Optimizing the Playing Field Where the Great Deleveraging Meets Freetopia

Two economic developments are currently having a profound effect on the playing field of consumer demand.  One is the Great Deleveraging: the painful scaling back of the household debt burden that reached a historical peak, at 133% of household income, in late 2007.  The Great Deleveraging means that household dollars that several years ago would have been earmarked for new discretionary spending are instead being diverted to pay down the hangover of old discretionary spending.  As fewer dollars chase the same supply of products we would expect some combination of lower prices and/or a reduction in the quantity of products supplied – a reversal of the SKU proliferation that has been a dominant feature of our consumer experience for the past several decades.

At the same time, though, a second major event appears to be unfolding:  the emergence of the economics of “free,” or “freeconomics” as provocatively described by Chris Anderson of Wired magazine in his recently published book “Free: The Future of a Radical Price.”  “Free” in Anderson’s formulation is the notion that the near-zero cost of doing business online turns upside down the conventional notion of economics as the science of parsimonious choices under conditions of scarcity.  The “economics of abundance” in Anderson’s phraseology may filter through the prism of our traditional understanding of markets as being good news for cash-strapped consumers (more stuff for which I don’t have to pay money) and bad news for suppliers of goods and services (“free” doesn’t sound like a price that will shore up my profit margins).

But is that right?  I would argue differently: the playing field where Freetopia meets the Great Deleveraging presents unique opportunities for enterprises that are able to use scientific methods to figure out the detailed contours of this new environment.  Household dollars are hard to come by.  But there are other things of value that factor into Freetopian economics: things like time, attention and reputation.  The key challenge for organizations is to figure out what these things are, who cares about them, where they fit into the picture and how to quantify them for optimal outcome.

I distill the following principal arguments from Anderson’s work: (a) the cost of doing business online is nearly zero; (b) transactions in Freetopia are not classical binary exchanges between a single buyer and a single seller, but rather involve a mix of parties where the exchange of cash is only a part of the value equation; and (c) some of the parties to the transaction are willing to offer some things for free in exchange for other things that confer some other value notion.  These complex multiparty transactions involve exchanges of product, service, cash, convenience, labor, information, gifts, reputation and awareness. In other words, Freetopia is not synonymous with free lunch (though, enjoyably, we discover in Anderson’s book the origins of this phrase as a value proposition used by San Francisco saloons in the late 1800s: anyone paying for a beer got a “free” lunch to go with it).

What this prompts us to do is to think in new ways about how our customers’ demand curves fit into that complex web of interests.  What are the components of the total cost borne by the customer in any given transaction, and what are the terms of value?  How valuable to the customer is a reduction in the cost of search?  What would induce the customer to pay more for A while getting B and C for nothing, or perhaps bartering a service (such as writing a review or filling out a questionnaire) that would benefit some other party to the transaction who would then subsidize part of the cash price of A to make it more appealing to the customer?  These are the types of opportunities that emerge on this new playing field.

The added complexity posed by these non-traditional transaction webs suggests that going by gut instinct alone will not suffice for organizations trying to figure out how to optimally supply their customers’ demand curves.  Nor, however, will the methods embedded in earlier generations of revenue optimization solutions be up to the task.  As Freetopia moves more into the mainstream of our economic lives the scientific methods that help us uncover the most important insights will need to do more than apply conventional optimization algorithms to historical daily prices.  At Sentrana our focus is on achieving mastery at the micromarket level – disentangling all the variables that connote what matters to a given customer at a given node in a given transaction opportunity.  As we look into the kind of future that Freetopia presages, we see an increased urgency for nuanced clarity and a growing role for scientific micromarketing – not as a one-off management tool but something at the strategic core of making the most from the opportunities this daunting – but potentially lucrative new world – will provide.

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