Productonomics?

Working Definition:

Productonomics is a collection of ideas, theories, best practices, and practical processes based on the application of microeconomic principles to technology-based product management and product development.

I call this a working definition, because I expect that the scope and meaning will change and evolve over time. The “product” sectors I am focused on are those around the web, digital media, and software. I am focused on these sectors for two key reasons:

1. It’s what I know. A 12 year career immersed in working in digital media and building web-based products has led me towards the ideas and concepts that form the foundation of Productonomics.

2. As I will explain in later posts, I believe that there is a unique connection between certain microeconomic principles and the fast-paced and entrepreneurial nature of this sector.

For the short term, Productonomics will simply be a series of blog posts. I hope to have many collaborators and contributors to help grow the ideas organically into a “framework” that can provide best practices, methods for decision-making, and even tools and processes that will help us all to make better decisions and better products. My belief is that as “information workers”, our desire is to find inspiration and guiding principles from to improve my own ability to design and make good products that people want to use.

“Wisdom of the Ancients”

I am still formulating this idea, but my basic premise is that in our fast-paced technology world, everything seems new, hyper-dynamic, and innovative – - and to an extent, it is; however, guiding principles that have been well studied, debated, and tested through history are not only valuable, but are a “grounding” influence that help us to keep us tied to basic principles while we attempt to innovate and invent. Economics, as a formal discipline is only about 220 years old, so “wisdom of the ancients” is a bit tongue in cheek, but brilliant people have come before us and studied similar problems, and we should remember and integrate their insight and conclusions.

“All of these new problems aren’t new”.

Which areas of economics within the focus of Productonomics?

Classical Micro / Marshallian

Austrians School

Game Theory

Behavioral Economics

Economics 2.0

Key Principles:

Principles are the fundamental components of economic thinking, and a surprising number of them are incredibly useful in day to day decision-making, but they are often misunderstood and misused. Productonomics will strive to explain these principles in the context of direct applications for the decision-making “information worker”.

Here is an abbreviated list of the core micro-economic principles we may cover in our Productonomics:

· Equilibrium Theory (ye olde “supply and demand”)

o Demand elasticity

o Short-run and long-run equilibria

o Price elasticity of supply

o Consumer surplus, producer surplus, Price discrimination, and market efficiency

o Tax incidence and deadweight loss

• Scarcity, choice, and Opportunity Cost
• Marginal Analysis

o Marginal utility

o Marginal use

o Marginal Cost

o Marginalism

· Theory of consumer choice

o Total utility and marginal utility

o Utility maximization

o Individual and market demand curves

o Income and substitution effects

· Production and costs

o Production functions: short and long run

o Marginal product and diminishing returns

o Short-run costs

o Long-run costs and economies of scale

o Cost minimizing input combination

· Firm behavior and market structure

o Profit, Profit maximization, Normal profit

o Perfect competition

o Efficiency and perfect competition

o Monopoly, Oligopoly, Monopolistic competition

o Sources of market power

o Price discrimination

o Interdependence, collusion, and cartels

o Game theory and strategic behavior

o Product differentiation and role of advertising

o Excess capacity and inefficiency

· Factor Markets

o Derived factor demand

o Marginal revenue product

o Labor market and firms’ hiring of labor

· The Role of Incentives and Property Rights

· Pareto Efficiency

· Fallacy of Sunk Cost

· Theory of value

· Game theory and Nash equilibrium

· Discounted Utility

· Inter-temporal Choice

· Consumer Good Theory

o Network Goods

o Positional Goods

o Complementary Goods

o Substitute Goods

Applied Productonomics

“Maximize value and minimize cost.” – - A very wise person.

“Easier said than done.” – - An even wiser person.

