Nicholas Lovell tells Nick Shanagher about how ‘free’ will change the future of business
Coming from the world of electronic games and with a background as a city analyst and business consultant, Nicholas Lovell is the perfect person to put together the ideas in The Curve, which explains how the internet will change your business.
‘We’re all retailers now’ is the title of one of his chapters, which shows that wholesalers will need to rethink their business strategies, even though they are not facing a meltdown like the music industry has been.
But even being retailers is not really good enough. In the book, Lovell notes that “most retailers are focused on selling physical products, not satisfying users.” What they need to do is to focus more on relationships.
To explain his view of how markets work, he analyses two competing theories. The first and oldest is from a French economist, Antoine Cournot. His theory says that supply and demand are a function of price, and competitors will adjust their prices to make the maximum profit. Combined, they will keep production low enough so they can all make profits.
Joseph Bertrand, a French mathematician, proposed the alternative. His theory says that price is the variable and competition will see the price fall to the marginal cost, where it has to stop. In a digital world, that means free.
Chris Anderson, the author of Free, says that “in abundant markets, where it is easy to make more stuff, Bertrand tends to win: price often just falls to the marginal cost.”
To understand how this applies to physical markets, we first have to think about Santa hats. Kart Rider is a free game that was played by 12 million South Koreans in its first year – that is, one in four of the country’s population raced cartoon cars around a virtual race track.
It was totally free but in the run up to Christmas 2007, its makers allowed players to buy Santa hats for their drivers to wear while racing. They put them on sale for $1 and sold one million in a week.
People bought them not because they made their cars perform better but because the hats made them feel like they were taking part in a fun occasion.
Feel is more important than price
The point that Lovell makes is that today, consumers have different concerns about products than they used to. People expect that what they want will be available and also have moved on from what it costs, assuming they will get good quality at a low price. Instead, “what matters now is how it makes us feel,” he writes.
The real money is made from developing ‘super fans’ and having an offer that makes them want to spend a lot of money with you. This is why relationships are so important: the internet makes information so readily available that it creates ‘a poverty of attention’ among customers. You need to make your customers pay attention.
Once you have that, you need to have an offer that means your biggest fans are prepared to pay more to be your customers – think symbol groups.
“I absolutely believe you should be selling emotions to people. The model was that we make a product and then some people buy it and they pay us the same amount of money whether they love us to bits or not,” Lovell says. “So there is no bottom line incentive to think about [super fans and how to sell to them].” But what should wholesalers do with this knowledge?
Lovell first suggests that free is coming to the wholesale marketplace. Your competitors will be figuring out how to to give stuff away digitally so they can build one-to-one relationships with your customers.
“You have to figure out who the customers are with whom you can use the web, first of all to reduce your cost and then over time to increase your revenues,” he suggests.
“It may be a product that influences how your customers behave rather than how you behave to your customers. But I’ve still got to think that through. “The free end is always information because that’s the stuff that you can share feely. It may be entertainment. It may be knowledge.
“It may be relationship communication. But that’s what the free end of the curve is. “So I, as a wholesaler, will be trying to figure out how much I can give away for free digitally, perhaps stuff that I used to charge for, that will enable me to undercut my competition.”
Whether you are competing on service or supply, he says, this may work: better service levels or exclusive products, “in each case, I can see how data and information can be given away for free to undercut the competition,” he says.
“So analytics is where I would start: giving real-time information on what I am selling, where and how, completely for free. All this massively expensive consumer market data about what sells and at which time of year.”
Spookily, Lovell, who says he knows nothing about grocery wholesaling, appears to be describing a lot of current developments in the industry. Unconvinced about whether his ideas will work for you?
Then read his story about the success of King Arthur Flour, which is now the number two brand in America because it uses the ideas that he describes. King Arthur Flour may not have set out to use a curve strategy but that is how it became successful and it sells a commodity – flour.
If you are thinking about what your world will look like five years out, The Curve is a valuable read. Lovell helps you to understand how things join up and how you might position your business to take advantage.
You may be familiar with many of the ideas that he discusses but the real value comes from how he puts them together to give you confidence about how to move your strategy forward.