Exploiting the Zero Price Effect Using Cloud Services

There is a compelling phenomenon known as the zero price effect which every CIO should be familiar with. The relevance of the zero price effect is in its connection to frictionless business and cloud services. By understanding the zero price effect, CIO’s can increase their ability to contribute strategically in their organizations and improve their strategy around cloud computing.

Zero Price Effect

I imagine nearly every adults understanding of economics is rooted in the simple concept of supply and demand. Our understanding extends a bit further to include the tension between the supply and demand for a product and its price. We don’t need an economist to understand this relationship between price and demand is elastic. Lower price, demand goes up. Raise price, demand goes down.

price demand elasticity curvesBut that aspect of price elasticity doesn’t always hold true. For instance very exclusive products or products that carry some cache react to a price increase with an increase in demand. Then for some products reducing price too far can actually cause demand to go down or be eliminated altogether. But when you lower the price to zero, something very interesting happens – the zero price effect.

In a nutshell the zero price effect is when the demand for a product is greatest when the price is exactly zero not when it is slightly more than zero. We see this all the time in our daily lives and instinctively follow this phenomenon when presented with an option having a near zero price versus an option that is actually zero. This is the incredible power of free and businesses of all types, not just Google and Facebook, are finding innovative ways of exploiting a zero price. And perhaps so can yours.

Getting to Zero with Cloud Services

The economics of the cloud services market are built around a standardized service that is low-cost, low-margin but in high volume where velocities and scale drive revenue. Because of scale, the unit cost of the service can be driven to near zero. And, when your costs are near-zero, the service can adopt a zero price model relying on indirect revenues or in offering premium services for a fee. I am sure you can think of several companies operating in this way even some industries being reshaped by this model.

The emergence of zero price services requires a unique mindset and a clear business model for how you will monetize (re: make money) the service. But what is really required for a zero price business model is an absolute focus on avoiding anything that adds friction which in turns adds cost.

This is where CIO’s need to focus their contribution to the business. On how to leverage low-cost or no-cost cloud services to build and test new products which can be offered at scale with a zero price. CIO’s should not simply confine their strategy to IaaS services to run these new products. They should look to PaaS solutions to prototype and build the products or where white label SaaS applications can be used as a branded platform.

In order for CIO’s to be in a position to make these contributions they must remember the adage that “chance favors the connected mind” and get plugged into the innovative applications of cloud services.

Just think for a moment about the Big Data movement. What has made big data possible is that the unit cost of storing more data or even all of your data is now near zero thanks in large part to cloud storage options. Another illustration to consider is allowing social login as a strategy to eliminate the friction of accessing your site without adding to the unit cost that includes the added bonus of capturing higher value profile data. And there are hundreds if not thousands of other examples to learn from.

Now What?

Applying the zero price effect may have limited potential in your business, or maybe not. You might surprise yourself once you start looking around a bit at how many places it might make a difference. You might find several strategies can be rethought if you could make cost not an issue. You first efforts might focus on products or projects already in the pipeline that can leverage cloud services to eliminate some friction and drive costs to near zero. That same idea might allow a project that was denied funding to now be selected for approval with its new ROI.

The reasoning behind a post on the zero price effect and yesterday’s on frictionless business is to help CIO’s expand their view of how they can make meaningful contributions. Not that my posts are particularly insightful, rather that it might serve to freshen your ideas by hearing things described using different words or by examining an idea from an alternate vantage point. You don’t need to be an expert to be able to see the connections and your potential to solve an existing problem or exploit an opportunity, you just have to be prepared.

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