Basically, want we want to develop here is processes, tools, best practices, and methodologies that allow us to perform better. These are developed from our understanding of high-level economic principals and then adapted directly to the work that we do through a cascade of thought process that goes something like this:

Economic Theory -> Deconstructing Market and Firm -> Analyze Components of Production -> Analyze Components of Consumer Decision-making -> Understand Nature of Knowledge and Output -> Reconstruct Factors of Output -> Measure and Adapt

· Understanding micro-economic principals can help us day to day.

· Understanding theoretical and historical concepts around human behavior is valuable and provides guidance at a very fundamental level.

· It can be very helpful to learn to “make decisions like an economist” and understand the incentives and market forces at work.

· Some of it is very practical and actually provides technical nuts and bolts

· Knowledge management – the real positive output of Product is good decisions

· “dynamic documents” – ongoing information flow and knowledge management that can actually keep pace with Agile development and the highly dynamic nature of the technology world.

What is it we do when we “do work”.  Write documents? Write Code? Assign Tasks? Have Meetings?  This isn’t really the work we do- the real work we do is acquire knowledge and make decisions. From this process, we birth products and our customers buy (sometimes not, of course) and use the products. The goal should be to focus our daily efforts towards the positive ends of creating good products that people want that create profit for the company.

These concepts are very close to the concepts of

Development Process

For most of my PM/technology career, I have felt like “we who build products and run make decisions but aren’t engineers, pure marketers or designers” (this is my long-hand for Product Managers) have been “missing something”.  , and recently, after putting some thought into it, I narrowed it down to “guiding principals”

Engineers have agile, designers have their thing (need to research), but what does the discipline of “product mangement” have?  Mostly a loose collection of aphorisms (come up with list), platitudes (list), and processes that attempt to guide us through what are generally very murky and fast moving waters.  Throughout my career, I’ve desperately sought some kind of guiding principle for creating web and software products.  Recently, myself and many others have come to come to recognize a very useful link between many modern micro-economic principles and the software?? product development field.

Decision Analysis, Engineering / Business Intelligence Dashboards, Etc.

This is where the “applied” part really takes hold. My goal at every company that I work at is to instill some discipline around understanding data and the results of our decisions. The trick is to do it on the cheap, intuitively, simply, using open source and even simple things like RSS, Twitter, Evernote, Wikis, etc. It’s all about turning information into knowledge, knowledge into insight, insight into correct decisions. The flip-side is to also think like an Austrian, and to not put too much stock in empiricism. Faulty conclusions are easy to come by from data, and said conclusions are also harder to

Digital Media

I think that economic thinking comes in especially handy when dealing with Digital Media and the various legal, technological, and cultural issues involved. My experience in the digital music space continually pulled me towards reasoning that had to come from a “deeper wisdom” outside of the pundits, analysts, industry insiders, and their detractors – hot and disruptive sectors are loud, chaotic, and full of misinformation. The fact that, as an insider, I DID have the “real story” didn’t make things any clearer, and in fact, added to the confusion. What clarified the landscape for me was a good hard look at basic incentives, price theory, monopolistic and rent-seeking firm behavior, and other core economic theories. It didn’t necessarily make it any easier to solve immovable problems, but understanding fundamentals offers a way to process the outcomes and determine next steps. All of a sudden, you start to look at “hard questions”, and the answers start to evolve:

· why is there still free music on P2P, $.99 music on iTunes, and then a smattering of other “hybrid models of subscription/ free + ads” – - there are a few simple economic answers that derive from the incentive structures of the parties involved, and it all starts to make sense.

· A label says: “we don’t want to devalue music” as an argument against experimenting with pricing. Well, they are confusing value with price… not the same thing. Marx did this too, and … well, we don’t need to go there.

· Why is all the music the same price, when in other industries, competition will drive prices down and innovation up? Answer – - one form of monopolistic price fixing lead to another. The labels colluded to keep CD prices high, and Apple keeps the price however it wants because it has huge market power, which the labels unwittingly gave it, and now they can’t innovation around Apple for fear of losing revenue from that channel.

