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RIP Clayton: Disruptive innovation in enterprise software

(Image credit: Image Credit: TeroVesalainen / Pixabay)

The passing of Clayton Christensen was a blow to the business world, but his legacy of disruptive innovation lives on.

If you have not, I recommend reading Innovator’s Dilemma. It is one of the most influential business theories of our day and changed the thinking of many business leaders, including Steve Jobs, Andy Grove from Intel, and Marc Andreesen.

For those that are not familiar with the concept of disruptive innovation, it is defined by Christensen as: “A process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.”

Ripe for disruption

Conflicting interests

I was first exposed to pricing and CPQ in 2000 working closely with two the of the original CPQ software vendors. In 2007 I moved to a Gen 1 price optimisation software company that was subsequently acquired.  While it had established itself as a leader in B2B price optimisation, it became apparent to me that the path the market was going conflicted with the interests of the existing customer base, which made up the product direction board. When asked, these large and established companies would answer that they did not want to put pricing into the cloud, even though this was the trajectory of enterprise software. Their large IT organisations wanted to maintain security and control over the process. In other words, the company was experiencing the Innovator’s Dilemma. 

We talked about it a lot internally but were unable to steer the company in a new direction, especially because of the consulting culture, which was based more on customers than the market as a whole.  This consulting culture and the focus on services revenue and profit is the opposite of a market and product led organisation, which characterises the most successful software companies (a topic that is, perhaps, for a different article). That said, after the acquisition, in 2015, I moved to a pricing and CPQ company that was 100% cloud native from day one.

In 2016, at a Professional Pricing Society conference, I had the opportunity to speak on the topic of “Disruptive Innovation in Pricing and CPQ”. I made the case that the reason the pricing software market had not taken off more readily was because it was dominated previously by large enterprise software projects, and these projects were scary because they entailed risk, cost, and quite frankly people had to put their career on the line for them.  Moreover, after implementations, many of the Gen 1 solutions were not flexible enough to change with the market and require costly upgrades and maintenance.

SaaS revolution

The industry was ripe for a new breed of company, 100% cloud enabled, configured in the UI. These traits made faster implementations, at much lower risk, and were much less scary. 

This change is not only a result of cloud technology, it is also a function of business model disruption. As Christensen also pointed out “The most disruptive changes are changes in business models, not just technology.” A cloud-based solution is part of it, but it’s also configured in the UI, allowing business users to make changes, with faster implementations. In addition, the product’s subscription model equipped with no long-term commitments is equally important.  All of these serve to reduce risk to the customer and allow them to get to a positive ROI faster. Gen 2 companies cloud-native options are disrupting the market, and the results are clear. With the Gen 1 providers, you would have to spend millions of dollars to get your first dollar back. That equation has now radically changed. 

Why is a new company able to disrupt the space when the established companies saw it coming? It’s a bit like the Titanic…companies can see the iceberg but can’t steer the ship out of the way in time. But if you jump off the boat and go build a more modern, smaller, and faster platform, you can navigate around them. And once people see that newer, faster boat, you bet they are going to want to jump on board.

This momentum and inability to change is what allows new companies to come in and disrupt established spaces. It is easy to put on-premise software in the cloud, but Gen 1 companies still have the existing clients and implementations with the old way of doing business and they either need to build or acquire this technology. Therefore, they are forced take the maintenance dollars from their existing customers and invest it in developing new technology that those customers won’t be using unless they migrate, which carries significant cost, risk and usually a loss in the customisation they have invested heavily in already. This is not an easy position to be in as company, and is at the heart of the SaaS revolution. Even something as simple as revenue operations and billing-based on subscriptions can be a massive challenge for existing companies that are not built to support these models, as it touches every business process from marketing to sales to finance to operations.

Dynamic pricing

The most exciting part of this is that a 100 per cent cloud native platform company allows for an acceleration of innovation to occur as there is no “baggage” of existing on-premise implementations, complex support matrixes, different releases and databases and servers, etc. All customers are on the same release and get access to the latest innovations at no cost to them. This means that companies are able to get the latest innovations as they occur, and the accessibility of the application allows them to change their pricing strategy and tactics as the market changes. This allows for truly dynamic pricing, augmented with rules and machine intelligence, creating a competitive advantage for the companies using it.  In the age of digital disruption, in more industries, being able to price dynamically and change your strategy and tactics quickly is becoming table stakes.

Gabriel Smith, Chief Evangelist, Pricefx