a new product with the new pricing, and to search out a new market. Do not confuse your existing customers.
• Look at Apple. They didn't stop charging upfront for new computers. Instead, they rolled out the iTunes Store. Then they rolled out the iPhone, with the hefty subscription fees paid back to them from AT&T and the high-margin revenue from the App Store. Different products, different market, differing pricing. Brilliant!
• Volume is an important aspect of the commodities business.
• If you're going to monetize at the point of value, you'd damn well better drive large volume, no matter what.