· Why is the transition to new technologies and paradigms so hard for the music industry? Incentives of music labels aren’t in line with their customers. Why is it so difficult for ad-based and subscription? Incentives aren’t aligned with their customers. Labels are “landlords” of master rights, and publishers are “landlords” of publishing rights… rent-seeking businesses naturally provide barriers to entry and innovation its been going on since it was the landowners vs. the industrialist at the beginning of the industrial revolution. (thanks, David Ricardo).

· Why are publishing and performance rights such barriers and hassles? Easy – the governments (and just ours) set compulsory rates, which are essentially price floors – artificial price floors lead to inefficient markets, underutilization of resources, and slow growth.

Who is it for?

My hope is that Productonomics will be able to help anyone within the decision-making sphere of product development. Initially, many of the direct examples and applied theories will be directed at the “decision tier” (those people who drive product decisions): Execs, Product Managers, Product Marketers, UX/UI/AI designers, Web Designers, Software Architects/Engineers. In specifically include Software Engineers in the decision tier, because I firmly believe they belong in the decision-making process, and I believe that Productonomics will help in providing structure to allow for more and more collaborative decision-making. Ultimately, my hope is that any “information economy” worker who faces the dynamism of markets and human consumption behavior will benefit.

Maybe we are all Economists

“I’m not an economist, but I play one at work” – Me.

· Econ studies individual behavior and decision making around “transactions” – these transactions can involve money, time, reputation, or any measure of “utility”.

· Economics is after the exact same answers Product Managers and Marketers are  – - what do people value, what will they give up to acquire it, and how do they make choices. These are the big questions that are easy to lose sight of.

· As technology weaves itself deeper into our social fabric and daily lives, we seek explanations grounded in human thought and interaction. The technologies and velocity of change may move, but the human value system is a lot more constant.

· Economics, sociology, and philosophy have an lot to offer us as information professionals - guiding priciples that can logically link the seemingly chaotic blender of innovation and with the fundamentals of the human condition.

· Lots of “big brains” have looked at the same problems we look at now from a totally different perspective. We use analogies a lot to describe things that are hard to describe, and can very enlightening to look to other disciplines for these analogies

· economics, while it may be a “soft science” (this could be debated for ever), it is based on discipline, mathematics, and over a century of  thought, debate, calculation, and experimentation.

· I’m not an an acedemic, nor am I someone who is anamored with fluffy theories – I’m an “old fashioned  web worker” who wants to understand innovation and value creation at the day to day level.

· The economic field is not, as it may appear, stodgy or full of luddites.  Some of the best “futurist” ideas and thinkers are either in or connected to the field, and economists have been extremely active in applying their explanatory power against complex modern issues such as intellectual property on the internet, the pros and cons of open source, and innovation and entrepreneurship as a major growth driver. There is even a new branch of the field referred to as “Economics 2.0″ that uses the term “software model” to describe solutions for many modern social, economic, and political problems.

Deep Thoughts…

Let me say this… I believe that anyone trying to do a good job at just about anything should pull from all of their experience and knowledge to arrive at good and creative decisions.  Our brains and the experience within them are not neat compartments of knowledge like a database, but rather loosely and ephemerally connected concepts, images, ideas, and patterns. In order to fully engage our intellectual potential, we need to call forth anything and everything, relevant, or irrelevant that leads us to those moments where we have clarity, validation, and hopefully, a good decision.  I could almost just as easily have developed ideas around “Productosophy” or “Producterature” that call on us to look to philosophy and litterature for answers to making good product decisions… in fact, the ties between philosophy, literature, and economics, especially prior to the the 20th century are often too blurred to be able to distinguish one from the other. Those of you who paid for an expensive liberal arts education will be glad to hear this, I’m sure. I, however, think that Economics is simply more specifically applicable to our trade, scientific in nature (again, that debate), and so closely … and its concepts can be easily broken up and applied to specific problems.