The other day, another fast-growing tech firm joined the NYSE with an unbelievably strong IPO debut, despite the market’s pandemic undercurrent. How do some companies continue to achieve incredible market valuations while others innovate but fail to translate that to market value at all? It’s the “billion-dollar question” and who better to address it than Steve Strongin, Senior Advisor at Goldman Sachs?

Steve’s written a lot about Everything-as-a-Service (or as it is also known, XaaS), digital transformation and disruption, and how companies create great value in the marketplace. He’s recently published A Survivors Guide to Disruption and The Great Reset: A Framework for Investing after COVID-19, and he was a recent guest on our XaaS Files podcast, which I moderated. We covered a lot of ground in our market valuation discussion. I’d like to focus here on Steve’s thoughts on targeting the right customer segments and innovating to bring customers value.

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Early adopters or slow adopters – where’s the value?

As someone who has worked in the tech sector for most of my career, I know that tech companies are all about building adoption, because over time these users represent significant sources of value. But suddenly people and companies have been forced to learn things they didn't know they could do. Learning curves have dramatically accelerated and that could make early adopters far less relevant for many technologies – particularly those that are consumer-focused.

“Much of tech followed the path of adoption rather than incremental value,” says Steve. “Companies pursued the customer base easiest to capture even if the value created and the ability for the company to monetize that value was limited. The idea was that having a user base would create forward opportunity regardless of the immediate profits. Now COVID-19 has moved an entire generation of users who were slow to change into new learning. We've essentially trained an entire generation of much better customers, with more money, more loyalty and more stability, to use digital platforms. Having learned how to do it, many don't want to go back to other channels. This actually makes the early adopter a poor target as they tend to continue to follow the new and makes the stickier slow adopters the clearly superior target, particularly high-income, slow adopters.”

It’s worth rethinking. Who are your early adopters? Your slow adopters? Which of these segments is most relevant to the journey to subscription?

Making things easy is table stakes

In any service business, customer adoption drives provider success. When a company stays focused on how the buyer is going to use and get value from the service, it seems to translate to how the company is valued. So how can you get your customers to value more quickly and in a sustainable way?

When providers approach innovation in the right way, it enables customers to generate more value for everyone. This might be an important time to consider new business models and monetization strategies that are aligned to customer value generation for the post-COVID market. Let’s take a simple example: making a service’s interface easy to use. Thanks to COVID, ease of use is now table stakes. With more people on digital platforms, it’s putting pressure on businesses to create easier-to-use and more intuitive experiences for the once-resistant users. Steve highlights how that changes development priorities: “It's not about getting backgrounds on Zoom that have fireworks. And, there is not a 62-year-old in the world whose primary desire is to have higher resolution cameras in Zoom. It's about getting Zoom to have a better mute button.”

What’s clear is that as companies innovate – from user interface development to new business models and monetization approaches – staying focused on bringing customers greater value is paramount to success. But maintaining that value in an increasingly competitive environment, while innovating for customers can be a complex challenge to navigate.

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“We've essentially trained an entire generation of much better customers, with more money, more loyalty and more stability, to use digital platforms. Having learned how to do it, many don't want to go back to other channels.”
- Steve Strongin, Senior Advisor Goldman Sachs 

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The paradox of revenue predictability and hope 

At Accenture, we find that recurring revenue models are great value-generation engines to which Wall Street seems to respond positively. You start the beginning of your fiscal year and 80 percent of your revenue is booked already. It’s a beautiful thing. As long as you're taking care of your customers and they're not churning, you’re resilient.

Steve agrees that the market responds to predictability and resilience. “In mature companies, the market is typically looking for real cash flows that are forecastable, easy to see and easy to understand. You understand why the company will be persistent. Most larger companies typically have portfolios of revenue streams and there is a cadre of analysts who analyze those revenue streams. And the more predictable and easier they are to see, the more the market will pay for it.”

But Steve is quick to highlight that there are many companies where the market isn't paying for predictable revenue. It's paying for hope. “To get paid for hope the market wants to see high volatility and low capitalization. He cautions that, “the inability to avoid losses in bad scenarios is why good companies – meaning well-capitalized, consistently strong performing, diversified businesses – generally have difficulty getting paid by the market for pursuing their ‘Hope Projects’. For existing firms with substantial financial resources, from investors’ perspectives, the more management tries to sell the upside of these type of projects, the more these firms are implicitly committing to continuing to spend creating more potential exposure and, in some cases, bad scenario outcomes.”

I’ll share more of Steve’s thoughts on balancing predictable revenue and hope projects in another post.


Disclaimer: This document is intended for general informational purposes only and does not take into account the reader’s specific circumstances, and may not reflect the most current developments. Accenture disclaims, to the fullest extent permitted by applicable law, any and all liability for the accuracy and completeness of the information in this presentation and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit, or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professionals.

Kevin Dobbs

Managing Director – Accenture Consulting

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